Charlie Myers: Houston to Dallas—A Domino Effect?

As a general contractor with projects in diverse market sectors, I am constantly trying to balance our sales outlook with our staffing needs, both in the short-term and for the long-term. Most CEOs know that sustainable growth requires this balancing act. With the recent volatility in oil and gas prices, as with any global issue, there’s a domino effect or chain reaction that occurs when one event sets off other events that may carry sizable momentum.

Because much of our work comes from the North Texas region, rumors of significant oil and gas layoffs in Houston, along with construction projects put on hold, have caught my attention, as have the attendant headlines about the commercial real estate market: “Dozens of proposed apartments in Houston stalled amid oil downturn.” “As consumers cheer, plunge in oil prices poses test for Texas real estate.”

Having weathered many real estate cycles over the past few decades, I wondered if Houston’s slowdown might find its way up to North Texas, despite our relatively diverse economy. With so much new construction in every market sector, powered by industry and population growth, absorption might have to catch up.

Fortunately, Dallas was not as vulnerable to the last big real estate bust in the mid-1980s which was largely driven by speculative development. Today, developers and owners are far more cautious about overheated markets.

What we do know about the slowdown in Houston is this: Houston has been the fastest-growing city in the United States, and a “breather” like this may actually help us with the balancing act of seeking sustainable growth. If the slump moves to North Texas and redlines some projects that impact our local economy, the silver lining may be that spiraling labor and material costs may come down.

Over the past few weeks, I’ve talked with some developers, real estate investors, tenant reps and subcontractors in Houston, and, surprisingly, their views are relatively upbeat.

One of the largest real estate investment, development, and management companies has observed a noticeable slowdown in institutional investment activity in office and multifamily projects, but current high occupancy levels and relatively few, new speculative projects under construction, may offer a softer landing in the office sector. For the industrial market, high levels of absorption with very little tied to the oil and gas sector, and record high occupancies in the retail market continue to attract institutional interest.

Architectural and engineering firms are busy. Construction pricing remains steady, and all of the trades have healthy backlogs because of their diverse project work. One of the largest drivers of construction in the city is the $1.9 billion school bond package of the Houston Independent School District that involves the replacement or renovation of 40 schools. Another is the healthcare construction boom spurred by new suburban medical office buildings, expansions and emergency centers being announced in Cypress, Sugarland, and The Woodlands.

Although one of our developer clients says that developers of all project types are hitting the “snooze bar,” he has a different view of Dallas. With Houston pumping the brakes, he expects construction activity in Dallas will be even greater, as capital chases opportunity.

A prominent general contractor and industry peer says his backlog is significant. While oil producers and well service companies are experiencing a slowdown, his construction projects in retail, education, warehouse, and Class B office space continue to thrive. A break in the pace might be welcome, but, overall, Houston can withstand much of the impact because of its growing diversification.

One of our Houston ULI members believes Dallas won’t be affected. Although Houston led the nation in office construction and started this cycle, Dallas was still relatively soft. Dallas is now into a robust new construction cycle for office and is leading the nation in jobs creation. So Dallas will continue to have momentum in new office construction, while Houston is now moving into a completion and leasing mode.

The biggest challenge in the midst of Houston’s slowdown? My subcontractors all agree on this one. Recruiting and retaining talent is job No. 1 for them, from project superintendents to the skilled trades.

A large excavating contractor admits that with the oil decline, he has been able to recruit operators from that industry. Despite his recruitment efforts though, he estimates labor costs will rise by 10 percent this year alone. With a workforce of 650, that’s a big challenge.

Similarly, a large commercial drywall company says it is extremely difficult to find manpower, and labor costs have risen by 19.3 percent since 2008. His workforce of more than 230 is still short by another 60.

At the Construction Users Roundtable’s (CURT) first labor shortage risk mitigation conference in Houston held in November of last year, the domino effect was in the data. According to CURT, Texas will see $380.3 billion in commercial construction put in place from 2013-2018, and, on the industrial side, $164.3 billion in projects. According to Daniel Groves, CURT operations director, “We believe there’s a shortage of as many as 2 million skilled workers.”

In a study by The Bauer College’s Institute for Regional Forecasting at the University of Houston, a serious labor shortage is also cited, not the volatility of oil pricing. Workforce development has become a critical initiative among general contractors throughout the region.

For the short-term, the pullback in Houston may give us pause to look ahead at potential effects on this region. But the long-term view is more challenging as we look at recruitment and training issues, and talent development to manage and lead in the future.

Read the full article at Dmagazine.com.

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