Commercial Construction Outlook 2020: Q&A with Arch-Con CEO Michael Scheurich
Michael G. Scheurich, CEO of Arch-Con Corp.
HOUSTON – (Realty News Report) – 2019 has been a strong year for Houston-based Arch-Con Corporation, a firm specializing in office, industrial, retail, multifamily, hospitality, community/non-profit, healthcare and corporate interiors. The company projects 2019 revenue of $512 million, up from $375 million in the prior year, and currently has 61 projects under construction across Houston, Dallas and Los Angeles. In Houston, Arch-Con is working on GID’s Regent Square Phase II, a 600-unit apartment community at West Dallas and Dunlavy, the next phase of a planned 24-acre development. With 184 employees now, the firm expects to add up to 30 more in 2020. Realty News Report spoke with Chief Executive Officer Michael G. Scheurich about the company’s outlook and Houston’s future—particularly whether the city’s construction boom will continue and how the commercial office market may perform in 2020.
Realty News Report: As new construction projects are planned, your firm is often on the leading edge. What are your expectations for 2020?
Michael G. Scheurich: The outlook for 2020 is positive. We enter the new year with a backlog approaching $500 million. That said, construction is typically the lagging indicator of the real estate cycle: the projects we see in progress now are usually the result of decisions made earlier in the cycle. It’s difficult to pinpoint exactly where we stand, but we’re seeing fewer new projects reach the planning stage, which suggests the pace of new starts may be slowing.
Realty News Report: The rig count has been declining. How will that affect the Houston economy?
Michael G. Scheurich: Oil and gas remain Houston’s primary economic driver, and that sector is currently lagging. Without higher energy prices or corporate expansions in energy, we risk creating an oversupply of projects already under construction and those planned for the near term. If fewer high-paying energy jobs are created, the pace of economic growth could slow.
Realty News Report: How will Houston compare to other major Texas markets?
Michael G. Scheurich: Houston is more diversified than in the past, but it still relies heavily on the energy sector and higher energy prices. Unlike Dallas and Austin, Houston does not see the same volume of corporate relocations, which could make Houston more vulnerable to a slowdown. Healthcare continues to be a strong and growing part of our economy, and we expect continued expansion in that sector.
Realty News Report: Industrial construction has been very active in Houston in 2019. What’s driving that?
Michael G. Scheurich: Over the past decade industrial development has shifted from traditional manufacturing to distribution centers, largely driven by e-commerce. These facilities demand larger footprints, higher clear heights and more trailer storage, which has attracted capital investment. The key question now is whether supply will eventually outpace demand. Absorption has been steady, but there are signs that new deliveries could catch up, which would pressure lease rates and extend leasing periods for new buildings.
Realty News Report: What do you expect for other commercial sectors—office, retail and manufacturing—in the year ahead?
Michael G. Scheurich: The office market continues to surprise with the number of new buildings under construction, driven in part by tenants seeking a “flight to quality.” Overall absorption remains modest, leaving older office stock at risk as it competes for tenants. Retail is shifting increasingly toward entertainment, dining and experience-based concepts as traditional merchandising retailers struggle with e-commerce and focus on improving same-store sales. Traditional manufacturing is relatively stagnant, with pockets of activity tied to specific industries such as petrochemicals and plastic resin production.
Realty News Report: Your firm is building several hotels. What is your view of the hospitality sector?
Michael G. Scheurich: The hospitality market is fairly stable, but opportunities to develop new hotels are limited. Many of the projects we currently have under construction were years in the making and are only now proceeding. I don’t expect a flood of new hotel starts over the next few years, given the constrained availability of brands and flat RevPAR trends in many markets.
Realty News Report: Arch-Con has expanded from Houston into other parts of Texas, and you recently moved beyond Texas. Can you comment?
Michael G. Scheurich: We continue to grow in Houston, Dallas and other Texas markets while also diversifying geographically. Arch-Con opened an office in Los Angeles a year ago and has seen significant growth there. Markets like Denver and Atlanta are also appealing because they have different economic drivers than Houston and help spread our exposure across regions.
Realty News Report: Anything else you’d like to add?
Michael G. Scheurich: A persistent challenge in Greater Houston is the shortage of qualified construction labor. Rising labor rates combined with skill gaps make it difficult to meet demand while maintaining quality. We recruit aggressively, but without a steady pipeline of skilled workers our options are limited. As a result, Arch-Con is investing in technology to improve project delivery. The construction industry is positioned to make substantial gains from new technologies as firms seek to maintain productivity amid constrained labor supply.
