2017: a blend of optimism and uncertainty - constant...

2017: A Blend of Optimism

and Uncertainty

2

FMI Corporation Copyright 2016

For over 60 years, FMI has been the leading management consulting and investment banking firm dedicated exclusively to engineering and construction, infrastructure and the built environment.

FMI serves all sectors of the industry as a trusted advisor. More than six decades of context, connections and insights lead to transformational outcomes for our clients and the industry.

About FMI

• A/E and Environmental

• General

Contractors/CM

• Heavy Civil

• Industrial

• Specialty Trades

• Utility T&D

• Cleantech and Energy

Services

• Construction Materials

• Building Products

• Oil and Gas

• Private Equity

• Owners

Sector Expertise

3


Global Growth is Improving

Can We Begin to Escape the Low Growth Trap?

Area #1

4


Source: The Economist Magazine

5


• Other Projections – International

Organizations• Goldman Sachs 3.5%

• OECD 3.3%

• IMF 3.4%

Global Growth

United States 2 – 2.3%

China 6.5%

India 7.5%

Western Europe 1.1%

Africa 2.8 – 3%

6


America Takes Key Steps to Grow

at 3% Plus Rates

Area #2

7


Steps to Grow

• Academic Consensus About What it Will Take• Comprehensive Tax Reform That Lowers Corporate Rates

without Increasing Debt

• Reduced Regulatory Burdens on Businesses

• Target Government Investments

• Infrastructure

• Education/Training (31st)

• R&D – Now 2% of GDP; Used to be 4%

• Private Investment to Improve Productivity/Growth

• Was 70% of Cash Reinvested - Now 42%• Share Buy Backs

• Increased Dividends

8


The Threshold Question

With One Party Now Controlling the Presidency, House and Senate,

Can we Get These Things Done?

9


M&A Activity Will Remain Strong

Area #3

10


The State of the Energy Business

Area #4

11


Source: Energy Information Administration

12


•At the end of 2016, the Supply/Demand Numbers were:

• Supply 96.44M BPD (after US cuts of 6-8M BPD)

• Demand 95.57M BPD

• Excess of Supply 870K BPD

•Proposed Cuts as of January 1, 2017 (231B Surplus ‘’14; 9B Deficit – ’15)

• OPEC – 1.2M BPD

• Non-OPEC – 600K BPD

• Total – 1.8M BPD

•Global Demand Growth 1.2M BPD

The Energy Supply Demand Numbers –

A Case for Optimism

Source: Energy Information Administration

13


• Steady Growth: 2.3% GDP

• Job Growth: 195,250/month (Rolling 12)

The US Picture

-6

-5

-4

-3

-2

-1

0

1

2

3

4

05 06 07 08 09 10 11 12 13 14 15 16

US Annual Job Growth (Millions)

Source: Bureau of Labor Statistics

14


Source: Greater Houston Partnership

15


Houston Continues to Lag the State

5.3

3.73.2

3.7

0

1

2

3

4

5

6

Houston DFW Austin San Antonio

December 2016 (MSAs; Not S.A.)

Source: Texas Workforce Commission

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•Estimated 2.7 Million People Added Since 2010• 1.56 Million Jobs Added Over Same Time Period

•Leisure, Hospitality and Technology Growth Has Offset Energy Job Losses

•Texan’s Ability to Navigate Lower Oil Prices

•NAFTA Renegotiations

• Immigration Reform• An estimated 2.5 million Mexican immigrants (9.3%) call Texas

home• Census Bureau Data Shows 13.6% of Texas workers are not US

citizens

•3.4% GDP (2.2% in 2016)

Texas Gaining Momentum

Sources: U.S. Census Bureau, Wells Fargo, Texas Workforce Commission

17


• Dallas• Corporate and Regional Headquarters Continue to Move into

Dallas• Toyota, Jamba Juice, Jacobs Engineering, Charles

Schwab, McKesson• Helped by its Central Location, Cost of Living and Economic

Development

• Austin• The Most Entrepreneurial Metro Area in the Country (Kauffman

Index)• The nation’s Most Attractive Real Estate Market (ULI)

• Continues to attract Millennials and Highly Skilled Workers• Losing its Affordability Edge

• San Antonio • Moderating• Employment Affected by Oil

Dallas and Austin Remain Strong

Sources: U.S. Census Bureau, Wells Fargo, Texas Workforce Commission

18


19


Houston: “The Worst is Over”

• Approximately 70,000 energy related job losses

• Replaced by Lower Paying Professions

Sources: GHP, Texas Workforce Commission, Wells Fargo, QCEW

X14.8

20


Source: GHP

21


$8,319

$22,706

$4,980$4,000

$3,000$2,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2016 2017 2018 2019 2020 2021

Projects Begin To Wind Down

Rapidly After 2017(Value of Projects Completed, $ million)

Source: Bill Gilmer, IRF

22


• Occupancy 88.5%

• Overbuilding and Aware• 22,549 units Delivered in 2016 (NR)

• 15,700 units still Under Construction

• Negative Absorption in Q4

• Roughly 15K units in lease up

• 6,700 units to be delivered by YE

• Rents Flattening/Heavy Concessions

• Projects on Hold

• 35-50% equity requirements mean

developers have enough equity to

keep bank whole and make interest

payments but suspend project until

market recovers

Multifamily

Sources: CBRE, John Burns Consulting, Apartment Data Services

23


• Further Declines Expected

Ahead• M&A and Bankruptcies

• Rents

• Concessions a Given

• Long Road to Recovery• 10.5 msf needs to be absorbed to

return to long term average vacancy

of 16%

Office

Source: CBRE

Vacancy Under Construction Sublease Space

15.7% (20.9%) 2.4 msf 11.1msf

24


PUBLIC WORK• City of Houston $414M – Down YOY, then doubles in 2018

• Metro: $9.3M

• Harris County: $89.1M

• Fort Bend County: $24M

• Port of Houston: $73.4M

HIGHWAY/CIVIL• TxDOT – 1.54 Billion (1.42B last year)

• Harris County - $258.2M

• City of Houston – $582M - up YOY; jumps to $900M in 2018

Public Work/Civil

25


• Flat in 2017 and potential to grow 2 – 2.5% supply in 2018

• Larger RevPAR decreases 16% in Q3, down 8% Q2 and

down 9.5% in Q1.

• Occupancy decrease to 61.7% - because of new supply

coming online

• 62.5% average occupancy in 2017

• 3K rooms to be delivered in 2017

• Dodd Frank Restrictions Caused CMBS financing to pull out

• Total supply growth will put continued pressure on rates

Hospitality

Source: CBRE

26


• Vacancy Rate: 5.1%

• 10.7 msf absorbed in 2016

• 13.6 msf Delivered in 2016

• 6.5 msf Under Construction

Light Industrial Still Has Hot Spots

• Positive Drivers Remain

• Low Natural Gas Fueling Petrochem Projects

• Panama Canal Expansion

Source: CBRE

27


Single Family

• Homes above $250k showing weakness

• Pockets of Success as Market Has Declined.

• Houston and Dallas MSAs lead the nation in SF Housing Permits (2016)

• Builder Sentiment High going into 2017

• 2017 New Home Starts – 26,250; 2018 – 28,500

Sources: Metrostudy, John Burns Consulting, Real Estate Center at Texas

A&M University

28


• Brazos, Damon, Dickinson, Hull-Daisetta, La Porte, Royal, Tomball and Waller all report no work in 2016.

• 25 districts reported $1.79B last year (25 districts this year)

• Backlog of Bond Programs Remains Strong

• High Growth Districts Burning Through Bonds at a Faster Rate

K-12 Market

District Construction

Alief 20.7M

Alvin 130M

Barbers Hill 24M

Conroe 160M

Cy-Fair 157M

Danbury 15M

Fort Bend 52.7M

Goose Creek 15M

District Construction

Houston 340M

Humble 35M

Katy 37.3M

Klein 40M

Lamar 55.9M

New Caney 42M

Santa Fe 29M

Splendora 30M

Willis 21.6M

$1.2 Billion

29


Higher Education

A&M $114M (Min.)

Baylor $7M

TSU $62M

UT $291M

San Jacinto $40M

University of Houston Rumors

30


• 4+ msf absorbed (NR)

• 5.7% Vacancy (NR)

• 1.6 msf under construction (Another

2.6 msf in pipeline for 2017)

• Stacked Power Centers/First Two

Story Grocery Center Coming in

2017

• Big Box/Grocery Expansions Slow

as Consumer Spending Flattens

Retail Set Records in 2016; Easing in 2017

Source: CBRE, Houston Chronicle

• Outside Retailers Continue to

Move In (Lidl, Shake Shack,

Dick’s Sporting Goods)

• Chef-Driven Restaurant

Concepts Continue to Trend

• Brazos Mall (Lake Jackson)

$25M Makeover Announced

• Consolidations & Closings (My

Fit Foods, The Limited,

Golfsmith)

31


• TMC Institutions Will Continue to Grow• 50 MSF is Used Now

• Add 10% (5MSF) Over the Next Five Years

• $400 SF = Approximately $20B in Construction

• TMC 3 – The Research Campus, with 1.4 MSF of Shared Research Space Lumbers Forward• 4 Large Academic Institutions Involved

• Hotel and Conference Center Underway

• Other Ancillary Facilities in Planning

• TMCx – The Innovation labs for Start Ups is Beginning to Blossom• Devices

• Drugs

• Data

Medical Outlook

Source: Texas Medical Center

32


• TMCx+ - Shared Facilities for Established Companies is Thriving

• J Labs Johnson and Johnson Will Headquarter Global Device

Business Here

• AT&T Major Player

• Google and Johnson and Johnson Building “Verve” – the 2nd Stage

Surgical Robot

• “Do all FDA Required Testing in One Zip Code”

• Venture Capital and Private Equity Support Now Committed Will

Allow Companies to Stay

• The Second Major Industry Cluster Bio Pharma – Great for this

City

Medical Outlook

Source: Texas Medical Center

33


• Craft Worker Shortage

• Pervasive and Growing – Limited Access to “Travelers”

Strategic Issues – Confront –Embrace – Take Steps

34


• Workforce Shortages

• C3

• Immigration

• The March of Technology

• BIM+ - Owner Interface

• Drones

• Sensors

• 3D Printing

• The Trend Toward Offsite Build/Onsite Install

• Prefabrication/Modularization

• Robotics Increasingly Used

Strategic Issues

35


• The War for Talent Continues

• Culture is a Key

• Millennials Are the Targets

• Change of Many Traditional Attitudes Toward What

Makes a “Good Employee”

Strategic Issues

36


•Mary Meeker – 2016• The Global Internet Adoption Rate is Flattening at 9%

• 42% of the World’s Population (3 Billion People) Are Now on the Internet

•Non-Tech Giants Are Acquiring Tech Companies to Fuel Their Growth and Transition to Digital

• GE’s Move

•Platform Companies Remain the Darlings• Uber/Lyft/DiDi - Investments in Ride Hailing Co.’s

• Facebook/Air B&B – Global Scale Quickly

Technology Exploding

Source: Bloomberg; KPCB Internet Trends 2016

37


Source: KPCB Internet Trends

38


Source: KPCB Internet Trends

2017: a blend of optimism and uncertainty - constant...

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