With its continued dependency on the energy sector, Houston has been greatly affected by the downturn in the oil and gas industry. No where is this more evident than in the cranes that dot the Houston landscape. To gauge the health of the construction sector, Realty News Report talked with Michael G. Scheurich, President & CEO of Houston-based Arch-Con Corporation, a Texas-based general contractor specializing in commercial design and construction services for real estate developers, building owners, architects, brokers and tenants. The company’s projects include downtown Houston’s historic Stowers Building and DCT Airtex Industrial Center, a 267,000 SF cross-dock distribution center near Airtex and Interstate 45. The company currently has 150,000 SF of office buildings, eight hotels, more than 1 million square feet of industrial buildings, 750,000 SF of retail/shopping centers and a dozen corporate interiors under construction.
Realty News Report: What’s your take on the Houston economy? Can it get worse? Better?
Scheurich: My best description is that we are all at a party. The band is packing up their instruments and heading for the door. Everyone is at the bar ordering drinks and on the dance floor. No one notices that the music has stopped. In other words, the primary driver of the Houston economy is stalled and no one seems to be concerned.
Realty News Report: What’s the impact of the plunge in oil price? Do you think it will significantly curtail construction?
Scheurich: Definitely. Most projects are proceeding with the expectation that oil prices will rise by the time that these projects will be delivered to the market. I believe that we will see new construction projects start to see a significant decline by mid 2016 and will slow to a crawl by early 2017.
Realty News Report: Houston and New York City are tied with 11.3 MSF of office space under construction. Is that going to dry up next year?
Scheurich: Currently, there is nearly 7.5 million SF of sublease office space available in the Houston office market. The new product being delivered in the next 12 months will add to the surplus office space available on the market, which will impact leasing rates negatively. I expect that this will all but shut down the ability to fund new speculative office building development projects 12 months from now. Currently NYC’s fundamentals are much better than Houston’s and the Big Apple will see continued growth while Houston will see a significant decline.
Realty News Report: Do you see office markets suffering the most? How bad will the sector get?
Scheurich: Most new office buildings have up to two years of interest carry built into their pro formas. No serious effect will be noticeable within that time frame unless interest rates rise in that same period. I expect consolidation and sales of low performing projects to start in 2017.
Realty News Report: What about other property types, shopping centers, industrial, hotels, etc. Will they slow down, too?
Scheurich: Shopping centers and hotels are the tail on the dog. New development in these areas will continue to be strong through mid 2017 with new construction projects declining starting at the beginning of 2017. Mixed-use projects will eventually decline because the office component will create a significant drag on pro formas. Preleasing of these projects will continue to become more and more difficult as inventory expands. Industrial is not overbuilt and should fair well.
Realty News Report: What’s the status of the Aloft hotel conversion of Stowers Building in downtown. Is it on schedule?
Scheurich: It is a great project with excellent fundamentals. Aloft continues to be a high performing brand and the building is located in a very hot market, especially with the number of large conventions predicted for Houston in the future. The expansion of the George R. Brown Convention Center will aid Houston in its ability to perform to expectations in the downtown market. The project will be delivered ahead of schedule and will be a popular location for the Aloft brand, especially during the Super Bowl.
Realty News Report: When the Houston economy is hard hit, what will the builders like Arch-Con do to survive? Be creative like the last downturn?
Scheurich: Builders will downsize and diversify. Medical, senior housing and school projects will become the next driver for the construction market.
Realty News Report: Most economists say real estate and energy are cyclical. Please look into your crystal ball and let us know your predictions. When do you see the turnaround? 2016? 2017?
Scheurich: I really don’t see any significant rebound in upstream oil business until mid 2017. However, it will take at least another 12 months after prices increase for oil companies and oil field service companies to invest in real estate. Midstream and chemical companies will continue to perform well and drive new development in southeast Houston.
Realty News Report: Job growth, after a great run, is slowing down significantly in Houston. What does this mean?
Scheurich: Absorption of multifamily units will decline progressively. This means that rents will decline and there will be opportunities for purchase/sales of newly delivered projects in 2017.
Realty News Report: Any other comments?
Scheurich: If world demand for oil increases due to geopolitical changes across the globe, then all bets are off. Population could actually continue to increase for the Houston area if the demand for oil increases and already existing wells are put back into production with newly-created drilling technology.
Realty News Report is a Texas-based publication edited by journalist Ralph Bivins.