2009 Outlook: Will Texas Continue to Buck National Trend?

Despite, the country’s economic crisis, the majority of Texas contractors have a relatively upbeat view about the coming year.

By Debra Wood

Backlogs from 2008 should keep Texas building through the year. Shown, the Hudson at McKinney Ranch broke ground in May. The apartment complex is being built by C.F. Jordan.

As in other parts of the country and world, a wariness about the country’s economy exists in Texas, even though contractors report healthy backlogs and expect government, health care and institutional projects now in the pipeline to continue.

“Texas is still, fundamentally, a solid real estate market,” says Darren Woody, president and CEO of C.F. Jordan in El Paso, with offices throughout the state. “It is not overbuilt, and we are still creating a lot of jobs. But Texas is not immune from the global credit squeeze. That’s the wildcard.”

That will make it harder for developers and local and state governments to borrow for projects. Woody expects it will be late 2009 to 2010 until “this flushes through the system.” He says funding will be available for developers willing to put more equity into their projects and pay more for debt.

“There is still money available for good solid deals,” Woody says. “Under $15 million projects are relatively easy to get done.”

In San Antonio, C.F. Jordan is building the Vistana, a $44 million, 17-story, residential rental project, and Vidorra, a $45 million, 20-story, luxury condominium project. It has the $24 million, 140-room Aloft hotel under way in Austin and $19 million, 70-room Avia in Houston. Both will finish in December 2009.

Health care is considered by most to be a market that will continue to build and add to existing facilities. Shown, FKP designed the latest addition to the Texas Children's Hospital campus in Houston, the 15-story Maternity Center.

And, C.F. Jordan is working on two student housing projects in Texas scheduled for completion in September: the $30 million Cypress Campus at Denton Station in Denton and the Parkway Place in College Station.

Likewise, Chris Peck, vice president of the Texas division of McCarthy Building Cos. of Addison, says he expects “the Texas market will remain active. 2008 has been a busy year for everyone.”

However, he adds that if the credit crisis is not resolved, both private and public work could be impacted. Peck expects health care and higher education will remain core markets.

“The fundamentals of Texas and the economy in the major metros, where we work, seem to be strong,” Peck says. “Our backlog looks really strong going into 2009.”

Businesses are still attracted to the state’s metropolitan areas, says Scott Ziegler, founding principal of Ziegler Cooper Architects of Houston.

“Dallas-Fort Worth, Austin and Houston represent 25% of the nation’s job growth,” Ziegler says. “And because of that job growth, we have the lowest foreclosure rate, which isn’t hurting us.”

Ziegler continues to see a demand for urban residential in desirable neighborhoods, but he says projects will require higher equity and more pre-sales to mitigate risk.

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GT Leach Construction of Houston continues work on Ziegler’s $35 million, 96-unit Highland Tower in Houston. Also in Houston, MDA Builders expects to complete in early 2009 the $57 million, 30-story 2727 Kirby condominium tower, also a Ziegler design, where 85% of the 96 units have sold. Gables Residential is about 50% complete on Ziegler’s Memorial Hills, a $47 million, eight-story, 324-unit apartment complex in Houston.

In Austin, Balfour Beatty Construction of Dallas has started glazing the $125 million, 55-story The Austonian, also designed by Ziegler. And in San Antonio, The Broadway is scheduled for a late 2009 opening. Koontz McCombs Construction of San Antonio is building the $55 million, 253,241-sq-ft, 20-story, luxury condominium, another Ziegler design.

Bill Scott, division president for Linbeck Group of Houston, reports an excellent backlog and says, “We will put more revenue in place [in 2009] than we are doing in 2008.” He credits that with jobs secured before the financial markets faltered.

“The question will be if the acquisition of new work in 2009 will look as good as 2008, and I think that’s a little muddled,” Scott says. The company has not had any projects cancel, and none has lost financing, he adds.

Kamal Ariss, vice president of business development and marketing for JE Dunn South Central in Houston, also reports a good backlog going into 2009, but he worries about the second half of the year. JE Dunn, already a diversified company working in many market segments, is concentrating on securing government projects because the credit crunch has affected private developers. The company has had a few mixed-use and hospitality projects delayed due to difficulties with financing.

C.F. Jordan is building the Vidorra luxury condominium tower in San Antonio, where military and public school sectors are expected to stay strong.

JE Dunn will break ground in the first quarter of 2009 on the $59 million, 230,000-sq-ft Fort Bend County Courthouse and the $35 million The Overlook at C.C. Young retirement center in Dallas. The company continues to work on the $85 million Texas A&M University Interdisciplinary Life Science Building in College Station.

“2009 seems pretty strong because there is a backlog of work,” adds Joel Stone, vice president of corporate business development for SpawGlass, with offices in Houston, San Antonio, Austin and South Texas. “Looking past that, it gets more unpredictable.”

Stone says that even if the federal bailout succeeds in getting the economy moving again, it will be six months to a year before things are re-energized. He considers higher education, senior living and military markets resilient.

SpawGlass expects to start work in 2009 on a $100 million student activity center at the University of Texas in Austin. It also has projects at Texas A&M and the Texas State University System.

Bonding and Financing Bonding cost is going up, and that concerns builders, Ariss says.

“The private sector and the commercial side will be a tough market, especially for the subcontractors,” adds Tim Hess, director of preconstruction services with the Southwest District of Hensel Phelps Construction Co. in Austin. “I think you will see a lot more competition and money drying up.”

Lance Sallis, managing director of the Austin business unit for Trammel Crow Co., a full-service commercial developer, says that’s already happening.

“Zero construction financing exists,” Sallis says. “Banks and traditional sources are out of the market, and that’s a function of the credit crunch.”

Consolidation of the banking industry will slow growth of branch banks, and consumers cutting back on shopping will decrease the need for new retail outlets, Sallis says.

Ziegler says some of his developer clients have turned to foreign investment to get projects off the ground.

Government Work Hess says there has been a drop in airport construction because less travel and fewer flights have cut the need for expansion projects. He predicts health care and military spending for Base Realignment and Closure Commission projects will remain strong.

Hensel Phelps continues working at Fort Bliss near El Paso. It and joint venture partner Jacobs Carter & Burgess of Fort Worth, received a $140 million design-build contract this year for two housing facilities at Fort Sam Houston in San Antonio.

C.F. Jordan is working on the $47.6 million, 243,000-sq-ft Armed Forces Reserve Center & Joint Vehicle Maintenance Facility at Fort Bliss.

Health Care In Houston, Hensel Phelps is building the $330 million, 24-story Methodist Outpatient Center. The company also is working on the second phase of the $161.5 million, 393,000-sq-ft Research Park Complex for the University of Texas Health Science Center in Houston, which will add space for the dental school.

“The main thing with health care is catching up old infrastructure,” says Hess, indicating that hospitals throughout the state are adding outpatient centers and new technology.

John S. Crane, president and CEO of FKP Architects in Houston, also reports strength in health care and the higher-education science and technology market, with some slowing possible.

“We have a pretty solid backlog of projects to carry us into 2009, but we are seeing people get a little more cautious and doing deeper due diligence on projects before they go ahead,” Crane says.

The eight-story, 324-unit Memorial Hills apartments topped out in October. Photo courtesy: Ziegler Cooper Architects.

FKP is currently designing a maternity hospital for Texas Children’s Hospital in Houston and recently received a contract to design an expansion at Memorial Hermann Katy in the Houston’s Katy suburb. The company has completed 80% of the design of the first two buildings of a new health science campus at Texas A&M.

McCarthy continues work on the $200 million, 500,000-sq-ft vertical expansion at the University of Texas M. D. Anderson Cancer Center in Houston. The company also expects to start an expansion of Midland Memorial Hospital in Midland this summer.

Possible Good News The softening of some material costs presents a bright side to the current situation, and some owners with money to proceed will find it a cost-effective time to build. Crane reports some stabilizing of material costs, with projects starting to come in at or below owners’ budgets.

Ariss says steel is still headed up, but he has seen a decrease in the price of oil, copper and aluminum.

“We consider this as a temporary drop that will affect pricing for the end of the year but not for the first and second quarter of 2009,” Ariss adds.

More designers, especially civil engineers, have slowed down,” SpawGlass’ Stone says. “That is usually about a year ahead of us and gives an indication of a slowdown.”

Trammel Crow’s Midtown Commons will eventually have 900 residences. Photo courtesy Trammel Crow.

Sallis says that consultants, including designers, who are brought in early are starting to feel a pinch and prices are softening. He expects that will affect trades later.

Ziegler says that is already happening, with trade subcontractors “scrambling to get work.”

Ariss says JE Dunn is taking extra measures when prequalifying subcontractors, asking about their financial health to ensure the companies can complete the work and will not fall into bankruptcy.

“This is an excellent time to be building if you have confidence two years from now things are not going to be terrible,” C.F. Jordan’s Woody says. “If you have a good, solid project, you are better off building now than when everyone else is. We are seeing that from our more sophisticated development clients.”

BY THE REGION

Dallas-Fort Worth “We’ve been pretty recession proof, but I expect that will come to an end in 2009,” says Raleigh Roussell, president and CEO of the QUOIN chapter of the Associated General Contractors, which represents Dallas, Fort Worth and East Texas. He adds that public work, including education, exists and health care appears stable, but he is not as optimistic about other sectors.

FKP is working on several projects at Cook Children’s Hospital in Fort Worth and Children’s Medical Center in Dallas. Linbeck is building the Cook Children’s projects.

Peck says McCarthy will complete the $50 million, 100,000-sq-ft Dee and Charles Wyly Theatre in 2009 and will break ground on the $35 million, 2,000-seat City Performance Hall, both in the Dallas Center for the Performing Arts.

C.F. Jordan is working on the $28 million, 330-unit Hudson at McKinney Ranch apartment complex in McKinney and the $25.7 million, 398-unit Watercolor at North Beach apartments in Fort Worth.

The Hanley Wood Market Intelligence Key Indicator Alert, released in October, called the long-term outlook for Fort Worth strong, due in large part to the impact of the Barnet Shale, one of the largest natural gas fields in North America. The Hanley Wood report predicted the shale “will bring thousands of jobs and billions of dollars in economic impact to the area,” and that “the Barnett Shale has helped insulate the Fort Worth metro area from the national economic slowdown.”

Houston “We’re still looking at a good 2009,” says Jerry Nevlud, president CEO of the Houston Chapter of the Associated General Contractors.

Construction at the medical center and schools remain active, with projects on the books moving forward. Some of his members are busy making repairs related to Hurricane Ike.

Linbeck expected to break ground in December or January on a $50 million, multilevel addition to the Houston Museum of Natural Science. It continues work on the Kipp Houston charter school program.

“These are small projects, but it’s a large building program,” Scott says.

Linebeck recently received the contract to build out Rice University’s space at the $150 million, 500,000-sq-ft Collaborative Research Center for Rice University in Houston, which it built. The company also is constructing the $230 million Baylor Clinic and Hospital in Houston and will start on the $170 million interior portion in February or March.

SpawGlass will begin a $65 million renovation project at George Bush Intercontinental Airport.

Russell Hamley, president of the Greater Houston Chapter of Associated Builders and Contractors, adds that the airport also plans to expand its people-mover system between terminals and add parking garages.

“As long as the price of oil is high, the Houston economy will be good,” Hamley says. “There is a lot of work on the books, and most members have backlogs at full capacity through 2009.”

Those jobs include industrial projects and health care and school construction. But dropping oil prices and tightening financial markets may affect the city. Hamley says he has not heard of any jobs being postponed or canceled.

San Antonio “We are relatively optimistic, but a lot of folks here are concerned about what seems to be a full-scale economic meltdown,” says Doug McMurry, executive vice president of the San Antonio chapter of Associated General Contractors. “However, we think there is a certain amount of panic and anxiety that we will grow out of as things stabilize.”

McMurry says there is public school and military work in the pipeline, and he expects those projects will become more prominent. But he adds that hospitality and health care may slow.

“So much of the [BRAC] work is crucial, not just to San Antonio and the local construction market, but to the federal government and national defense,” McMurry says.

Steven J. Schultz, president Associated Builders and Contractors South Texas Chapter in San Antonio, agrees, citing work keeping members busy at Fort Sam Houston and in public school districts.

“There is public-sector money, a few billion over the next three years, that will have a ripple effect,” Schultz says. “We’re expecting thousands of families with BRAC.”

However, he adds that difficulty financing projects could put private developments on hold.

Balfour Beatty Construction of Dallas has started glazing the $125 million, 55-story The Austonian, designed by Ziegler Cooper.

“The construction community is not as upbeat as two months ago, which is not surprising when you see what is happening with stocks,” Schultz says.

Austin “For 2009, we’re anticipating a slowdown in all product types, but Austin, while it is slowing and has some overbuilding, will suffer less than either of the coasts,” Trammel Crow’s Sallis says.

Chasco Constructors of Round Rock will finish Trammel Crow’s two-building, 272,888-sq-ft Pecan Park office complex in North Austin in 2009. The team recently completed the two-building, 226,800-sq-ft Expo Business Park, which is leased and sold. The developer will finish construction in 2009 on Midtown Commons, a mixed-use project, with 60,000 sq ft of retail and office and an initial 352 apartments. Chasco is building the commercial space and Texas DBL of Irving the multifamily apartments.

On the other hand, Lee Nelson, senior vice president of leasing and asset management for Colonial Properties in Atlanta and responsible for Austin, says, “There has been a large slug of new [office space], and absorption has slowed to a trickle.”

While job growth is still good overall, Nelson adds, job creation in the technology sector has dropped off.

El Paso “Texas is beating the norm,” says Oscar Venegas, president of Venegas Engineering Management and Construction of El Paso and vice president of the Associated General Contactors of El Paso.

“Fort Bliss construction continues to rock and roll, and there is still a lot out there,” adds Venegas, who serves as a subcontractor for some of the concrete work at the base.

The University of Texas at El Paso has about $140 million in new work, including an engineering annex and a nursing school.

The Panhandle Tonya Felder, executive director of the Panhandle of Texas Chapter of Associated General Contractors, says her members are “really busy.”

Felder says Amarillo College, a local community college, plans to start construction in 2009 on a three-story building, and the city of Amarillo will let contracts to build five firehouses and an airport expansion.

Felder says that on the private side, the Western Crossing Shopping Center in Amarillo, owned by Seitz Group, is adding retail and restaurant space, and several strip malls are under construction.

He attributes the activity to continued job growth at Bell Helicopter in Amarillo, Hilmer Cheese in Dalhart and ethanol plants in the Panhandle.

“Housing has not really slowed,” Felder says. “We’re seeing it even out. But commercial? We are going strong.”