Credit Market Thaw Signals It's Time For Houston Developers To Tackle New Troubles

Now that financing is more accessible and construction costs are comparatively stable, Houston developers are turning to all of the other obstacles preventing or slowing their construction projects.

A lack of skilled labor, tight credit markets, strained supply chains and difficulty with Houston’s energy provider have all thrown wrenches into plans since the pandemic, panelists at Bisnow’s Houston Construction Trends and Innovations event said.

But with more liquidity becoming available, they expect the limited number of construction projects underway now to grow next year, particularly in one unexpected asset class: office. 

“The liquidity available for developers dictates development and new projects,” Pat Hicks, CEO of Hicks Ventures, said at the event at The Royal Sonesta Houston Galleria on Thursday. “So that's thawing a little bit.” 

Having been through about a half dozen cycles, Hicks said he knows from experience that credit markets are showing signs of improvement and “at least doing deals in Houston.” 

“Given that, you'll see more and more debt come, the spreads will get a little bit more competitive,” Hicks said. “The amount of leverage will get a little bit higher as we come out of it.”

Development has been difficult to fund in recent years given a 40% increase in construction costs, Tellepsen CEO Tadd Tellepsen said. For several months, Tellepsen figured in a 1% to 1.5% projected monthly increase in costs.

“Construction pricing has certainly been the bane of a lot of us in this room over the last two years,” he said. “I know for Tellepsen, we had a couple projects over the last few years get put on the shelf. So that's incredibly disappointing.” 

In the last year, construction costs have only increased 3%, Tellepsen said. They haven't flattened, but the rate of increase has slowed and normalized, he said.

A budding concern now is the price of labor.

“Labor is a real problem, skilled labor,” Tellepsen said. “You mainly see that in the trades of mechanical, electrical and plumbing. Those are the higher-skilled trades, so naturally you see more constraint there. So it is shaping up to be a problem.” 

The supply chain is also a challenge, with items like air handlers, chillers and electric gear having 30-to-50-week lead times, Tellepsen said. The worst problem is securing generator sets, which exemplifies why it is important to start planning and procuring equipment early in the development process.

“Gensets can come at the end of the project … but we're seeing upwards of 90 weeks on certain gensets,” Tellepsen said. “So plan your projects early. Get involved early. Get your engineering team early, your contractor early, and you can develop a package with enough information to start to procure.” 

Overall, the supply chain has been improving, Arch-Con President Jason Cooper said, but that could change with President-elect Donald Trump returning to office.

“The thing that we may have an issue with, that we had an issue with in his first presidency, were the tariffs and what the impact of the tariffs are going to be on light fixtures, millwork,” Cooper said. 

Supply chain shortages can be unpredictable, making “one widget in the gear” impossible to obtain, he said.

Still, working with CenterPoint Energy has presented the biggest hurdles to Arch-Con finishing its jobs quickly, Cooper said.

“Even before you bring a contractor on board for some product types, you're going to need to be meeting with CenterPoint. … Get the ball rolling, to get in that terms-and-conditions package as soon as possible,” Cooper said.

Considering all of these construction obstacles, plus the substantial vacancy in Houston’s office market, office development has been exceptionally slow. CBRE’s third-quarter office report shows a 26.2% availability rate and just 451K SF of office space under construction.

But the sector has at least a few enthusiasts.

“Yeah, I'm the idiot trying to build an office building today,” Hicks said, referring to Framework @ Block 10, the 200K SF mass timber office building planned for 10496 Old Katy Road in West Houston. 

Class-A product in that submarket isn't suffering at all, and “rates are through the roof,” Hicks said. Asking rent per SF in Class-A Katy Freeway offices is $47.23, well above the Houston Class-A average of $37.97 per SF, according to CBRE. 

“When I was there, it was probably $20 gross,” Hicks said of the area's office rents. “So we're coming out of it. And the first guy up with the new building wins.”

Midway broke ground early this year on CityCentre Six, a 308K SF tower in West Houston that is mostly preleased by chemical company Dow. 

But there is a large market for boutique office buildings along Interstate 10. People are interested in four-to-six-story buildings where they can quickly park and walk to their desk, Cooper said, “rather than having to park in the parking garage, take an elevator down to the lobby over, take an elevator up to there.”

“And if they have to leave, they don't feel like they have to leave for the day and never come back because it's such a pain to get back into your office again,” he added. 

Boutique buildings that are amenitized and in walkable areas will compete like Class-A trophy towers used to, Cooper said.

Leasing velocity is trending upward, and debt markets are thawing, which helps office developers, Hicks said. 

“I’ve heard this five to six times in my 38 years: ‘There will never be another office building built,’” Hicks said. “I bet there’s three or four. Three or four will get started in ’25, guaranteed.”

Major developers and other “big-money folks” in Houston have gained confidence since the election, Grey Wolf Engineers President Jason Atkinson said. Houston has great market fundamentals, but the biggest challenge to development has been the lack of investments to move projects forward, he said.

Now that the money is loosening up, that could quickly ramp up development activity. 

“We have a tremendous economy that defies a lot of the rest of the country. There's no state, no city I'd rather be in,” Atkinson said. “From what we're seeing so far, 2025 is shaping up to be a pretty strong year.”