In the wake of Hurricane Harvey and other storms to hit North America & the Carribean, development costs—not only up and down the Gulf Coast of Texas but also in areas that escaped the storm’s wrath—are poised to jump as builders grapple with a tighter labor market and higher material costs, according to speakers at a ULI Austin event in October.
Jim Rado of Austin, regional manager at David Weekley Homes, said the Houston-based homebuilder already is hearing from roofing contractors and suppliers that post-Harvey price hikes of 5 to 10 percent will take effect January 1.
On the labor front, David Weekley’s manager in the Houston area recently tried to recruit drywall crews from San Antonio to finish ten houses before the end of this year, Rado said. However, those crews are in short supply because many drywall laborers have been flocking to hard-hit Gulf Coast cities like Port Aransas and Rockport to rebuild residential properties, he said. Out-of-town crews that are available come at a premium.
Over time, such impacts will be “pretty drastic,” Rado said. The effect will not become clearer until insurers pay homeowners’ Harvey-related claims and residents decide whether to rebuild, he said. “I would add in some . . . price increases to your fixed-cost bids,” said Rado.
For his part, Nick Moulinet, an Austin executive at commercial builder DPR Construction and chairman of the Real Estate Council of Austin, said he is not sure how pricing in commercial construction will fare in the aftermath of Harvey. So far, DPR has noticed no impact on the costs of labor or materials in Texas, he said.
Still, Moulinet worries that workers hopping over to the residential side will create a labor shortage in commercial construction, because thousands of homes were damaged or destroyed in the Houston area and along the Gulf Coast while far fewer commercial structures were harmed.
“The thing that I think scares us the most is the perception that prices are going to increase, the discussion that prices are going to increase, that fear of, ‘Hey, it’s going to come, we just don’t know when,’” Moulinet said.
As a result of that fear, construction prices in the post-Harvey environment will climb “whether they need to or not,” he said.
Texas Governor Greg Abbott has estimated damage from Harvey at $150 billion to $180 billion. More than 200,000 homes were damaged, including the more than 12,000 that were destroyed. Authorities tallied more than 80 Harvey-related deaths.
Speakers at the ULI Austin breakfast said they do not expect a mass exodus of hurricane-distressed residents or businesses from the Houston area to Austin or other places, unlike what transpired after Hurricane Katrina hit New Orleans.
However, CW Sheehan, an Austin vice president at commercial real estate services company JLL, said some people might think twice about whether to live in or start a business in the Houston area in the wake of Harvey and major floods that hit the region in 2015 and 2016.
But Sheehan and Moulinet said people and businesses will remain in and relocate to Houston because of its status as the fourth-largest U.S. city and a global energy hub. One incentive for companies to locate in Houston is the office vacancy rate of nearly 23 percent for the third quarter of 2017, which provides leverage for tenants seeking deals on leases, according to a JLL report.
As the Houston area recovers from Harvey and the region continues to attract new residents and businesses, the issue of housing affordability looms, said Rado.
“In my 40 years in the business, I’ve never seen a bigger disconnect between what it costs to buy land, build something, and have somebody be able to afford it, and then leave any of us a profit,” Rado said. “If we grow, we can’t grow in the places that people want to be, because they can’t afford it. We’re having to build further out, like we did in the ’80s and ’90s.”
In building away from the core of the Houston area, developers end up drawing blame for sprawl-induced flooding, Moulinet said. “Whether it’s true or not, that’s the narrative,” he added.
Going forward, Moulinet said, more foresight is needed regarding design, development, and construction in Houston and elsewhere in Texas to accommodate growth, but also to anticipate disasters like Harvey.
Government officials who establish development codes must be held accountable for “where and how we grow,” Moulinet said. But builders, engineers, architects, and other industry professionals also bear a responsibility to help people understand the risks of where they want to build homes and offices, he said.
The struggle over responsible development boils down to a tug-of-war between supply and demand, Moulinet said.
“Is it the real estate community that’s responsible for putting people in harm’s way, or the people that are buying themselves into harm’s way?” he asked. “That’s going to be the big question that we’re going to have to answer. [Developers are] always going to be responsive to the demand.”