Archive for the ‘AEC’ Category

Grading Our 2012 Projections

Tuesday, October 2nd, 2012
Market researchers like to make predictions, assigning projected growth percentages to everything from market subsectors to the global economy. Yet, how often do they look back to see how they did when the next year rolls around…especially if their prediction was off?

It’s like taking a test, but never getting a grade.

In late 2011, we ranked 26 U.S. sectors and subsectors based on their anticipated growth and activity in 2012. We did not assign projected growth rates, just a ranking, top to bottom, from the market that our data indicated would be healthiest in 2012 to the one we expected to be least healthy.

We don’t do estimated growth rates because, simply put, we think they’re all but useless and not worth the trouble. How valid is the numerical estimate from even the most competent economist when we’re talking about volatile design and construction markets in a turbulent national economy?

Even if these numbers could lay claim to some accuracy, how important is it really to the average AEC firm? Does it matter to a 50-person West Coast architecture firm if the $17 billion healthcare construction market ticks up 2.1% or 2.2%? Sure, that 0.1% is a lot of money in the big picture, but if this firm is only capable of capturing $5 to $10 million of it, there are far more important factors to consider.

All you need to do is look at the massive differences among the various prognostications to question their relevance. For example, for 2012, IHS Global Insight (Englewood, CO) called for 9.6% growth in the retail and other commercial sector for 2012 off $32 billion in 2011 spending put-in-place. Wells Fargo Financial (San Francisco, CA) predicted only a 3.6% gain on $43.4 billion in 2011 spending put-in-place. Almost a third less growth on a 35% differential in 2011 spending put-in-place. (This is according to the AIA Consensus Construction Forecast.)

Let’s face it; these things are hard to quantify. We don’t even try. (If you like these numbers, though, we do report on how others see the markets growing, though the results are often contradictory.)

Instead, we prefer to consider factors such as whether the right metrics are in place for growth in the sector, the overall economic health of a geographic area, and trends and developments in the industry. Most importantly, we want to find out and assess what owners and investors are saying, seeing and feeling about specific markets.

So let’s look back at a few of our rankings for 2012:

1. Apartments. We ranked apartments at the top of the list simply because the market was strong when others weren’t and it showed no signs of slowing. Our comment at the time was “The good times aren’t over yet for the surprisingly strong multifamily-for-rent sector.” This was especially true amid the struggles of single-family housing.

How’d we do?  The National Association of Home Builders (NAHB) (Washington, DC) Multifamily Production Index rose for the eighth straight time in the second quarter of 2012. While the highest rate of activity has been concentrated in the strongest metropolitan areas, and production is far better in market-rate units than affordable, we’d be hard pressed to find a market that has done better.

2. Wastewater. “Despite a likely reduction in federal funding, the wastewater market is back near the top due to increasing demand, aging infrastructure and government mandates,” we wrote.
 
How’d we do? Experts say it has been flat through the first half of 2012, and we didn’t get the regulatory push we thought we might. Yet, given the intense need, growing municipal and industrial demand, and potential for catastrophe if we don’t act, we’re not conceding this one yet. At minimum, it is certainly a solid long-term market.
 
3. Health Care. “Not without its issues, and reform has the industry in limbo, but still good in the short term and great long term. A caveat: if the GOP wins the presidency and tries to repeal reform, the limbo could linger.”
 
How’d we do?  We were a little optimistic on this one, though it is still in the top tier. We’ve talked with health care design firms who experienced their first down period in years in 2011-2012. Health care construction grew only slightly through the first half of 2012, and projects continued to be delayed and canceled. It remains a good market overall, but the stagnation brought on by reform and other pressing issues held it down more than expected. On the plus side, Modern Healthcare reported that capital investment is climbing among health systems.

Energy Production an Election Battleground

Monday, September 10th, 2012

The Democrat and Republican parties tend to differ greatly on the best approach to energy production and use. However, just four years since the GOP was chanting “Drill, baby, drill,” and the Dems were howling against the Bush Administration’s approach to global warming and pushing aggressive renewable energy goals, the sides have managed to find more common ground in Election 2012.

A September 5 article in the Houston Chronicle, headlined “Democratic Party platform touts natural gas, tones down climate change talk,” reports:

In the party platform they unveiled [September 4], Democrats draw a distinction between “Big Oil” and “cheap, abundant natural gas” they tout as “helping to bring jobs and industry back to the United States.”

At the same time, the Democratic platform tones down its assessment of the severity of global warming and what the United States should be doing to arrest it — a big turnaround from four years ago, when the party warned that “the epochal, man-made threat to the planet” of climate change had to be halted.

The changes reflect two economic realities:

The recent surge in domestic production of natural gas from dense rock formations across the country  is bringing jobs to Ohio, Pennsylvania and other battleground states.

At the same time, the ailing economy nationwide has made broad initiatives to combat global warming — including cap-and-trade programs that would put a price on carbon dioxide emissions–a tough sell in the nation’s capital.

Both Republicans and Democrats have linked economic gains to domestic gas production.

The GOP hasn’t moved as much in its energy platform as the Democrats have, but the party’s views on the issue have “evolved.”

An excellent analysis of the competing platform in the Casper Star-Tribune – headlined “Where do the Dems and GOP stand on energy and the environment?” – notes:

Both the Republican and the Democrat party faithful highlighted energy policy and environmental issues in their platforms. That’s not unusual. But take note what they say, and how it compares to their platforms written four years ago.

Some things sound the same and some are very, very different. And while both parties seek some identical things — energy independence, energy efficiency, a balance of energy development and environmental protection — the devil, as always, is in the details.

The gap between their views may be smaller, but the “details” illustrate that the sides still differ greatly in their overall approach.

What does this mean for energy development in general and the AEC industry in particular? A lot depends on who wins in November.

The emergence of plentiful natural gas reserves appears to have softened the Democrats’ push for renewable energy sources such as wind and solar, but these remain a critical element of the party’s energy approach.

Republicans, likewise, seek to end reliance on foreign oil and strive for a “sustainable energy future.” However, as in 2008, their timetable is not as ambitious.

Energy is a major issue, not only in the 2012 election, but in the fate of the AEC industry’s rebound in 2012. Our 2013 Guide to the U.S. AEC Markets delves deeper into the issue and offers our views on which elements of the market will thrive and which will struggle. To pre-order the publication at a discount, click on the icon at the top right and pay with your major credit card.

Has Housing Plummet Struck Bottom or Is A Shadow Looming?

Friday, September 7th, 2012

One of the first rules of market research is to consider the source. So, when trying to decide which side is right in the housing bottom debate – the optimists who say that the freefall in prices and sales has ended or the naysayers who focus on the shadow inventory of foreclosed and underwater homes – it is important to remember this rule. 

In an article headlined “Homes Selling More Quickly, Time on Market Down with Tighter Supplies,” economist Lawrence Yun shows that he is in the former camp. “A notable shortening of time on market began this spring, and this has created a general balance between home buyers and sellers in much of the country.”

Yun’s employer is the National Association of Realtors®, who would like nothing more than to see the housing crisis nightmare end. Not only does Yun argue that the price dive has reversed itself, he cautions that a housing shortage may be in the offing.

“Ironically, if housing construction doesn’t pick up to normal levels within two years, supply shortages could be sustained for an extended period and lead to above average appreciation,” Yun said. “Therefore, any unnecessary hindrance to housing starts, such as excessive local zoning regulations or stringent bank capital rules for construction loans, should be carefully re-examined.”

Not everyone shares this outlook. A June 26 article on the Forbes magazine web site reports “10 Million Underwater Mortgages And Shadow Inventory Worth $246B Mean Housing Trouble.”

The lead paragraph under this ominous headline begins, “Don’t be so sure the housing market is on its way back to health.  Despite the first monthly increase in home prices in 7 months, as the Case-Shiller indexes showed on [6/26/12], there are still more than 10 million properties with underwater mortgages, and a shadow inventory of 1.5 million, or four months supply.  Negative equity will continue to take its toll on consumption, while the shadow inventory, worth about $246 billion according to CoreLogic, will constrict lending and probably affect banks’ earnings.”

What could Forbes’ motive be for the negative spin? It’s hard to say, but Charles Tatum, a cynical reporter played by Kirk

Douglas in a 1951 film called “Ace in the Hole,” said, “Bad news sells best.” Trust me, it’s a credo that many newspapers and magazines live by.

This is not to suggest that either of these organizations are being dishonest or falsifying data to achieve the results they want. Both viewpoints are well supported by facts. It’s just how they choose to interpret these facts and data that the researcher must question.

An objective look at this issue suggests that the truth – as is often the case – likely lies somewhere in the middle.

The residential market’s importance to the overall health of the AEC industry and U.S. economy is a major theme in our upcoming release – The 2013 Guide to the U.S. AEC Markets. Even firms that don’t work in the single-family or multifamily residential space are significantly affected by its performance. Retail isn’t the only development sector that follows rooftops.

For each market and subsector, we include a graphical breakdown of the current state of the market, the outlook and other important information (see the Multifamily example below). This is in addition to pages of narrative, tables and charts, insightful quotes and other important information that fills this 200-plus page book.
 

Multifamily Capsule 

About Our Book

The 2013 Guide to the U.S. AEC Markets will examine these issues – and many more – in far greater depth. The soon-to-be-published comprehensive report will include a review of the sector-by-sector projections from the 2012 forecast, as well as:

  • Dozens of interviews with leaders and experts in the markets served by architects, engineers, environmental consultants and contractors.
  • Ten industry trends (and what they mean to you)
  • A recap of 2012 and the U.S. Economic Overview for 2013
  • A U.S. geographic outlook, regionally and state by state
  • Discussion of passed, pending and potential legislation that could affect the AEC industry in 2013
  • A look at the post-election AEC industry from both sides of the aisle
  • Most promising international markets and regions
  • The 2013 outlook for over 25 major markets and subsectors
  • Ranking of the hottest and coldest markets for 2013
  • More than 20 pages of links, articles and other resources for firms to consult and use in their own research

Buyers will also receive quarterly Updates of fresh market data and industry developments. These 20-plus-page reports will ensure that the 2013 Guide will prove its worth all year long. 

The list price for the pdf-only version of The 2013 Guide to the U.S. AEC Markets is $299, but right now, you can get the prepublication price of $225. (Hard copy price is $279 prepublication, $349 list.) As always, we offer a full refund guarantee; so there’s no risk to you.

To pre-order your copy of The 2013 Guide to the U.S. AEC Markets  – due out by October 5 – click on the button on the top right and pay with your major credit card.

Table of Contents for The 2013 Guide
to the U.S. AEC Markets (Working)

Part 1: Introduction: A Time Like We’ve Never Seen Before

Part 2: Ten Trends in the Industry

Part 3: The U.S. Economy: Is the Recovery Finally Here?

Part 4: Election 2012: What it Means to You

Part 5: The Geographic Markets in the U.S.

Part 6: The International Markets: Beyond BRIC

Part 7: U.S. Market Outlook for 2013

  • Introduction
    • Demographics
    • Methodology
  • Residential Outlook
    • Single Family
    • Multifamily/Senior Housing
  • Commercial Outlook
    • Office
    • Retail
    • Hospitality
    • Industrial/Warehouse
  • Manufacturing
  • Institutional
    • Health Care
    • Higher Ed
    • K-12
    • Science/Technology
    • Government Buildings
  • Transportation
    • Roads/Bridges
    • Aviation
    • Rail
    • Ports/Shipping
  • Water/Wastewater
    • Water Supply
    • Wastewater Treatment
    • Storm Water Management
  • Energy
    • Renewable
    • Non-Renewable
  • Environmental
    • Solid Waste
    • Hazardous Waste
    • Air Pollution
    • Testing & Analytical Services

Part 8: Best & Worst U.S. Markets for 2013

Appendix: Resources & Links

The 2013 Guide to the U.S. AEC Markets comes with a full money-back guarantee. Click on the button below to order.

If you have any questions, e-mail to research@jagg-group.com.

Good News Friday from NGKF – Metro Job Recovery

Friday, August 31st, 2012

There’s a cool feature on the website of the research firm Newmark Grubb Knight Frank (New York, NY) called “Good News Friday.” Every Friday (or so), the group highlights some piece of good economic news in a brief analytical article.

The August 24 entry assesses the state of job recovery in various regions and metropolitan areas. You can read it here.

We’ll discuss this more in our next entry.

3 Market Briefs – The Outlook for Apartments, China & MOBs

Tuesday, August 28th, 2012

Residential Markets: Despite overall economic uncertainty, the apartment sector is fulfilling its rebound promise.

One private-sector market that continues to buck the economic doldrums is multifamily for rent.

In a January 2012 entry on the AEC Insight blog, under the headline “Apartment Market Strong in 2012,” we reported that commercial real estate specialist Marcus & Millichap (Calabasas, CA) was calling for a noticeable increase in construction activity in the apartment sector.

“Developers are getting busy, as are lenders and equity investors. 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.”

Despite the sluggish overall recovery, the apartment sector has held its expected course.

In its Second Quarter 2012 assessment of the apartment market, Marcus & Millichap reported, “The disappointing and markedly slower pace of employment gains had little impact on the steady demand for apartments in the second quarter. Rental housing remains essential for a growing population, even in periods of uncertainty and economic malaise. Conditions remain favorably aligned for sustainable, strong apartment performance. Robust demographic trends, including higher levels of immigration, the surge in echo boomers forming their own households, a further shift away from homeownership, and the growing diversity in household composition support continued demand for rental housing.”

Vacancy rates in major metropolitan cities such as New York (2.2%), Minneapolis (2.4%) and San Jose (2.5%) are miniscule. Even cities experiencing relatively high vacancy rates, such as Jacksonville (8.2%), Houston (7.6%) and Atlanta (7.1%), are seeing these rates plummet. This all bodes well for the apartment market in 2013.

The 2013 Guide to the U.S. AEC Markets assesses which cities and regions will see the greatest increase in apartment construction activity – and when. The book also addresses other aspects of the multifamily market, including when condominiums are likely to return to favor, senior housing’s outlook and other trends.

International Markets: Checking in on China 

In a blog entry in August 2011 (Is China Over for…U.S. Firms?), we asked if the allure of China for AEC professionals had waned. The clear conclusion was that there was still work for U.S. firms, but that competition was stiffer and the need for “Western expertise” had diminished some.

In that blog article and two research publications – The 2012 AEC Market Guide to California and PSMJ’s AEC Firm U.S. Market Sector Outlook – we quoted Andrew Nathaniel Mayer, an American architect (and blogger) living and working in China. This included his review of an article in the New York Times, in which he wrote: “The New York Times finally caught up to what savvy architecture firms in the U.S. have known for at least the past decade: there is a lot of work to be had in China.”

Mayer told us via email:

When it comes to Western or American AEC firms working in China I would have to say that the larger corporate firms have an edge up in entering the market due to their resources and reputation. Chinese firms are getting smarter now and moving up the value chain quickly so I foresee less need for ‘Western expertise’ in the future.

That being said, China is still open to qualified companies, provided those firms play by China’s rules and partner up with local joint venture companies. No part of China is off limits to western firm involvement, but the interior parts of the country are the areas booming at the moment.

A year later, is this still the case?

Mayer clearly thinks so. He notes that the country’s gross domestic product continues to grow at about a 10% rate, while population growth is slowing. Mayer references a recent demographic study of the country that states, “it would easily become the largest economy in the world if its per capita gross domestic product (GDP) came even close to that of other countries. China, the world’s second-largest economy to the U.S., has a per capita GDP less than $5,200, compared with the United States’ per capita GDP of more than $48,000.

Mayer concludes, “My conservative prediction is that China has about 5-10 years left of strong economic growth. The per capita GDP is still remarkably low, mostly due to the hundreds of millions still living in rural areas. The potential to earn much higher wages in urban areas (where salaries are raising rapidly) ensures that there is a steady of influx of people into cities.”

The Guide’s section on the international markets probes further into the outlook for China and other major nations, as well as the best routes and greatest difficulties for U.S. firms working in foreign lands.

Institutional Markets: The future of MOB construction.

In some ways, medical office buildings (MOB) are a microcosm of the overall health care construction market. While activity in MOB construction is solid, it is not as robust as many expected it to be.

A summary of the 2012 Medical Office Buildings & Healthcare Facilities Conference of the Building Owners and Managers Association International (BOMA) (Washington, DC) concluded that capital constraints continue to plague healthcare systems.

Laca Wong Hammond, Head of Healthcare Real Estate for investment company Raymond James (St. Petersburg, FL) and Morgan Keegan, 2013 Co-Chair of BOMA’s Medical Office Buildings and Healthcare Facilities Committee, wrote: “While investor appetite for healthcare real estate remains strong, transaction volumes, especially large monetizations of medical office portfolios, have continued to be lighter than expected. Development activity has been slower than expected, and many healthcare systems are weighing the merits of using third party capital versus using their own, particularly with historically low bond rates. Not-for-profit systems increasingly report significant capital challenges, including concerns about taxation, as cash-strapped states are looking for additional revenues.”

Healthcare Trust of America (HTA) (Scottsdale, AZ), a real estate investment trust (REIT) with more than 250 healthcare properties (more than 90% MOBs) in 26 states, is bullish on the outlook for MOBs in the next few years…as long as you’re not talking about design, construction or development in general.

In its annual report, HTA notes, “Construction activity in the medical office sector has been relatively constrained, particularly considering the two large population waves that are just entering periods of increased healthcare utilization. Additionally, the importance of close proximity to medical campuses or hospitals, which are oftentimes locations with little developable land or high cost barriers to development, curtails new medical office construction. With little new medical office product expected in the near term, tenant demand will focus on existing well-located properties.”

Despite the relative weakness of the MOB development market, activity will continue in some locations and for some project types. For example, Marcus & Millichap’s John Smelter says that off-campus MOBs are gaining in favor: “Major property owners and lenders continue to show favor for on-campus medical buildings, but off -campus buildings will become ever more attractive as health systems and other providers respond to patient demands for greater convenience and readily accessible care,” he says.

Given the nation’s demographics and the AEC industry’s recent boom in healthcare projects, this is obviously a key sector to consider. The 2012 Guide devotes a full section to the outlook for health care projects in 2012 and beyond, as well as several pages in the chapter on industry trends.

New 2013 Guide to the U.S. AEC Markets Assesses Election Impact

Wednesday, August 22nd, 2012

[Here’s the first promo for The 2013 Guide to the U.S. AEC Markets, which we will publish in September.]

What would an Obama second term mean to the AEC industry in 2013 and beyond? If Romney and Ryan capture the White House in November, how would it affect architecture, engineering, environmental consulting and construction companies?

In the new 2013 Guide to the U.S. AEC Markets, to be published by The JAGG Group next month, readers will get an early glimpse of how the results of the 2012 Presidential Election are likely to influence the industry’s performance in the coming year and throughout the winner’s term. This special, election-year section of the 2013 Guide analyzes each major candidate’s past economic and AEC-related policies, actions, proposals and pledges, and then interprets how his victory would affect the AEC industry and the specific markets we serve.

This trusted annual planning guide will also include the industry news, advice and insightful research data that readers have benefited from since author Jerry Guerra’s first forecast in 2002.

“The presidential election in 2008 was an important component of the 2009 forecast book, but this year’s vote will have substantially more of an effect on our industry than any election in recent memory,” says Guerra, who has researched and authored more than a dozen market research publications for the architecture, engineering, environmental consulting and construction industries.

“We also have a much greater body of information to draw on than in previous elections,” adds Guerra. “Obama clearly showed certain tendencies on infrastructure investment in his first term. And for the GOP ticket, Romney’s time as Massachusetts’ governor and his running mate’s controversial budget proposals allow us to predict with reasonable accuracy how certain markets and segments of the AEC industry will benefit or suffer depending on the result. The key is to look past the campaign-year political rhetoric and see what they’ve actually done and what they say they will do.”

For example, the Romney-Ryan ticket is likely to propose less government spending on transportation infrastructure projects – Ryan’s budget plan calls for significantly reduced amounts for Highway Funding and Romney’s platform includes eliminating all Amtrak subsidies. But a popular transportation blog desribed Romney as a “metro-friendly moderate” on transportation, and Ryan backed the Transportation Bill that passed in June.

“The issues aren’t black and white,” concludes Guerra. “The GOP team will be less likely to support taxpayer-funded infrastructure investment, but we can’t look at this in a vacuum. We have to also consider how their policies, on taxes and other aspects of government operations, could affect the small businesses that comprise the bulk of the AEC industry.”

In addition, the 2013 Guide to the U.S. AEC Markets will include a review of the sector-by-sector projections from the 2012 forecast, as well as:

  • Dozens of interviews with leaders and experts in the markets served by architects, engineers, environmental consultants and contractors.
  • Ten industry trends (and what they mean to you)
  • A recap of 2012 and the U.S. Economic Overview for 2013
  • A U.S. geographic outlook, regionally and state by state
  • Discussion of passed, pending and potential legislation that could affect the AEC industry in 2013
  • Most promising international markets and regions
  • The 2013 outlook for over 30 major markets and subsectors
  • Ranking of the hottest and coldest markets for 2013
  • More than 20 pages of links, articles and other resources for firms to consult and use in their own research

Buyers will also receive quarterly Updates of fresh market data and industry developments. These 20-plus-page reports will ensure that the 2013 Guide will prove its worth all year long. 

The list price for the pdf-only version of The 2013 Guide to the U.S. AEC Markets is $299, but this week, you can get the prepublication price of $199. (Hard copy price is $249 prepublication, $349 list.) As always, we offer a full money-back guarantee; so there’s no risk to you.

To pre-order your copy of The 2013 Guide to the U.S. AEC Markets  – due out October 5 – click on the button below and pay with your major credit card.

Matheson Financial Advisors M&A Forum Report

Monday, June 11th, 2012

An impressive group of leaders from top AEC firms across the country gathered at the Matheson Financial Advisors M&A Forum at the Trump International Towers in Chicago last week. The educational focus was on firm growth and shareholder value enhancement, but the attending AEC executives were also entertained and enlightened by an exceptional roster of speakers and some exciting networking events.

The event kicked off Wednesday night with an amusing and informative talk from Fox News journalist Tucker Carlson, who gave his view of the coming presidential election and how its outcome is likely to affect the country and the AEC industry. Carlson said that the Republican field of candidates would have been stronger, but Obama seeemed unbeatable when potential candidates had to decide whether or not to throw their hats in the ring. Now, says Carlson, Obama looks very beatable.

He went on to say that Republicans are so afraid of the direction that the country is headed, they’re desperate for a candidate who will tell it to them straight. However, Carlson said, presumptive GOP nominee Mitt Romney is probably not that guy. Another problem for Romney, said Carlson, is that he and Obama are the only two people in the entire country who have signed a law requiring an individual mandate for health insurance. As a result, he said, Romney will have a difficult time exploiting Obama’s biggest weakness — the universal health care legislation.

Other keynotes included Peter Knipe of STV, who discussed the history of how his firm became 100% ESOP owned; Robert Gomes of Stantec, who gave a comprehensive overview of the growth strategy that propelled the firm from a 600-person Canadian firm 25 years ago to one of the largest firms in North America; and Andrew Busch, who closed the conference on Friday with a global outlook on the economy.

In between, general sessions and breakout sessions focused on growing through acquisition, preparing to sell a firm, capitalization strategies and several other strategic factors related to enhancing shareholder value and improving the firm’s (and owners’) future prospects.

The venue was fantastic, with a spectacular city and river view from the 16th floor where the forum were centered. All attendees were also treated to a Chicago White Sox baseball game, viewed from a left field luxury box (and a walk-off game winning hit in the 9th).

Sponsors included Ames & Gough; MBV Law, LLP; Pilot Hill Advisors; and Plante Moran. Firms in attendance ranged from ENR top 20 giants and other high-profile companies to small and mid-sized firms looking to gain an edge on their competition and ensure a stronger future.

For schedule and session descriptions, go to https://mathesonadvisors.com/m&a_forum/. The forum was also “live-tweeted” via @mfamaforum and blogged at http://mfamaforum.blogspot.com.

 

Fremont Boom on the Horizon?

Monday, March 12th, 2012

[The following is from the First Quarter Update to The 2012 AEC Market Guide to California. The Update is a 35-page research report available only to buyers of the Guide.]

The City of Fremont has been in the national press recently as the home of the infamous failed solar energy company Solyndra. Somewhat lost amid the politics was the fact that approximately 1,500 jobs went by the wayside when the plant shut its doors in August. This was on the heels of the 2010 closure of the New United Motor Manufacturing, Inc. (NUMMI) plant, which put 4,500 out of work.

Despite these challenges, Fremont focused forward. In February, the city of about 215,000 people announced a “Jobs Recovery Strategy,” which outlines a plan for the revitalization of an 850-acre area surrounding the new Tesla Factory (at the site of the former NUMMI plant). The plan, aided by a U.S. Economic Development Administration (E.D.A.) grant, “focuses on the creation of high-wage, skilled jobs, promoting innovative technology uses and employment-focused transit-oriented development (T.O.D.),” according to the city.

This and other economic development strategies appear to be working. In our First Quarter Update of the JAGG Development Index, a feature published in The 2012 AEC Market Guide to California, Fremont jumped from 26th to 4th in our list that measures the economic development outlook of 128 California cities and towns.

Fremont’s sudden climb came as a result of an impressive 0.6% drop in the citywide unemployment rate from October (7.3%) to December (6.7%) and the addition of more than 300 new residential permits in the last two months of the year alone. A closer examination of the permit data finds that the vast majority of the new permits were from a single 300-unit multifamily property.

Kamal S. Obeid, S.E., P.E., a civil and structural engineer and the president of Landtech Consultants, Inc. (Fremont, CA), says he is seeing a mild increase in development interest, but that overall construction activity in the city currently remains soft.

“In general, I’m not seeing a great deal of development going on right now,” said Obeid, who has a project on hold in the city due to market conditions. “I know that there is one relatively large project occurring in the Central Business District that appears to be mixed-use, primarily residential.”

Obeid’s observations are not inconsistent with the findings of the Index, however, since it is intended to be a predictive tool. In fact, Obeid sees some market indicators that could foretell a recovery of development in Fremont.

“Office rents have been fairly stable in Fremont,” says Obeid. “There are some vacancies, but landlords aren’t too interested in giving discounts to their tenants right now. The multifamily market is still hot in Fremont, with the city favoring condos over apartments. And though I’m not sure how the research and development market is, Fremont – South Fremont in particular – benefits from its proximity to Silicon Valley, and technology companies do seem to be spending again.”

Fremont’s drastic leap up the rankings is unusual for the index. In fact, most other cities in the Index moved only a few places one way or the other.

The City of San Francisco, which shared the top spot with the Yolo County city of Davis in the last ranking, moved into sole possession of 1st, distancing itself from the field. From January to December 2011, San Francisco’s unemployment rate dropped nearly two percentage points, finishing the year at 7.6%. Residential permits did not return to the level seen during the boom years of 2005-2007, but were only off by about 25% in 2011 from the average of those golden years.

Santa Clara County’s Mountain View jumped from 4th to 2nd. It boasts a 6.4% unemployment rate, relatively low foreclosure activity according to the latest available statistics, and residential permit activity in 2011 that was 65% higher than the city experienced in the boom years.

Holding steady in third place is the small city of Walnut from Los Angeles County. Walnut actually topped the Index in the third quarter, but slid to third in the last two with increased foreclosure activity and a slight rise in unemployment rate.

Davis slipped into a tie for 5th with Orange County’s Irvine (previously 6th) and Alameda County’s Dublin (previously 9th). Rounding out the top 10 are Aliso Viejo, dropping from 4th to 8th; Santa Monica, slipping from 6th to 9th; and Mission Viejo, climbing from 12th to 9th.

As noted in The 2012 AEC Market Guide to California, the JAGG Development Index is:

…designed to be an informational resource that calculates a variety of important metrics that influence the outlook for development in a particular area. This is almost entirely an objective, quantitative analysis based on these metrics in cities across the state. It is not intended to definitively judge the potential for development or the economic outlook for any of the specific cities listed. Cities are not self-contained, so to place too much emphasis on the statistics within a city’s boundaries is unwise.

Instead, the intent is to rate these important factors according to a scale we developed based on our estimate of the impact each will have on the city’s economic health. For this reason, we place a higher emphasis on unemployment rate, foreclosure rate and current permit activity in relation to historical permit activity. Most of the data for the First Quarter Index is from year-end.

JAGG Development Index – 1st Quarter 2012

City (County) Index Score

1. San Francisco (San Francisco) 60

2. Mountain View (Santa Clara) 54

3. Walnut (Los Angeles) 53

4. Fremont (Alameda) 52

5. Davis (Yolo) 51

5. Dublin (Alameda) 51

5. Irvine (Orange) 51

8. Aliso Viejo (Orange) 50

9. Mission Viejo (Orange) 49

9. Santa Monica (Los Angeles) 49

Matkins/Anderson Survey Optimistic About Commercial Sector

The 2012 AEC Market Guide to California found that many market indicators in the commercial sector are pointing toward recovery, particularly in the areas of the state further along the economic recovery curve. A recent survey by law firm Allan Matkins (Los Angeles, CA), in conjunction with the UCLA Anderson Economic Forecast, concurs.

California’s office and industrial space markets have made some, albeit uneven, progress.

The progress, such as it is, has been driven by the steady employment gains in coastal California, particularly in professional, technical and scientific services and health care, users of office space, and in export-related sectors and manufacturing, [as well as] users of industrial space.

The latest survey results, exhibit a continuation of the last 24 months, and for the first time, the Survey provides evidence of a nascent new build cycle.

Although occupancy rates and rental rates have not yet risen to levels required to induce significant new construction, improving economics has induced an increase in alterations and remodeling of existing space. In the last six months. Permits for remodeling of commercial real estate in the seven surveyed markets (exclusive of apartments) reached or exceeded the pre- 2007 levels. While the dollar value of the remodeling does not account for inflation and may be allocated to very different types and uses of commercial real estate, they do indicate a move towards conditions appropriate to engender a revitalization of the commercial structure construction industry.

The Survey Report concludes that the commercial and industrial markets are certainly on their way to full recovery, with a decent chance of seeing solid early-stage activity by the end of 2012.

“The optimism about 2014 in the Survey, which first appeared in some markets in December 2009, is an important indicator of both the probability of new additions to stock being started over the next two years and of opportunities for new investment in office and industrial space,” wrote report author Jerry Nickelsburg of the UCLA Anderson Forecast.

“The eighteen months of pessimism during the recession has now been followed by two years of increasing optimism among the Survey panels. This is qualitatively consistent with the historical pattern of commercial real estate cycles. The depth of the recession and the recent slowing of growth have attenuated the recovery in commercial real estate markets, however, the Survey results [still suggest] a turning point in commercial markets and commercial construction by late 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.