New Houston Construction Sinks While Commercial Renovations Swim

Commercial renovations are on an upswing in Houston even as new commercial construction has plummeted over the previous year.

Increased construction costs, hybrid work trends and the higher cost of launching new projects have severely depressed new building activity in Houston and around the nation. But the number of renovation projects is creeping up as landlords adapt to the very same trends.

Commercial renovation permitting was up 6.8% in July from the previous year, meaning about $1.5B in such projects had been launched so far in 2023, according to a report released by Greater Houston Partnership in late August. By contrast, new commercial construction was down 42.2% over last year, with $789.5M in such projects underway as of July.

Brian Malarkey, executive vice president and director of interior architecture for Kirksey, said the parallel trends can be explained by the ongoing increased cost of construction, the flight-to-quality movement and lease terms ending, forcing tenants to re-evaluate their needs and spaces.

Kirksey last week released its Construction Cost Trends 2023 report showing that supply chain, labor and inflation issues continue to push construction pricing up, though conditions are less volatile than last year. 

“I think we’re still reeling from some of those issues,” Malarkey said. “But it’s definitely calmed down a bit. We're not having to be as proactive with some of the materials and systems as we used to, but we still are doing early pricing and early procurement.” 

The cost to construct high-rise office buildings has ranged from $142 to $198 per SF this year, up from $124 to $175 per SF in 2021, according to the report. The low end for low-rise office buildings jumped from $100 to $113 per SF in the same time period, while the low end for mid-rise office buildings jumped from $118 to $132 per SF, according to the report.

On the corporate interiors side, however, the Kirksey report showed only moderate price increases and even some declines. Interiors, including lighting, ceilings, doors and countertops, increased in price by about $5 per SF across the board, while fitness facilities dropped about $10 per SF and furniture stayed flat, according to the report.

In a down market, leases still expire and activity continues to happen, even if that means a downsize, Malarkey said, adding that corporate interiors pricing doesn’t fluctuate as much as ground-up architecture. 

“There’s a lot of little things happening, [like] refreshes,” Malarkey said. “People are staying in place and then renewing their leases because they still don’t really know what’s going to happen with remote work.” 

Some companies are settling into remote work while staying in place and altering their offices to fit their needs, he said. Other companies are snatching up great deals in the marketplace and doing renovations to create the ideal space for themselves, he said.

“The other response is, ‘There’s such great deals out there right now. Let’s go ahead and move and spend the money to make it a place that people are super excited to come to work every day,’” Malarkey said.

Common interior renovations Kirksey is seeing in office spaces include creating interior stairways for better interconnection, he said. A lot of attention is also being focused on renovating “work lounges,” Malarkey said. Differing from the break or lunch rooms of the past, these are meant to be utilized throughout the day, he said. 

There is also a trend to create an “ecosystem of spaces,” including a work lounge, focus rooms, huddle rooms, semi-enclosed collaborative areas and booths that workers can use at different times, “just depending on what you're doing,” Malarkey said. 

While spending on commercial renovations has outpaced spending on new commercial construction by about 2 to 1, or $710.5M, this year, they were at much more even levels at this point in July 2022, according to the Greater Houston Partnership report. Last year, there were $1.38B worth of commercial renovation projects permitted and $1.37B worth of new commercial construction projects permitted at this point in the year, per the report.

The 42% plunge in new construction doesn’t surprise Malarkey. 

“The lending market is really difficult right now,” he said, adding that 2022 saw the start and completion of some projects that were delayed by the onset of the pandemic.

But that pent-up demand is largely depleted now. New projects are risky, and people are risk-averse, he said. 

“Some organizations decided, ‘Well, we’re not going to build that build-to-suit project that’s ground-up. Let’s just find a building and purchase it or let’s just lease space,’” Malarkey said. “That’s why you’re seeing the difference between those two.”