HOUSTON – (Realty News Report) – 2019 has been a great year for Houston-based Arch-Con Corporation, which focuses on office, industrial, retail, multifamily, hospitality, community/non-profit, healthcare and corporate interiors. Arch Con’s revenue this year is expected to be $512 million, up from $375 million last year. The company has 61 projects under construction in Houston, Dallas and Los Angeles. In Houston, Arch-Con is building GID’s Regent Square Phase II, a 600-unit apartment complex at West Dallas and Dunlavy, the latest phase of Regent Square, a planned 24-acre development. The company — which currently has 184 employees — anticipates hiring up to 30 more employees in 2020. Realty News Report sat down with Chief Executive Officer Michael G. Scheurich to talk about the future of Houston and the company – particularly whether the city’s strong construction boom will continue and how the commercial office market will play out in 2020.
Realty News Report: As new construction projects are being planned, your firm is on the initial cutting edge. What are your expectations for 2020?
Michael G. Scheurich: The outlook for 2020 is very good. We have a backlog of nearly $500 million going into the new year. However, as a construction company we are the tail on the dog. This means that projects in construction are often the visible results of the real estate cycle that has already peaked. It is hard to determine where we are in the cycle, but it seems that the pace of new projects making it to the drawing boards is declining.
Realty News Report: The rig count has been declining. How is that going to impact the Houston economy?
Michael G. Scheurich: Oil and gas, Houston’s primary economic driver, is lagging. It seems that without higher energy prices and corporate expansions in this sector, it will eventual present an oversupply of new projects that are currently in progress now and those that are planned in the near future. If there are fewer higher paying jobs being added then the economy will struggle to maintain its current pace of growth.
Realty News Report: How will Houston compare to the other major Texas markets?
Michael G. Scheurich: Houston is much more diversified than ever before. That being said, the Houston market depends greatly on higher energy prices. Since we do not experience the number of corporate relocations to Houston such as Dallas and Austin, there is a risk that Houston could experience a slowdown sooner than the other major markets. Healthcare continues to be a significant contributor to our economy and we foresee more growth to come.
Realty News Report: In 2019, the pace of industrial construction has been very strong in Houston. What’s going on?
Michael G. Scheurich: Industrial development has evolved over the past decade from largely manufacturing facilities to distribution centers. This is primarily due to the advancement of e-commerce which requires larger and larger buildings with tall clear heights and more trailer storage. This has enticed more investment from capital sources to keep up with the demand. The question, though, is how much is enough? Absorption has remained steady but there are signs that new product delivery is catching up with demand. If that is the case, we will see lease rates begin to drop and new buildings remain unleased for longer periods of time.
Realty News Report: What about the other sectors of commercial – office, retail, manufacturing buildings. What do you predict for the year ahead?
Michael G. Scheurich: The office market continues to surprise people with the number of new buildings under construction. This is primarily due to companies “flight to quality” for new buildings. Overall absorption remains low which is leaving older buildings without tenants hanging in the balance as they fight to compete. Retail continues to move more toward entertainment and food/beverage. The typical merchandising retailers continue to struggle with e-commerce as they downsize and become more focused on improving same store sales. Traditional manufacturing is somewhat stagnant except for specific areas like plastic pellets and petrochemical products.
Realty News Report: Your firm is building a number of hotels. Your thoughts on the hospitality sector?
Michael G. Scheurich: The hospitality market is relatively stable today, but the opportunity for development of new hotels is low. The projects that we have under construction have been in development for several years and are just now getting the green light to proceed. I don’t expect a large number of new hotels making it into construction over the next few years due to the lack of available brands and stagnant RevPAR (revenue per available room) rates.
Realty News Report: Arch-Con has grown and is expanding from Houston to other parts of Texas. And, I have heard you recently expanded outside of Texas?
Michael G. Scheurich: We continue to expand in Houston, Dallas and other parts of Texas. However, we are moving into other states to help diversify our business. Arch-Con opened a Los Angeles office a year ago and is seeing incredible growth. Other markets like Denver and Atlanta are appealing to our firm and will help us serve regions that have different economic drivers than Houston.
Realty News Report: Anything else you’d like to add?
Michael G. Scheurich: The lack of qualified construction labor in the Greater Houston area continues to be a struggle to keep up with the demand for construction jobs. Labor rates continue to rise while quality declines. Arch-Con does its best to recruit from the limited labor pool but without a fresh supply of workers willing to perform the work leaves us with few options. Arch-Con continues to pursue technology to improve its performance in project delivery. The construction industry is poised to make large strides in the advancement of new technologies due to the need for execution without an adequate qualified labor supply.