September 2007 - The Texas construction market has seen healthy growth in recent years, but in 2007 it’s on track to register a decline.

This decline will occur despite a state economy that continues to perform relatively well. Texas employment advanced through mid-2007, and consumer spending remained strong. According to the Federal Reserve Bank of Dallas, state employment grew at an annualized rate of 2% in May and unemployment fell to a record low of 4.1%. The state has benefited from its prominence in the energy industry, as higher energy prices have prompted healthy job growth over the past few years. Other industrial segments, such as manufacturing and technology, are driving job gains in the state as well. In fact, Texans are increasingly concerned that the labor market has become too tight and will lead to a shortage of workers and higher wages.  In 2006, the state GDP for Texas grew 4.3%, faster than the 2.9% increase for the U.S. as a whole.

 An influx of new residents, coupled with strong business spending and healthy job growth, provided fuel for the construction market’s fire in 2006. The value of total construction starts grew 19% to $67.8 billion, on the heels of a 16% gain in 2005.  Boosted by this recent strength, Texas registered the largest dollar amount of construction starts among the fifty states in 2006, surpassing California.

In 2007, however, the upward trend has reversed.  Total construction is expected to slide 8% this year as each of the three major sectors (residential building, nonresidential building, and nonbuilding construction) falters from last year’s elevated pace.

Residential Building. While most of the nation plunged into a steep housing correction in 2006, the state of Texas continued to build. For the nation, the dollar value of single-family housing starts declined 14%. In Texas, however, the dollar value of single-family housing starts continued to rise – gaining 5% over the year. The value of multifamily housing rose by an even stronger 19%, helping to lift the state’s residential total to $35.1 billion, up 6%.

One of the main reasons that residential construction in Texas performed so well last year is housing affordability. The state did not see the same rapid price appreciation that occurred in many other areas of the country over the past five years. According to the Office of Federal Housing Enterprise Oversight (OFHEO), national home prices increased 56% from the end of 2001 to the end of 2006, while Texas prices rose by a more reserved 26%.

Highly affordable housing and a strong local economy were able to largely shield the state from the housing correction in 2006. In 2007, however, continued weakening in the nation’s housing market and the crisis in the sub-prime mortgage market will have a more negative impact. Single family housing will slip 4% while multifamily housing drops 11%, producing a 5% downturn for total residential building in Texas. By national standards, however, these declines will still be restrained.

Nonresidential Building.  The Texas nonresidential building sector also fared well in 2006, compared to other parts of the nation. Nonresidential building jumped 30% last year to $18.6 billion, as Texas came in second only to California in the size of its nonresidential market.  The outlook for 2007 is for a modest deceleration from the lofty amount achieved last year, as groundbreaking for nonresidential projects drops a modest 3%.

Both components of nonresidential building (commercial/industrial and institutional projects) realized strong dollar volume growth in 2006. The value of commercial and industrial starts increased 33% to $8.5 billion and institutional construction rose 27% to $10.1 billion. This year, however, the two components will diverge.  Commercial and industrial starts will continue to gain (up 1%), as growth for offices and hotels balances modest slippage for retail building.  The institutional group in 2007 is expected to fall 5%, as healthcare facilities retreats from last year’s exceptional performance, outweighing further growth for school construction.

Nonbuilding Construction.  Nonbuilding (or engineering) construction in Texas enjoyed one of its best years ever in 2006, surging 49% to $14.1 billion. The increase was driven by almost all of the nonbuilding categories, with notable contributions coming from electric utilities and “other public works.”  Most of the largest projects in 2006 were energy-related, including a $1 billion natural gas plant in Port Arthur, a $300 million natural gas line in the Dallas-Fort Worth area, and a $750 million coal-fired power plant in San Antonio.  Also reporting double-digit gains in 2006 were highways and bridges as well as sewers and water supply systems.

Although total nonbuilding construction starts are expected to decline 22% in 2007 (pulling back from the robust level that was achieved in 2006), the ever-present need for expansion points to healthy growth in future years. In late 2006, for example, the Dallas Area Rapid Transit (DART) announced growth plans for future bus, rail, and vehicle services to meet the demands of an ever-increasing population in North Texas.

To order a copy of the full report on Texas construction, visit www.analyticsstore.construction.com.

For information about McGraw-Hill Construction’s Research & Analytics services, please go to www.analytics.construction.com or call 1-800-591-4462.