Development Is Coming To Small Cities Around Houston. Infrastructure Needs To Run To Catch Up

Major commercial development is coming for small cities surrounding Houston, whether the infrastructure is ready or not.

The impact of fast growth hitting small towns came to the fore last month when the city of Magnolia placed a temporary moratorium on new development because there are simply no more water connections available using the city’s current infrastructure.

But Magnolia is far from the only once-rural area feeling the strain, considering the continuous and rapid-fire growth of the Houston metro area. That has left small-town officials scrambling to prepare their infrastructure for what is coming, cope with what's underway and figure out how to fund it all.

As State Highway 99, or the Grand Parkway, continues to be built in a giant loop around Houston, formerly rural areas are becoming more accessible and attractive to developers.

Cities that used to feel like sleepy small towns, many with populations under 5,000, are now seeing evidence of expansion on a daily basis. With that growth comes the requirement for wider roads, more water pipes, bigger classrooms and other infrastructure.

“The suburban fringe of the Houston area has reached them, or has passed them now,” Texas A&M Real Estate Research Center economist Adam Perdue said.

The triple whammy of new development, migration to the suburbs and more people moving to Houston has made it tricky for small cities to prepare and fund their infrastructure.

In 2017, officials in fast-growing Manvel, 18 miles south of Downtown Houston in Brazoria County, held a series of conversations with engineers, developers and potential developers to get a grasp on how much growth was coming.

“In 2021 or '22, we determined that we had already blew through those plans,” Manvel City Manager Kyle Jung said. “And those were one-year, three-year, five-year, 20-year plans. The amount of growth that we had exceeded what we had even thought in [all of those] plans.”

It is likely that Magnolia’s growth was just as unpredictable.

The population of Magnolia, about 40 miles northwest of Houston and 20 miles west of The Woodlands, remained a relatively small 2,635 in 2021. But that was almost double 2010’s 1,395. And there are many more residents living in the city’s extraterritorial jurisdiction, where the moratorium also applies — an estimated 142,172 people lived within a 10-minute drive of Magnolia as of 2020, per data provided by the city.

Magnolia enacted its four-month-minimum moratorium on Dec. 21 after an analysis by AEI Engineering determined there was no remaining water capacity, recommending the city halt new development. The city is building a new well on the east side of the city, to be completed in August, and plans for a second new well are in the works. 

Developments like Gulf Coast Commercial Group’s 60-acre mixed-use development, Magnolia Village, will be allowed to continue, as well as any other development that doesn't impact the water system. 

Magnolia Village, at FM 1488 and Spur 149, will include three 10K SF retail buildings in its first phase, as well as 12 single-tenant pad buildings and 300 multifamily units. The development’s brochure boasts more than a dozen future single-family development sites in a 5-mile radius, some as large as 5,600 acres.

Development of those tracts would put the town on a growth trajectory similar to Manvel, which is expected to reach a population 13 to 15 times larger than its 2018 population within two decades. When Jung first joined the city staff in 2012, Manvel counted 5,000 residents. The 2020 census recorded the population as 9,992, and recent population estimates are as high as 12,355. 

Timing and funding infrastructure to keep pace with development isn't an exact science.

Conversations about Manvel Town Center, a 273-acre Weitzman commercial development to be anchored by an H-E-B, began in 2013, Jung said. City officials had an idea of what infrastructure would be needed, but not when it might come into play.

“If you can’t tell me the timing, how do you anticipate the city building the infrastructure so that it’ll be ready at the right time?” Jung said.

In Manvel, Weitzman and the town struck a Chapter 380 agreement. Like Municipality Utility Districts and Tax Increment Reinvestment Zones, Chapter 380 allows municipalities to offer incentives to promote economic development, often allowing a means of dividing the cost of infrastructure to service it.

“We said, 'Yes, we would provide you with utilities, but you have to build the utilities and we will reimburse you over time as your development produces the amount of revenue needed in order to do that,'” Jung said.

Weitzman directed the development of a wastewater treatment plant, a water plant, detention facilities, feeder road modifications and the construction of Kirby Drive at one boundary of Manvel Town Center, according to its website. The water and wastewater plants will be turned over to the city once construction is complete. 

Larger developments, like subdivisions or master-planned communities, tend to use MUDs, which function as independent, limited governments and can issue debt to help developers finance infrastructure such as water, sewer, drainage and road facilities.

But they aren't foolproof. Manvel also enacted a moratorium in December 2013 for MUD 29, which serves the Rodeo Palms subdivision, when water pressure was impacted during construction of Manvel Junior High. Solving the impasse required an engineer to provide a capacity letter to the city ensuring enough water infrastructure would be available to serve each house being built within the MUD. The moratorium ended when a new well was drilled in 2015.

Impact fees are another way for cities to generate funds for new infrastructure, Perdue said. 

“The logic, they say, is that the communities, these newcomers, aren't paying for the development,” Perdue said. “It does help with this upfront problem.”

The city of Fulshear, which has seen massive growth from about 1,100 residents in 2011 to over 25,000 in 2021, has substantially increased its impact fees to help fund infrastructure for new development. 

The city adopted a fee of $2,250 per service unit for water and $3,250 per service unit for wastewater in 2019, Fulshear Assistant City Manager Zach Goodlander said, noting that a single-family home would require one service unit while shopping centers or multifamily developments would require more.

But after a study and recommendation from engineering firm Freese and Nichols, those fees were hiked last year to $7,202 per service unit for water and $21,678 per service unit for wastewater.

The changes came for several reasons: Construction costs have risen, the city is trying to keep the residents’ water rates at or near their current rates, and the fees will help pay for projected bond sales and necessary improvements to water and wastewater plants, Goodlander said.

Tajana Surlan, a RE/MAX broker who represents a 125-acre tract in Fulshear, isn't happy about that change, though she is passionate about Fulshear's growth potential, "classiness" and small-town charm.

“They can stifle economic development,” Surlan said. “Increasing those impact fees will kind of discourage the kind of attractive commercial and higher-density residential development that the city says it wants.”

Some major developers looking at the 125 acres have been taken aback by the impact fees in meetings with the city, she said. Surlan is interested in creating a TIRZ district for the tract, which would take future taxes on the property and divert them to reimburse the developer. 

“A TIRZ becomes a magnet, it becomes a commercial magnet,” Surlan said.

Yet Fulshear doesn’t seem to be having trouble attracting development. The city's population is expected to more than double again by 2028, jumping from 31,861 residents in the city and its extraterritorial jurisdiction in 2019 to 77,651, Community Impact reported.

Goodlander defended the impact fee increases, saying the city goes through a complicated statutory process to charge them, which requires it to keep a regularly updated water/wastewater master plan.

“Growth is very fluid, so it’s very important to make sure we’re always looking at the plan,” he said, adding that when it comes to development, “we haven’t seen any slowdown.”

Conversations about infrastructure should begin long before construction, according to Ramsey Chehayeb, vice president of CHC Investments, which develops commercial real estate in the small but growing city of Crosby about 24 miles northeast of Houston.

Before building — or even a design — comes engineering work, permitting and optimizing a site plan based on different land easements, which help ensure utilities and infrastructure are in place, he said.

“If there’s a tract and there’s no utilities, let’s say water and sewer, that are near the tract to hook to, the developer can pay the city to bring the utilities closer to the tract,” Chehayeb said. “But it’s not something that we’ve ever done in Crosby, for example. It makes it very, very expensive and economically unfeasible in most cases.”

Crosby has enough utilities for the kind of retail centers CHC Investments develops, including a 10-acre site in the works, he said. 

But the city is anticipating more growth, spurred by a thoroughfare connecting Highway 90 to Interstate 10 that cuts the drive to Downtown Houston from 40 to 20 minutes, he said.

Crosby ISD is preparing for an influx of 7,000-plus new homes and more than 10,000 new students, per the Houston Chronicle, as developers flock to the town's available land, drawn by the widening of FM 2100.

“They’re doing an expansion from two to four lanes in anticipation of all the homes that are going to be built over the next 25 years,” Chehayeb said, adding he believes Crosby is ahead of the game on planning for the influx. "It’s very important. If they don’t do that, it’s going to cause a lot of traffic jams down the line.”

Congestion is just one of the issues that could come from a lack of infrastructure prepared to handle growth, Perdue said.

“You might have low water pressure issues. Schools will be overcrowded,” he said. “This is not just a local municipality. This is across jurisdictions. It's a strong issue.”

It is clear where the growth is going, Perdue said, citing the Grand Parkway’s path and the land along FM 1488 that connects Magnolia to The Woodlands, a major employment hub. But there are risk factors to consider when timing the infrastructure to be ready, he said.

“You don't necessarily want to predict it. Because if you're wrong, you just laid out $10M worth of infrastructure and you're paying taxes on it,” he said. “Having to bear that cost for local taxpayers for an extra two years before the development actually comes is a costly proposition.”

Infrastructure construction is quite “piecemeal,” Perdue said, meaning timing and development need to be in alignment.

“It's very chunky," he said. "That's another part of the difficulty with infrastructure."