Steady Pace Continues Along With Rising Costs

Uncertainty Remains Over Labor, Materials

by Jennifer Hiller

Economists and construction industry experts around the state say they expect 2006 will be a strong year for most Texas construction markets.

With a wealth of health care and education projects on the table, industry professionals anticipate continued growth across most sectors in 2006, even as the rebuilding efforts in Louisiana put some pressure on the state's skilled labor pool.

"I think everyone is mostly optimistic about next year, and that goes for all types of markets," said Raleigh Roussell, president and CEO of the QUOIN chapter of the Associated General Contractors, which represents Dallas, Fort Worth and East Texas.

Ray Perryman, economist and principal of The Perryman Group, an economic and financial analysis firm in Waco, said the volume of commercial construction contracts should continue to rise in 2006 even as the residential housing market cools off a bit. "It will be a good year for the commercial and industrial side of construction," he said. "Residential will fall off to some extent but will still be strong. We've been overbuilding there to some extent."

Perryman predicted that the biggest concerns for Texas construction firms will be the diversion of labor and materials to Louisiana for the post-Hurricane Katrina rebuilding efforts.

"Some of our laborers and contractors might be diverted to Louisiana," he added. "Some materials will also be diverted, which will put some upward pressure on commodity prices. Those are the things that people will need to be concerned about. We're going to be OK in terms of the overall economy."

Perryman said the aftermath of the 2005 hurricane season, and Hurricane Rita in particular, will mean some new construction projects in East Texas. "Rita will generate some new construction, but there was not a whole lot of damage from that storm overall, so it won't be too much," he said.

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Jerry Nevlud, executive vice president of the Houston Chapter of the AGC, said that many Houston-based construction firms and specialty contractors continue to enquire about licensing and work in Louisiana. "There will be companies that will be looking to go there in 2006," he said. "There is work to be had. There's some opportunity for growth. Some of our members already have things going on in the New Orleans area."

But while some local construction firms have found an opportunity to expand into a new market for the first time, others are concerned about the pressure on the Houston-area construction labor market. The wealth of jobs in Louisiana and the inflated wages being paid there are drawing workers from throughout Texas.

"We may be facing a workforce issue," Nevlud said. "The biggest issue is related to the specialty contractors. There could be real pressure among the skilled workers and craft workers.

However, the outlook in Houston across nearly all construction sectors looks good for 2006, he said. "High-rise office buildings aren't there," Nevlud said. "But people are excited about the possibilities in the industry as a whole. There's still a lot of medical. A lot of our members are still doing school work."

Voters in Houston's suburban school districts have approved bond measures that will bring more new school construction projects to the region. Cypress-Fairbanks ISD, which approved a $470 million bond program in 2001, passed a $713 million measure in late 2004 to try to keep pace with campus population growth.

In late 2005, Deer Park, Barbers Hills, Pearland, Alvin and Galena Park were among the school districts to win voter approval of their bond programs.

"Around the perimeter of Houston, the school districts are finding it hard to build quickly enough," Nevlud said.

While Dallas ISD's $1.37 billion bond program - the largest in state history - has been keeping many construction firms busy, the Metroplex expects to see more opportunities in the higher-education market in 2006, Roussell said.

Tarrant County Community College will start work on a $280 million bond program while Dallas County Community College will launch a $450 million construction effort..

Dallas ISD has been spending as much as $300 million a year for new construction, renovation and critical needs such as electric systems, HVAC, ADA compliance and envelope repairs to roofs and brick. But the district still has projects to bid for its bond program. "This year will still be good," Roussell said. "It will start to taper in 2007."

Although it's a fragile market, business for developers in the region looks better than it has in several years, he said. "Anything that tends to move construction costs up creates concern on whether developers can lease the space and so forth.

"If you talk to property managers and developers, rents are going up so they will still be able to beat those cost differences." Roussell said the only real concern for developers is that the national economy remains fragile.

Interest rates are still favorable enough that churches should be able to continue building new facilities, Roussell said. Manhattan Construction Co. is also expected to start work in 2006 on the area's highest-profile project - the new $650 million Dallas Cowboys Stadium, he added. The new stadium is scheduled to open in Arlington in 2009.

In San Antonio, retail, education, aviation, health care and hospitality work will provide a wealth of new opportunities for construction firms, said Doug McMurry, executive vice president of the San Antonio Chapter of the AGC. "The outlook for commercial construction is exceptionally good," McMurry said. "So good, that industry leaders are very concerned about inflation and labor shortages."

In an effort to catch up with the explosive growth of residential development on the city's north side, two of the state's largest school districts are managing huge construction programs.

North East ISD has started sitework on a new, $70 million Lady Bird Johnson High School, but McMurry said the building will be bid separately in February. Northside ISD will also build a new $70 million reliever high school, two middle schools and an elementary school.

Farther north, Boerne ISD is expected to accept proposals for a new, $50 million high school.

"There will be lots of opportunities at the San Antonio International Airport," McMurry said. Bids will be accepted for a new $40 million parking garage in February and a new $60 million terminal in March."

The $160 million Methodist Stone Oak Hospital will bid in March, McMurry added.

The area's highest-profile construction project - the $800 million Toyota Tundra plant - will enter its final construction phase and should be operating by fall. The project is the second auto assembly plant to be built in Texas since General Motors constructed one in Arlington five decades ago.

In the Rio Grande Valley, local governments are continuing to do remodels and capital improvement projects on everything from justice centers to administration buildings, said Mike Harris, executive director of the Rio Grande Valley chapter of the American Subcontractors Association.

Rapid population growth across the region has fueled school, hospital and church construction, and no slowdowns are anticipated for 2006.

"The architects and engineers can't get the plans out fast enough," Harris said. Higher-education projects are also expected to keep local contractors and subcontractors busy as colleges across the region grow and expand.

The University of Texas - Pan American campus in Edinburg is getting its first new dormitory in three decades. The $12.5 million residence hall will allow 400 more students to live on campus by the fall.

More retail centers and restaurant construction - fueled by shoppers coming across the border from Mexico - is expected to continue growing across the Valley and in 2006, particularly in McAllen, Harris said. There is also continued talk about more condominium development on South Padre Island, he said.