Building To Suit Population Growth
27 Mar 2017
Commercial real estate construction follows increases in population, and Texas has hit a growth spurt. In May 2016, the U.S. Census Bureau reported that five of 11 of the nation’s fastest-growing cities — Georgetown, New Braunfels, Frisco, Pearland and Pflugerville — are in Texas.
The state’s metro areas, and the surrounding suburbs fueling this growth, are seeing construction in several sectors. High-end multifamily is popular throughout Texas. In Houston, hotels were being constructed in anticipation of the Super Bowl. In North Dallas, multifamily and retail are expanding to serve corporate growth, while industrial and manufacturing buildings are being constructed to serve transportation hubs south of the Metroplex.
“We are seeing a lot of growth all over the state,” says Srinath Pai Kasturi, vice president and general manager of the central Texas division of Cadence McShane Construction. “Over the past four to five years, Texas has been fortunate to have seen a large influx of people from other states, and that has stimulated growth.”
Texas added more than 1.8 million jobs from 2004 to 2014 —the most in the United States and 2.5 times California’s total change, according to Texas Comptroller of Public Accounts’ analysis of data from Economic Modeling Specialists, International.
The state added an estimated 210,200 jobs from December 2015 to December 2016, according to the Texas Workforce Commission.
While demand for some commercial properties will likely rise in response to this growth, many construction firms are feeling the pinch of a skilled labor shortage. Companies are meeting that challenge by creating efficiencies wherever possible with new technologies, supporting educational programs in construction fields and using pre-fabricated materials that lessen the need for onsite craftsmanship.
“The construction labor force that we’re dealing with right now is smaller than it was in 2007 by several million jobs,” says Stratford Land’s Chief Risk Officer Mark Drumm. “We have the workforce that we’re going to have, so we’ll be harder pressed to see significant volume. And that’s good. Looking at risk across all product types in the commercial sector — we need to be building for what is in demand.”
The construction industry is focused on implementing new programs and vocational training to combat the lack of human resources to meet the demand.
“We spend a lot of time recruiting on the management side across the state and out of state,” says McCarthy Building Companies Texas RegionPresident Ray Sedey. “We would like to see more students enter into the construction industry. We’ve started a craft-training program. Construction companies need to fill current employment gaps as well as get a pipeline of those ready to enter into the workforce in the next five to 10 years.”
Texas Real Estate Business checked in with some of Texas’ busy construction firms to find out what they’re working on, how changing populations and shifting workforces are affecting their industry, and what changes the construction business faces in the years ahead.
Cadence McShane Construction Company
Cadence McShane provides general construction, construction management and design-build construction services for the industrial, multi-family, office, mixed-use, educational, government and healthcare markets. The company is headquartered in Dallas with regional offices in Houston, Austin and San Antonio.
Recently, Cadence McShane has seen an uptick in workforce housing construction. Two recent housing projects for pipeline workers in Richwood — Brazos Crossing and Oyster Creek —reveal an increase in infrastructure construction despite low oil prices, according to the company. Situated within 12 miles of the Gulf of Mexico and a few miles of each other, both apartment complexes were completed in 2016, bringing 509 new units to this market.
These workforce projects are typically used to house employees as part of their compensation packages, or are rented at guaranteed rates for a set amount of time. Typically, workforce housing communities break ground in rural settings with the idea that as development occurs around the business, property values rise and owners can convert the communities to conventional multifamily and sell the assets.
Another trend on this firm’s radar is seniors housing, a booming sector inspired by aging parents who follow their middle-aged children into Texas, as well as by pent-up demand in business- friendly suburban areas benefitting from corporate relocations.
Cadence McShane’s Director of Business Development, Sue Lehrer, is leading this effort. While she recognizes the substantial growth that the seniors housing market in Texas has enjoyed, Lehrer explains that it wasn’t without growing pains due to the oversaturation of units within densely populated metro areas. Now, Lehrer says, “investors are looking at smaller towns where the demand is strong but supply is still catching up.”
Most recently, the firm completed an 82-unit assisted living and memory care facility in Leander, a growing suburb north of Austin. “We expect to see these types of projects increase throughout the suburbs,” Lehrer says. “This is only the beginning.”
Stratford Land is a Dallas-based real estate investment company that focuses on acquiring, entitling and selling properties in high-growth corridors in Texas, Arizona, Southern California and the eastern seaboard from North Carolina to Florida.
Chief Risk Officer Mark Drumm provides market, economic and strategic insight for Stratford Land’s investment decisions at the local, regional and national levels. He explains that commercial construction and development in Texas will need to move forward smartly, cautiously and concurrently with emerging social trends.
With labor concerns and rising costs of materials — the latter is up 3.8 percent from January 2016 to January 2017, according to the Associated General Contractors of America — new construction will need to be as low-risk as possible. Today, it’s difficult to replicate previous volumes of activity and output from past healthy business cycles.
“We don’t need to be doing a lot of speculation right now because so much is changing in a lot of industries,” he says. “People aren’t working in traditional offices as much, and we can all see what’s happening with retail. From brick and mortar to internet, it’s going to change in the next 10 years, so we need to be very careful in all those product types that we’re really building for quality demand.”
That type of demand can be seen in the popularity of multipurpose mixed-use projects. Such projects center on people’s ability to rent or buy homes in developments that allow them to walk or bike to offices and shop at small-format, food-focused retail. The most successful of these projects, Drumm says, also include easily accessible amenities, indoor/outdoor spaces and common areas that encourage socialization and provide easy options for physical fitness and quick access to green spaces.
The Canyon in Oak Cliff is one such Stratford Land asset that fits this profile. About three miles west of the Dallas Central Business District, the site is approved for retail, office, industrial/ flex and high-density residential use. It currently has an in-fill opportunity of 180 remaining acres. There are affordable multifamily and senior living communities now open on the property, and hotel and restaurants are under construction.
“It’s one of those rare opportunities in an in-fill location to have that much land and be able to deliver the level of amenity that you would typically see in master-planned communities into a mixed use project,” Drumm says.
At about 200 acres, the development will eventually contain approximately 7,500 residential units, 1,000 hotel rooms, 1.2 million square feet of office space and 800,000 square feet of retail space.
“Developers used to build what which was really what they wanted,” Drumm says. “And now I think that you need to make sure it’s multipurpose, multi-useable, flexible and can grow or change over time.”
An example of an emerging trend in adaptable construction is designing parking garages that can be converted into apartments or other uses. It’s fitting for an era in which automated cars, ride and bike share trends, and increasing public transportation options significantly reduce the number of cars on the roads in higher population areas.
In its “Emerging Trends in Real Estate” report from 2016, the Urban Land Institute reported that lowering overall costs of construction is the second-highest priority of developers, which makes the idea of altering parking structures financially and socially appealing.
“Even if we still have a ways to go before we reach the point where we forget that the gas is on the right and the brake is on the left, we will be seeing change trending in the parking patterns of real estate developments,” according to the report.
McCarthy Building Companies
With offices in Dallas and Houston, McCarthy typically has about 30 active projects in commercial, transportation, marine, water/wastewater and solar at any given time. Some projects currently underway include Children’s Health Plano Specialty Center, Houston School of Performing and Visual Art and three modernization projects for the Port of Houston.
Throughout the company’s 35 years, it’s been most active in the healthcare sector but is diversifying via more higher-education and hospitality projects. McCarthy’s current primary focus is the Dallas-Fort Worth and Houston metros.
“In both of those markets, we see long-term growth potential,” Sedey says. “One sector we see picking up is transportation as the Texas Department of Transportation is embarking on one of the biggest expenditures over the next decade.”
McCarthy completed the 14-story, 325-room Hyatt Regency Houston Galleria in the summer of 2015. While hotel financing has been difficult to align recently, Sedey says demand is high in Houston.
The firm anticipates year-over-year revenue growth of about 25 percent. “We have approximately 300 employee owners in Texas along with 500 craft workers,” Sedey says. “We are hiring and we expect to grow significantly over the next 24 months.
Operating across Texas with offices in Dallas and Houston, Arch-Con handles projects that amount to roughly $250 million in volume yearly.
One of the firm’s projects, Valley Ranch Town Center, is fulfilling what President and CEO Michael Scheurich says is a high demand for new retail on Houston’s northeast side.
The 240-acre, mixed-use project is the largest development currently under construction in Houston, Arch-Con says. Developed by Signorelli, it is situated in the northeast corridor of Houston near the Grand Parkway and Highway 59. Arch-Con’s scope of work includes site work and 350,000 square feet of retail, including a Kroger Marketplace, Academy Sports + Outdoors and junior anchor and small shop tenants.
Arch-Con also just broke ground on Creekside Apartments for The Howard Hughes Corporation in The Woodlands, a master-planned community about 28 miles north of Houston. “People might be surprised to see that Houston’s still building multifamily, but that’s an example that it’s still healthy,” Scheurich says.
Creekside will serve the south region of The Woodlands when it opens in mid-2018. The development encompasses more than 10 acres and uses architect Humphreys & Partners branded “Big House” design concept. This includes a mix of two urban buildings that are four stories tall, along with 10 Big House structures with direct access garages, enclosed private stairs for upper units and walk-out patios and balconies.
Arch-Con is also building the I-20 Commerce Center in Dallas, a 900,581-square-foot, precast tilt-wall storage facility for industrial use. Three of the building corners will have aluminum entrances for office areas and ample space for office parking, as well as trailer/truck maneuverability. To the Northwest, Scheurich is particularly interested in the growth occurring around Texas A&M University in College Station, where he says the university is expanding while families are also beginning to move in.
The 25 by 25 initiative was launched in 2013 with the goal of increasing engineering enrollment at A&M to 25,000 students by 2025. The initiative was developed in response to a similar issue the construction industry is facing: the need to increase the state’s engineering workforce. Arch-Con built the multifamily units, which opened this past August, at Century Square for owner Midway. The architect was STG Design Inc. The urban contemporary apartments encompass a total of 326,000 square feet with 249 units and a 100,000-squarefoot, precast parking garage with 275 spaces, two interior courtyards — one with a pool and another a quiet area. Other amenities include a weight room, game room, study lounge and yoga area.
While the college is growing, many families are also beginning to move to College Station, Scheurich says. “Put those together, and you’ve got a lot of commercial development.”
Keller Webster, a 40-year veteran of the construction business, founded KWA Construction in 2004. Since 1980, Webster has been focusing specifically on multifamily. And in 2016, KWA’s high-profile Arlington Commons was awarded the Dallas Business Journal’s Multifamily Deal of the Year for 2015.
KWA, which builds exclusively in Texas, is the general contractor on Arlington Commons, a $200 million project that will bring 1,300 apartments to the Arlington area, midway between Dallas and Fort Worth.
The city of Arlington and the developer, The Nehemiah Company, worked together on this project. The city contributed a $10.5 million reimbursement for the razing and redevelopment of the former apartment site, which has buildings dating to the 1970s. Construction costs for the first phase are $39 million.
Phase one of Arlington Commons will produce a four-story, 353-unit community that will be complete in February 2018. Brian Webster, president of KWA construction, says the developers are planning four phases. JHP Architecture/Urban Design is the project architect.
“This is a monumental project for KWA Construction, not only for the opportunity to work on a redevelopment of this scale and with such a high caliber team, but also knowing how truly transformative it will be for Arlington residents,” Webster said.
Webster says the key metric that enforces a healthy outlook in multifamily construction is the volume of corporate relocations throughout the state.
An article from a December 2015 issue of the Dallas Morning News asked, “Is Texas the new California?” The news article reported that 1,510 companies moved to the state, in whole or in part, from 2008 to 2014.
“The Texas market has had exceptional growth over the past four to five years,” Webster says. “The cities have done a tremendous job of attracting people from all over the country to settle in Texas.”
Taylor Williams, Rebusiness Online, 3/27/17, rebusinessonline.com