Rising above inflation: Texas experts pave the way for construction success and innovation

Inflationary pressures in the commercial real estate construction industry in Texas have presented significant challenges for contractors and developers. According to industry experts, the consequences of inflation and its far-reaching effects are becoming increasingly evident.

Project costs in Texas have surged by over 30% in the span of three years, accompanied by interest rate increases by the Federal Reserve, explained Tim Sommer, president of SPD Construction. This inflationary environment is expected to result in shrinking backlogs for private sector contractors well into 2024.

“Thankfully the population growth in Texas has given developers the confidence to continue pursuing projects despite the cost,” Sommer said.

John Atcheson, president of ARCO Design/Build, said his company’s cost-tracking history reveals the initial onset of inflation pricing came in late 2020, peaking in June 2022.

“We have seen tremendous pressure on the construction industry to keep up with the demand of the robust industrial distribution and warehouse market,” Atcheson said. “The outright demand for warehouse and distribution space, plus the inflationary market, created a perfect storm for cost increases and material supply issues.”

The uncertainty and volatility introduced by inflation have strained relationships among stakeholders in the CRE sector.

“The standard language in contracts that was typical for many years suddenly became scrutinized by all sides,” said Michael G. Scheurich, CEO of Arch-Con Construction.

Then, he added, financing projects became more arduous and time-consuming. Higher interest rates, construction costs, land expenses and equity requirements make it less likely for projects to advance to the construction phase, despite strong demand.

Although short-term trends suggest a slight decline in construction pricing on average, the industry still grapples with the consequences of inflation. While a return to pre-pandemic pricing levels may not be feasible, the short-term expectation is for construction pricing to continue decreasing if demand slows due to rising costs and the Federal Reserve’s persistent upward pressure on monetary policy.

There are positives to be found. Progress is being made in addressing supply chain challenges, which have plagued the construction industry for several years now.

“The lingering issues that the market is still experiencing are secluded to electrical components and concrete cement supply increased costs,” shared Atcheson.

Scheurich said delays with items such as doors and hardware, glass and glazing and appliances have seemingly been resolved. Like Atcheson, he is concerned about availability of gypcrete, cement and other gypsum products.

“Most other construction materials have returned to an about-normal timeline,” Sommer said.

Texas construction companies have been proactively managing the challenges they face by adopting effective strategies. Communication plays a vital role in mitigating project costs and timelines, experts told REDnews.

“Some projects are subjected to cost overruns and delays, but by communicating up and downstream, relationships can not only be salvaged, but reinforced,” shared Scheurich.

By establishing early and transparent communication channels with clients, companies can convey project constraints and explore alternative methods to minimize impacts.

“Our clients enlist our services very early on in the design process to make sure procurement issues are addressed,” said Sommer.

ARCO Design/Build emphasized the importance of agility, risk reduction and efficient project completion. Open lines of communication have been crucial in informing clients about evolving market conditions, including supply chain issues and inflationary pressures. Early and frequent communication allows for dialogue and proactive measures such as releasing materials ahead of time to ensure uninterrupted project timelines.

“We openly communicated cost implications on the front end of the project before a contract was signed, so everyone could understand the impact on the development. Once the contract was signed, we held our ground and kept our word,” said Atcheson. “One of our core values is ‘treat people fairly and do the right thing’ and that’s what we did.”

Maintaining strong relationships with clients and vendors is a key priority for companies like Arch-Con Construction as well.

“Adverse conditions like what we have encountered the past few years make great companies stand out, make good companies get better and make bad companies go away,” Scheurich said.

Some companies are looking to an innovative approach to address some of those issues: 3D printing.

CIVE, a leading company in the construction industry, is collaborating with PERI 3D Construction and HANNAH Architecture to create the first multi-story 3D-printed home in the United States. Over the course of two years, extensive lab testing was conducted to refine the concrete mix and perfect the home’s design.

“The objective of this project was to test the architectural limits of what 3D printing can do, gather data on the process, and use this information to scale 3D printing towards affordable multifamily housing in the commercial sector,” explained Leci Wood, marketing coordinator for CIVE, which is serving as the general contractor for the project.

The inspiration behind CIVE’s foray into 3D printing stems from the visionary mindset of its president and CEO, Hachem Domloj. With a deep interest in technology and innovative construction techniques, Domloj recognized the potential of 3D printing to revolutionize the industry.

“[It] allows faster, less expensive, stronger, weather-resistant solutions to some of the most common issues that the commercial sector faces,” Wood said, adding that 3D printing allows for architectural complexity without the need for costly cold form techniques.

Beyond their pioneering 3D-printed home project, CIVE has a robust pipeline of more than 1000 multifamily units under design, permitting and construction. The company envisions transformative 3D-printing developments that have the potential to revolutionize the construction industry and challenge conventional building practices.

“CIVE strives for excellence and beyond. We add value to every project we take part in and we believe in achieving higher than industry standards,” said Wood. “We’re looking to lead the design/build industry into the future not just with 3D printing, but by designing new and innovative ways to approach all the sectors: multifamily, retail, mixed-use, entertainment, hospitality, medical office, industrial, etcetera.”

Despite the significant challenges posed by inflationary pressures in the commercial real estate construction industry in Texas, companies have demonstrated resilience and adaptability. Contractors and developers have navigated rising project costs, supply chain issues and strained stakeholder relationships through effective strategies and open communication. With their experience, strategies and forward-thinking mindset, these Texas experts are well-positioned for success in the coming years, building our future.

Navigating the future: Houston office market embraces change

The Houston office market continues to undergo a period of recovery and adaptation in the aftermath of the COVID-19 pandemic. As businesses and employees explore new work models and redefine their office space requirements, the market landscape is experiencing shifts that reflect the changing needs and expectations of tenants. REDnews spoke with industry experts to gain insights into the current state of the Houston office market, emerging trends, the evolving amenities used to attract workers and predictions for the upcoming year.

According to Abby Alford, transaction management director for CBRE, Houston has felt the impact of the current economic conditions, but that does not imply a complete halt in activity.

“While leasing activity slowed overall this quarter, we’re seeing submarkets identified in drive time analysis studies to be a convenient location for employees, such as West Houston, strengthen,” Alford said.

In Q1 2023, Houston posted negative net absorption, but the overall average vacancy rate slightly decreased to 23.1%. It’s worth noting, however, that CBRE analysis found roughly 80% of that vacancy rate can be attributed to 10% of buildings.

Bob Cromwell, managing director of office services for Moody Rambin, noted that large users are contracting their office footprints, leading to negative absorption. However, the amenities-rich environment in areas like Memorial City/CityCentre have fared well with vacancy rates as low as 3%.

“There is no space,” added Cromwell. ”That amenity-rich environment is actually doing quite well.”

COVID-19 significantly reshaped the use and perception of office space. Cromwell emphasized that the dust has yet to settle, as businesses navigate the new normal. He observes that tenants are gravitating toward spec suites, highlighting the need for flexibility and ready-to-use spaces. Furthermore, tenant lounges and recreational areas, incorporating features such as golf simulators, are emerging as new trends.

Alford added that landlords are rethinking traditional amenities and exploring innovative ways to create collaborative environments. The emphasis is on fostering a comfortable and destination-like workspace that encourages employee interaction and engagement. Common areas, break rooms and huddle rooms are receiving increased attention to promote a dynamic and productive environment.

“The important thing for amenities is thinking outside the box and creating collaborative environments,” Alford stressed.

To entice workers back to the office, employers are embracing a live-work-play approach. Amber Carter, CEO and managing broker for Seven Fourteen Realty, highlighted the importance of a supportive atmosphere and company culture.

“Offering healthy snacks that are available throughout the day, fitness centers/ gym memberships, outdoor walking space or trails have been a few of the top amenities that employers have incorporated,” said Carter. “Offering space for childcare and pet care has also reflected positively in attracting workers back to the office. Most families are having to decide whether to have the expense of childcare or have a parent stay at home if a work from home option isn’t available.”

Carter predicts that the office space landscape will not return to pre-pandemic levels, but rather evolve into a new normal. She anticipates that property owners with larger buildings will explore repurposing options, combining housing, entertainment and office or co-working spaces to meet the changing demands.

As far as Houston office development, Cromwell believes it will slow down due to interest rates and how much space is currently available.

“You’re not going to see much in the way of speculative office development in the near term,” Cromwell said.

Looking ahead, experts in the Houston office market tell REDnews it will continue to evolve with property owners exploring creative repurposing options and emphasizing collaborative work environments. By embracing change and meeting the evolving demands of the workforce, Houston’s office market is well-positioned for a successful future.

The life sciences industry is betting on Texas. Developers should too

The State of Texas is a natural mooring for life sciences companies. It has one of largest clusters of biotech and pharmaceutical professionals in the country, and a network of universities and institutions focused on building strong biochemistry, biophysics and technology-based programs designed to churn out highly skilled talent. Texas has the makings of a mature market, but a void of turn-key manufacturing, lab/R&D real estate is slowing momentum. Together, the state’s three largest metros, Dallas-Fort Worth, Houston and Austin, boast an aggregated population of over 15.5 million but only nine million square feet of inventory, a fraction of other dynamic life sciences markets.  

So, what is driving the disconnect? Texas seems to be caught in the middle of a chicken-or-the-egg riddle. While biotech companies are waiting for the arrival of new state-of-the-art facilities, developers are standing by for the arrival of biotech companies. To resolve the standoff, developers can look to evidence of the impending real estate demand to justify breaking into this technical market. There are three key trends that will ensure the continued expansion of the life sciences sector in the state, and each is reason alone to motivate new development.

Economic incentives
The Cancer Prevention & Research Institute of Texas (CPRIT) has been a substantial driver of the industry’s expansion. The $6 billion grant program has helped to recruit 285 researchers and 16 companies to the state since launching in 2007. PanTher Therapeutics is a recent example of how the grant program is supporting growth. The clinical-stage oncology company, which focuses on treating solid tumors, received $14.2 million from CPRIT to expand the development of its clinical therapies. A taxpayer-funded program, CPRIT currently has capacity to deliver significant funding grants like this through 2027.

In addition to CPRIT, the Texas Medical Center Innovation Institute funds a series of programs to support the growth of early-stage life sciences companies, providing advisory and essential amenities. Both of these programs illustrate the state’s ardent investment in expansion of the life sciences industry. As more companies take advantage of funding opportunities and state-supported services, it will be imperative that there are quality facilities in place to meet demand.

Utility infrastructure
Like real estate availability, power is a major need for life sciences companies, many of which utilize substantially more power and water than a standard office tenant. Life sciences companies are looking for reassurance that Texas power and water utilities can meet their needs given its checkered reliability history—and many local municipalities are meeting the moment. Cities throughout Texas have committed to accelerating the expansion of substations and bringing in larger water and sewer infrastructure.

CenterPoint Energy is investing and expanding its electrical infrastructure in the Texas Medical Center area, which has helped to support an expansion of TMC Innovation Factory Labs, scheduled to open sometime this year. In addition, Xcel Energy is building new substations throughout Northern Texas, another hotspot for life sciences activity in the state, to ensure the region’s power grid can accommodate growth. These are just a few of the ways utility companies are supporting the industry’s growth.

Business-friendly suburbs
Austin, Dallas-Fort Worth and Houston are expectedly in the biotech spotlight. The three cities have established life sciences networks and a ripe pool of professional talent. However, the surrounding suburbs are presenting tremendous opportunity for developers. Markets like The Woodlands, Taylor, and Round Rock have quickly captured demand due to their business-friendly environment and commitment to infrastructure support. There has been a steady migration to these metros, foreshadowing further momentum to come. With ample land for new development in these suburban areas, there is a unique opportunity to create life science campuses that most tenants prefer to settle into, being close to other likeminded companies and talent.

There are many examples of this suburban flight. In partnership with Nurix Therapeutics, Alexandria Equities is developing 12 acres of life sciences real estate in The Woodlands, representing an investment of $200 million, and NexPoint has announced plans to develop a 200-acre “cutting-edge” life science project known as the Texas Research Quarter in Plano, representing a $3.8 billion investment. . Plus, Dallas’s Pegasus Park has reimagined the former corporate campus of jeweler Zale Corp. as a life science hub, adding 135,000 square feet of lab and office space to the development, which includes tenants like UT Southwestern, TAYSHA Gene Therapies, McKesson, Colossal, ReCode, etireaRX and BioNTX Each of these projects will attract new demand from companies that support these global giants and that want to establish a presence in the area.

The expansion of the life sciences industry marks a new era in commercial real estate, with the introduction of light-industrial, technology-enabled properties. The asset class is a new horizon for the industry, and undoubtedly, forward-thinking real estate developers have an opportunity to support the industry’s expansion throughout the state. However, even the most discerning developers can overlook demand cues. Having a partner that is embedded in local market dynamics and that deeply understands the nuanced fundamentals that inform development decisions is essential to drive strategic decisions and capitalize on this tremendous opportunity.

Project Management Advisors, Inc. Senior Project Manager Grayson Mann specializes in tenant improvement and ground-up development for biotech, pharma and the distribution industries.

Dallas industrial market: A closer look at submarkets and future trends

The industrial real estate sector in Dallas, Texas, has witnessed remarkable growth and achieved significant milestones in recent years. With the market surpassing the one-billion-square-footage mark, second only to Chicago, it has become a key player in the industrial sector.

According to Q1 2023 data from Colliers, the Dallas-Fort Worth (DFW) industrial market continues to thrive. Construction levels remain elevated, with 62 million square feet under development. However, for the first time in eight quarters, the quarter-over-quarter construction growth rate has slowed. The delivery of a record 19 million square feet of speculative development has affected vacancy levels, resulting in a slight increase to 6.3%.

Rental rates in the warehouse sector have surged to all-time highs, with big-box rates reaching $5.72 NNN and non-big-box warehouse rates peaking at $8.39 NNN. These escalating rental rates indicate the robust demand and competitive nature of the Dallas industrial market.

To truly understand the Dallas industrial market, it is crucial to examine submarkets within the region. Transwestern Development Company Regional Partner Denton Walker emphasized the variations across different submarkets.

“The best submarkets in North Texas, such as north Fort Worth and north Dallas, have positive lease activity where there is better labor supply available,” said Walker. “The southern sector of the Dallas-Fort Worth area will experience slower lease activity for ample bulk distribution warehouse space due to the large supply available and less labor available.”

By focusing on submarkets, real estate professionals and investors can identify specific areas with unique characteristics, labor availability and infrastructure that align with their requirements.

In addition to submarkets, another delineation that’s important is the size of the project. Allen Gump, EVP at Colliers, splits the market between projects larger than 250,000 square feet and those that are smaller.

“In some places in the Metroplex, it’s very hard to find 150,000- or 200,000-square-foot space. In Dallas, for example, you really do have trouble finding spaces under 250,000 feet that fit the criteria that you’ve got,” Gump said. “The dynamics are very different.”

He explains that industrial development in the Dallas market has reached a turning point. While there are still numerous buildings under construction, the feverish pace of development has eased. Developers are now adopting a more cautious approach, with fewer new projects being initiated without significant leasing activity.

“It wasn’t that long ago that there were something like 17 million-square-foot buildings under construction around the Metroplex. That’s a lot of million-square-foot buildings,” said Gump. “It costs a lot to carry a million-square-foot building for several months or even longer.”

With factors such as rising interest rates and reduced liquidity, developers are now seeking greater stability and demand before commencing construction. This shift signifies a return to a more sustainable pace of development.

Newmark Managing Director Zach Riebe shed light on the capital markets for industrial properties in Dallas. Smaller, bite-sized deals are currently in focus due to challenges in financing larger projects. This shift aligns with the cautious approach taken by both equity and debt providers.

“There’s a theme we continue see is that buyers, developers, and equity/debt providers continue to prefer smaller, more infill projects in today’s environment, whether that be pursuing acquisitions or speculative development,” Riebe said. “However, we anticipate that there will be some larger portfolio trades and capitalizations in 2023 as larger institutional investors creep back into the market and feel the pressure to deploy capital .”

While the cost of capital has increased, the broader macroeconomic tailwinds in Texas, including favorable borrowing costs and availability of capital, continue to support the demand for industrial real estate. Despite the evolving financial landscape, the Dallas market remains a strong performer compared to other tier-one markets across the country.

Newmark President and Global Head of Industrial and Logistics Jack Fraker underscored the strength and resilience of the Dallas industrial market.

“The market’s fundamentals, including leasing activity, absorption, and rental rate growth, are at record levels,” he said. “The presence of a vast inventory of smaller buildings offers reliable and predictable returns, particularly in infill submarkets closer to population centers.”

Looking ahead, the Dallas industrial sector is expected to maintain its strength due to a variety of factors. These include the exceptional labor force, excellent transportation infrastructure, central location, access to major airports and availability of economic incentives for industrial development. The growth of educational institutions in the area, such as Southern Methodist University and the University of Texas, further contributes to a talented workforce.

With a diverse range of submarkets, a slowdown in big-space development, and a cautious approach in the capital markets, the Dallas industrial sector is adapting to changing conditions. Despite challenges, the market’s fundamentals remain strong, attracting investors and tenants alike. As the sector moves forward, careful analysis of submarkets and an understanding of future trends will be essential to unlocking the full potential of the Dallas industrial market.

Thriving opportunities in Austin’s multifamily sector

The Austin multifamily market continues to demonstrate resilience and attractive investment opportunities, despite challenges posed by a variety of factors. Geopolitical pressures, capital markets instability, recession fears, oversupply, softening apartment fundamentals and sector-specific job layoffs have influenced the market dynamics. In response, operators have shifted their focus from true rent growth to retaining residents and enhancing asset management and operations.

According to analysis by Institutional Property Advisors, Austin is experiencing an incoming supply wave, leading to an elevated pace of new unit additions. This surge in supply is expected to have a near-term impact on vacancy rates, raising them from the record lows reached in the first half of 2022. However, Austin’s population growth remains strong, with the metro projected to have the highest year-over-year inventory change since at least 2000. The influx of younger residents, particularly in the 20 to 34 age cohort, who are historically inclined to rent due to Austin’s heightened homeownership costs, will contribute to long-term property performance and validate the ample construction pipeline. Despite the temporary pressure on vacancy rates, Austin is still projected to outperform most other major markets in terms of net absorption in 2023.

Berkadia Senior Managing Director Kelly Witherspoon acknowledges the prevailing challenges in the market.

“The general tenor this year is hanging on to what you have,” he said. “I do believe true rent-growth is a secondary focus for most operators right now, rather, focused on retaining residents with a stronger eye on asset management and operations.”

Kelly Witherspoon

Witherspoon expresses gratitude for Berkadia’s holistic culture and growth, emphasizing the firm’s commitment to exceptional service and integrity.

“In Central Texas and Austin, we’ve created an amazing culture and will continue to provide our clients exceptional service with integrity, honesty and grit,” he said.

Berkadia’s expertise spans various property types, serving both institutional and private firms. From lease-up developments to older vintage value-add assets and land, Berkadia’s comprehensive capabilities make them a formidable player in the Austin market.

The company recently concluded a successful campaign for a larger, well-located 1990s vintage community in Austin that had never undergone a programmatic renovation.

“It had been owned for over 25 years, incredibly rare in Austin, and we had tremendous activity,” shared Witherspoon. “We had over 50 tours, over 30 offers and 500 confidentiality agreements executed.”

This exceptional response highlights the high demand for value-add opportunities in the market. Investors are keen to acquire properties with potential for rent premiums post-renovation, particularly in well-preserved assets from the 2000s to 2010s.

While there is still a thinner competitive pack at the top of the market, there are significant opportunities for investment.

“There were many campaigns in 2022 that didn’t materialize into transactions, which is incredibly rare for Austin,” Witherspoon explained. “In 2023, we’ve had very few of them, mainly due to sellers understanding the market is different.”

Although there is a bid-to-ask spread, indicating a difference in price expectations between buyers and sellers, the market still attracts numerous interested buyers. Austin’s multifamily market continues to be an appealing destination for investors seeking long-term growth and stability.

“It continues to be a competitive environment in Austin,” said Institutional Property Advisors Senior Managing Director of Investments Kent Myers. “We’ve had increased levels of transaction level activity and are starting to see institutional interest back in the market.”

Kent Myers

Myers highlights the substantial number of units currently under construction, leading to a considerable supply wave. Nevertheless, the market’s resilience is underpinned by Austin’s robust job growth and the current decline in permitting activity currently a -27% decrease year over year.

As the market continues to evolve, lower-cost areas are poised to receive increased demand. Austin’s strong net in-migration has benefitted outer cities that connect the market to San Antonio, resulting in an intertwined metropolitan area. San Marcos, for instance, boasts a vacancy rate lower than the overall metro and the lowest mean effective rent, showcasing the appeal of well-connected and cost-efficient locales. Additionally, urban areas with limited development pipelines, such as Northwest Austin, are well-positioned for growth. The upcoming Phase 2 of Apple’s campus in September is expected to create high-paying jobs, which will benefit Class A and B rentals in the area.

“Given the job growth in Austin and in-migration that we’re continuing to see, the market’s been extremely resilient,” Myers stressed. Even with the heightened level of supply previously referenced, we expect Austin to end the year with rent growth numbers slightly below 3%.

While challenges persist, the Austin multifamily market remains resilient and opportunities for investment abound. Firms including Berkadia and Institutional Property Advisors recognize the shifting dynamics of the market and are adapting their strategies to retain residents and optimize asset management. As Austin continues to experience robust population growth and net in-migration, the multifamily sector is poised for long-term success. The combination of ample construction, favorable demographic trends and the appeal of lower-cost areas indicates a promising outlook for the market.

The Sizzle Still There in Industrial Market

How hot can the industrial market get? No one knows the answer. But a recent report from CommercialEdge shows that the sizzle continues in this commercial sector, with the national average for in-place industrial rents rising 4.4% this February when compared to the same month one year earlier.

According to CommercialEdge’s most recent industrial report, the average in-place industrial rent across the top 30 markets in the United States hit $6.45 a square foot in February.

And the average price of industrial leases signed in February hit $7.35 a square foot. That is 90 cents higher than the national average for in-place leases.

And those aren’t the only strong stats for industrial. CommercialEdge reported that the national industrial vacancy rate averaged 5.2% in February, a drop of 30 basis points when compared to January.

At the same time, the average sale price for industrial space was $125 a square foot as of February. The average sales price for this sector has been on a steady upward trend for six consecutive quarters, increasing a jump of 50% from the third quarter of 2020 until the first of 2022.

Nationally, industrial transactions amounted to nearly $9.1 billion in the first two months of the year. According to CommercialEdge, this strong start is yet more evidence that investor interest in industrial properties is not slowing, considering that the first quarter of a year is typically the slowest for commercial real estate transactions.

Five U.S. markets exceeded the $500 million mark by the close of February in terms of transaction volume. Chicago industrial transactions ranked second in the country in this category, behind only Philadelphia, with $689 million in transactions.

Across the country, 592.5 million square feet of industrial space was under construction by the end of February, accounting for 3.5% of existing stock. The industrial pipeline has increased by more than 90 million square feet in the last six months, according to CommercialEdge.