Archive for January, 2012

Apartment Market Strong in 2012, California Transportation Ups and Downs

Thursday, January 19th, 2012

Real Estate advisory Marcus & Millichap (Calabasas, CA) released its 2012 National Apartment Report yesterday and the findings should be welcome news for architecture, engineering and construction companies that work in the multifamily-for-rent space.

Unlike other real estate markets that boast improving metrics, but are not yet to the point of sparking new construction, apartments are putting the AEC industry to work, says the firm.

“Developers are getting busy, as are lenders and equity investors,” noted Marcus & Millichap in the introduction to its 61-page report. “And, after the brief pause in late 2011, we should see more projects started, steadily boosting additions to supply over the next three years. For the time being, demand will outstrip supply additions by a wide margin, leading to lower vacancy across virtually all markets and the first year of broadening rent growth.”

The report, which you can access for free if you sign up on the research page of the Marcus & Millichap web site (www.marcusmillichap.com), suggests that there is no mystery to the strength of the apartment market, even when one of its main drivers — employment — is generally weak.

“The common perception that apartment renter demand is defying economic fundamentals is understandable but only partially true,” the report reads. “Favorable demographics among prime renters, the release of pent-up demand as young adults debundle from family and roommates and increased renter demand due to falling homeownership certainly drove more renters to apartment communities last year. At the same time, young adults captured a majority of the 1.8 million private-sector jobs created over the past year, which emphasizes the importance of underlying economic performance as a major driver of rental demand. This becomes more important in 2012 and beyond as the white-hot levels of post-recession net absorption cools off to healthy but less-spectacular levels.”

Strength in the apartment sector is a major theme of The AEC Market Guide to California, our own 340-page research report on all the markets in California. In the Guide, we named apartments the top AEC market for 2012, stating: 

“The ride isn’t over for the apartment market…in fact, it may be just beginning if single-family housing continues to lag. Demographics and economics point to a strong 2012 for multifamily-for-rent.” 

We noted in our report, and Marcus & Millichap reinforces in its research, that California is home to several of the top geographic markets in terms of outlook for apartment development. This status actually improved in 2012, as San Jose climbed three spaces to claim the top spot among 44 diverse metropolitan statistical areas (MSAs) ranked in their annual National Apartment Index (NAI), while San Francisco leaped forward five spots to second place.

Orange County (5th) and San Diego (6th) held the same places as last year, as did Oakland (16th). Los Angeles slipped two spots to 13th, while Sacramento plummeted seven spots to 42nd. San Bernardino-Riverside crept up three spots to 29th in the index, which ranks MSAs based on their cumulative weighted-average scores for various indicators, including forecast employment growth, vacancy, construction, housing affordability and rents.

Sacramento’s employment woes are well-documented, with an unemployment rate still hovering around 13%, so the fall in ranking is somewhat understandable. This is largely due to public-sector layoffs in the capital city, but this is not the only reason — major corporations such as Cisco Systems and Bank of America have reduced their workforces in the city as well.

Despite its poor ranking,  Sacramento’s apartment market is showing signs of rebounding. The Sacramento Business Journal, in a June 2011 article, announced “Multifamily Market Heats Up.” The article focused primarily on sales activity among investors, as opposed to new construction, but the message was clear – the market is rebounding due to improving conditions in Sacramento and a more challenging market in the nearby San Francisco Bay Area.

“Wary of the superheated Bay Area market, multifamily housing market investors are flocking to Sacramento. Low prices, the move away from owner-occupied housing and intense competition elsewhere are among the factors driving up interest,” the article said.

Mark Johnson, president of Acclaim Homes (Menlo Park, CA), said, “We like the fundamentals in Sacramento. Obviously, there are foreclosure problems and government layoffs. But…we think Sacramento is going to pick up with job growth in the next 12 months.”

The message, then, is that the rising tide raising all ships in the apartment market hasn’t passed Sacramento by.

Transportation Ups and Downs

If the transit market for AEC firms in California is to live up to the expectations of the 2012 AEC Market Guide to California, where we rated it the sixth-best market for AEC firms among 40 ranked, it may have to do it with the funding scales tipped more toward the federal government than the state.

While federal budget proposals have favored mass transit, the Governor’s proposal slashes $3.7 million and 41.7 positions from the state’s Mass Transportation program. “With the significant reduction of Public Transportation Account funding for capital projects, the Budget proposes a reduction in project oversight positions to appropriate levels,” says the accompanying narrative in the Governor’s proposal.

The job cuts could mean that the state will lean on private consulting firms more, and the Governor continues to support, high-speed rail, so the outlook could be worse.

All in all, the Governor’s budget is favorable to transportation, according to David Ackerman, writing in the AGC’s Monday Morning Quarterback publication. “Governor Brown’s budget released on January 5 proposes a significant structural change for transportation, and guarantees funding availability for current and new projects,” wrote Ackerman.

Consolidation of multiple agencies, including Caltrans, would leave a stand-alone Transportation Agency that “will allow transportation policy to be developed and implemented at the cabinet level,” wrote Ackerman, a principal with lobbying firm The Apex Group (San Francisco, CA).

He also applauds the Governor’s proposal to eliminate the annual “hold” on highway funds under a late budget and to permit Highway Users Tax Account (HUTA) money to flow to maintain contracts and staffing for transportation programs by clarifying language related to borrowing from these funds.

“The budget also continues the state’s commitment to completing Proposition 1B, by proposing $2.8 billion in a combination of earlier appropriated funds and new funds to continue ongoing construction and implementation of projects,” Ackerman concludes.

California Budget Proposal Would Merge Caltrans with Other Transportation Agencies

Tuesday, January 10th, 2012

California Governor Jerry Brown’s initial Fiscal 2012-2013 budget proposal is causing quite a stir for its combination of proposed hikes in sales and income taxes, cuts to social programs and reorganization of state government structure.

Only a few state programs would receive increases over the prior budget, including K-14 schools. But many of the proposed budget figures depend on voter approval of tax hikes at the November 2012 ballot box.

Somewhat less publicized is the fact that the Governor’s proposal would eliminate and consolidate 48 boards, commissions, programs, and departments. This includes Caltrans — which would be merged into a new umbrella Transportation Agency — and several other bodies related to the transportation, education, environmental and water markets.

As of now, this is just a proposal — and a proposal short on key details at that. While we haven’t had a chance to thoroughly analyze the full 258-page document released (inadvertently) last week, here are a few of the items that jumped out as it relates to the AEC industry and the markets it serves.

Transportation

Agency and Commission Consolidation. The Governor’s proposal would create “The Transportation Agency,” which would consolidate the Department of Transportation (Caltrans), the Department of Motor Vehicles (DMV), the High-Speed Rail Authority, the Highway Patrol, the California Transportation Commission (CTC) and the Board of Pilot Commissioners into a single agency.

Brown would also eliminate the Office of Traffic Safety, transferring its functions to the DMV (or what’s left of it, we suppose). The State Infrastructure Bank would be absorbed along with several other agencies into the Governor’s Office of Business and Economic Development.

Finally, the responsibilities of the Department of Boating and Waterways would be transferred to the Department of Parks and Recreation, and the California Boating and Waterways Commission would be eliminated.

Some state legislators have proposed eliminating Caltrans in the past. And while this is not exactly the plan that many envisioned — whereby the functions performed by the state would transfer to counties and local governments — it is an interesting development nonetheless. The debate over this issue should be…spirited.

Five-Year Infrastructure Report and Caltrans Review. The budget announcement leaves many questions unanswered about transportation spending in Fiscal 2012-2013. Based on the sketchy details of his January 5 release, Brown is proposing to cut funding to the High-Speed Rail Authority from about $16.6 million to $15.9 million. The Governor is also directing Caltrans to “perform a detailed review and analysis of all of their programs to evaluate whether the functions need to exist and the level of resources needed to accomplish them.” The proposal adds that the required Five-Year Infrastructure Report will be released in the spring, so we may have to wait until then to see what the Governor’s office really has in mind for transportation in Fiscal 2012-2013.

Future capital projects for Amtrak and other Mass Transportation would also seem to suffer under the plan.

Education

School Funding and Tax Increases. The Governor’s proposal calls for $52.5 billion in funding for K-14 education – still less than the amount from the Fiscal 2007-2008 budget, but up nearly $5 billion from Fiscal 2011-2012. The message for state-funded higher education is that there will be no further cuts – assuming the tax increases go through – and that growth in higher education funding will return in fiscal 2013-2014. However, the California Budget Project reports that Governor Brown threatens $4.8 billion in automatic cuts from K-14 funding and $200 million each from the University of California and California State University systems if the tax hikes fail. This prompted Dan Schur, a former aid to Governor Pete Wilson, to call it “the most expensive ransom note in California political history.”

Environment

Changes for CalRecycle, State Geology and Mining Board, and Department of Toxic Substances Control. The Governor’s proposal would transfer the Department of Resources, Recycling and Recovery (CalRecycle) to the California Environmental Protection Agency, stating, “hazardous waste, electronic waste, used oil, used tires, and landfill permits are typically not considered ‘natural resources’ but wastes that should be regulated under the California Environmental Protection Agency, not the Natural Resources Agency.” It would also eliminate the State Geology and Mining Board and transfer its responsibilities into the Office of Mine Reclamation within the Department of Conservation.

Under the Department of Toxic Substances Control, the Expedited Remedial Action Program, Private Site Management Program, California Land Environmental Restoration and Reuse Act Program, Hazardous Waste and Border Zone Property Designations, Abandoned Site Assessment Program and Registered Environmental Assessor Program would be eliminated.

Cap and Trade. Governor Brown pledges that the new Cap-and-Trade Program “will create fiscal incentives for businesses to reduce their greenhouse gas emissions. The proceeds generated from the program, potentially $1 billion in the first year, will be used to invest in clean energy, low-carbon transportation, natural resource protection, and sustainable infrastructure.” The claim has been met with skepticism from economists and environmentalists alike.

Water

The Delta Habitat Conservation and Conveyance Program. The proposal states that the Delta Habitat Conservation and Conveyance Program is developing a plan that will provide the basis for issuing permits for the operation of state and federal water projects. “The Budget proposes $25 million and 135 positions to complete preliminary engineering work. Future funding requests to address the state’s water needs will be necessary.” It is unclear how much of this work would be available to private firms.

The proposal also consolidates regional water boards and the Colorado River Board, and eliminates the Watershed Coordinator Initiative Program.

We’ll follow up with more on the effects of the Governor’s budget as information becomes available.

Market Facts from the 2012 AEC Market Guide to California

Tuesday, January 3rd, 2012

The Market Outlook Section of The Expanded & Revised 2012 AEC Market Guide to California begins on page 81 and ends on page 279 — nearly 200 pages of data, analysis and even opinion about the many markets served by AEC firms in California. (And, for the record, these are actual full-sized pages…on the order of 500 words per page, not 50 words with some creative formatting.)  

Here are just a few of the facts you can find in this section, including data from the Residential, Commercial, Manufacturing, Water/Wastewater and Transportation markets and subsectors. (Please Note: We updated the original blog post, adding the latter two markets. The final piece, with excerpts from the Institutional, Power and Environmental markets will follow.) 

Single-Family Residential. The state’s median home price of $244,000 in November 2011 reflected a small increase over October, the first improvement since June. The November median marked the 14th straight monthly year-over-year decline in median home price, and was almost half the high watermark of $484,000 recorded in early 2007. Meanwhile, distressed sales (comprised of foreclosures and short sales) accounted for more than half of the homes sold in California through November.

Multifamily For Rent. The apartment market in San Diego reported a gain of nearly 140% in multifamily permits of five or more units through September 2011 (compared with the same period in 2010), suggesting a resurgence in construction. Real estate professionals say apartment supply is “thin” and unlikely to keep up with projected demand. San Diego was hardly alone among major metros in promising multifamily-for-rent results.

Senior Housing. A source at the National Investment Center for the Seniors Housing & Care Industry (NIC) said that 3rd quarter results ”showed us that there were very high levels of absorption…some of the highest that we’ve seen over the past few years.” This bodes well for front-end AEC services in senior housing following a difficult period for the market.

Office. Real estate advisory firm Grubb & Ellis says Orange County office tenants are taking advantage of the current commercial market, “relocating within the market, not only to save money by capturing lower rates, but also to take advantage of the opportunity to create a new environment for their firms by designing efficient floor plan configurations and securing space in areas that have desirable amenities.” With this factor in place, Orange County’s market for new office construction is trailing some other major California metros in its recovery, but may hold a better forecast for renovations and expansions in 2012.

Hospitality. For the week of November 6-12, 2011, San Francisco was the nation’s only metro with a hotel occupancy rate above 90%. Its rate was 91.9%. Industry data places San Francisco miles ahead of other U.S. cities in the health of the hotel market, but this may not necessarily translate into construction activity.

Industrial. The Inland Empire is “a burgeoning powerhouse of distribution activity” that soaked up 7.5 million sq. ft. of industrial space in the 2nd quarter, accounting for a full 25% of absorption nationally, according to Grubb & Ellis. Opinions about the IE’s industrial market outlook remain mixed, however.

Manufacturing. The report, “Manufacturing: Still a Force in Southern California,” notes that the five-county Los Angeles metropolitan area employs more people in manufacturing than the traditionally industrial states of Ohio, Illinois and Pennsylvania. Despite these falling employment numbers, the manufacturing sector in some California metros is expected to show surprising strength in 2012.

General Transportation. According to the California Transportation Commission’s “2011 Statewide Transportation System Needs Assessment” report, delivered to the state legislature in October 2011, the total need for all system preservation, system management, and system expansion projects for the 2011 to 2020 period would cost nearly $536.2 billion. Total estimated revenue from all sources during the 10-year study period is $242.4 billion. This represents a shortfall of $293.8 billion.

Continued transportation infrastructure investment from the state is only part of the solution says the CTC. In its report, the group identifies a vibrant federal surface transportation program as the key to bridging the state funding gap, and makes explicit recommendations on how to carry this out. 

Multimodal Transportation. Though the recent trend in urban planning has been to ensure multimodal equity among motorists, pedestrians, bicyclists and mass transit, the federal government  may be taking a step backward in this regard. Congressional leaders who authored the conference report that eventually became the 2012 transportation appropriations bill, made it clear where they want TIGER grant money to go: “The conferees direct the Secretary to focus on road, transit, rail and port projects.”

The thinly veiled implication is that too much focus has been placed on “non-traditional” forms of transportation such as bikeways and pedestrian trails, as well as high-speed rail.

Aviation. In September 2011, the state released its biennial airport capital improvement plan (CIP), “California Aviation System Plan 2012-2021.” It includes “2,057 airport development and Airport Land Use Compatibility Plan (ALUCP) projects desired by airport sponsors with a fiscally unconstrained cost estimate of $3.62 billion.” Of this, 88% ($3.13 billion) would be funded by the Federal Aviation Authority (FAA), 12% ($431 million) would come from local funds, and only 2% ($64 million) would come from the state.

With the federal aviation bill that expired in 2007 nearing the end of its 22nd extension (January 31, 2012), the big question is whether Congress will finally pass new legislation reauthorizing the FAA and ensuring the needed federal funds. Even if a new FAA law is enacted, the actual project work at state airports is likely to be considerably less than the CIP estimate.

Transit and Rail. Congress stripped all federal funding for high-speed rail from the FY2012 funding bill, but the backlash against HSR may ultimately benefit light rail and bus lines. The Fiscal 2012 Transportation, Housing and Urban Development and Related Agencies (THUD) Appropriations Bill, signed into law in November, was full of budget cuts, large and small. But it treated transit and bus programs well, providing a total of $10.6 billion in FY 2012 funding for the Federal Transit Administration (FTA), a 3% increase over FY 2011 levels, according to APTA. The Formula and Bus Grant programs received $8.3 billion, an $18 million increase, and the New Starts Capital Investment Grant Program is funded at $1.9 billion, a $358 million increase.

Bus rapid transit projects in Fresno, Oakland and San Francisco will receive a total of $72.8 million in earmarked funds under the Bus and Bus Facilities program.

Ports and Shipping. The ports and shipping sector is a dynamic market heading into 2012, with strong import-export activity and continued public and private investment in port facility improvements balancing against several major issues and threats. Activity could increase even more if legislation passes that would direct Congress to release $5.6 billion from the Harbor Maintenance Trust Fund. Threats to the market include the impending opening of the Panama Canal Expansion, which could draw as much as 25% of inbound traffic away from California’s ports, according to one estimate, as well as burdensome and inconsistent state regulations that impede California’s ability to compete in a global market.

Port facility owners and advocates say that competing ports, both domestically and internationally, are looking to take market share away from California’s major ports. Thus, they say, needed investments in port facilities must continue if the state’s ports are to maintain their leadership position.

Water/Wastewater. The big water-related political topic of 2012 is likely to be “will they-won’t they” with respect to the $11.14 billion Water Bond Proposition that was initially due to be on the 2010 ballot. At Governor Schwarzenegger’s urging, the measure was pulled with the intention of re-introducing it in 2012 when the economy would presumably be better.

The economy is better, but possibly not better enough to ask voters to go further in debt with another in a long line of bond measures. Also, the drought conditions that were a major driver of the original measure have eased considerably.

Indications are that the bill will be on the ballot, but most likely in a scaled-back form.

This is obviously a small sampling of the information reported in the 342-page 2012 AEC Market Guide to California. When feasible, the report breaks down the markets by major metropolitan area and geography. (We’ll offer more facts from the Guide Market Section’s next 100 or so pages — including the education, health care, transportation, water/wastewater, environmental and energy markets — in upcoming AEC Insight blog entries.

The report also includes a section we call “12 for ’12,” which looks at a dozen major issues expected to affect the California AEC industry in 2012. In addition, the report provides a summary view of the national and state economic outlook, a review of legislative action and other political factors influencing the industry, and a final chapter that assesses 40 different markets served by AEC firms by anticipated strength in 2012. The links and resources section is nearly 50 pages alone. (See below for a full Table of Contents.)