Archive for the ‘AEC’ Category

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.)

Court Ruling is ‘Death Blow’ for California RDAs, Win for State Officials and Schools

Thursday, December 29th, 2011

With only three days left in 2011, the California Supreme Court ruled that the state had the right to abolish the redevelopment agency (RDA) program, which Governor Brown did in June, but not to set up a smaller program that required RDAs wanting to stay operational to make payments to schools and other public programs. Here’s an excerpt from an article on SFGate, the website of the San Francisco Chronicle:

The California Supreme Court dealt a death blow to the state’s decades-old redevelopment program, ruling today that state lawmakers did have the authority to eliminate the economic development program, but striking down a law that would have allowed the agencies to exist in a smaller form.

The ruling is the worst-case scenario for cities and other proponents of redevelopment, who had sued the state over two bills approved by lawmakers and signed by the governor. Under those laws – AB26 and AB27 – the state’s 390 redevelopment agencies would cease to exist unless they agreed to pay $1.7 billion this year and $400 million in future years toward schools and other agencies such as special fire districts.

Today, the high court ruled that AB26, which eliminated the agencies, was legal; but they said that AB27, which would have forced the agencies to make payments to schools and other public programs if they wanted to continue to operate, was not legal under state law.

The court’s decision is a relief for state leaders, who counted on that money to plug the state’s budget shortfall this year and in the future.

This topic is covered in our 340-page Expanded and Revised 2012 AEC Market Guide to California, which we released this month. 

The section on the RDA controversy includes detailed data about the state’s $8 billion RDA program and the ramifications of the court’s much anticipated decision.

A panel discussion of the San Francisco chapter of the Urban Land Institute (ULI) reflected the worry of RDA backers.

As reported in Urban Land magazine, Fred Blackwell of the San Francisco RDA said large, long-term projects such as the Transbay Transit Center, Mission Bay, and the Hunters Point Shipyard transformation would “simply not get off the ground.”

Moderator Zane Gresham, an attorney at Morrison Foerster (New York, NY), said, “These funding issues for smart urban development and redevelopment are one of many problems facing the state, and policy makers are hard-pressed for solutions. What are the choices? It’s a series of trade-offs and every constituency should be weighed in those choices. Clearly, the challenge that this presents for affordable housing, for economic development, for infrastructure development really can’t be overstated.”

The article adds, “What does that mean for San Francisco? Half of the city’s RDA budget goes toward affordable housing, said Blackwell. If RDAs are abolished, some 1,400 affordable housing units that have not been committed would be in jeopardy.”

During our interviews for the 2012 Market Guide to California, we spoke with a Mission Viejo city official who said they were counting on redevelopment funding, in some form anyway, for two major projects. “We have plans in place for two large low-to-moderate income housing facilities that we hope to pay for with help from the state’s Redevelopment Agency’s Low and Moderate Income Fund,” said the official.

Faced with a choice between forfeiting the funding or paying a fee to remain viable, the city “opted in” — at a cost of $1.82 million for fiscal 2012 — and moved ahead as if the funds would be available. Now it is possible that the redevelopment money may never find its way to these projects.

According to the Orange County Register, Mission Viejo Mayor Dave Leckness said, “We’re paying $1.8 million to protect $12 million,” referring to redevelopment funds already dedicated to the two projects mentioned above.

The Visalia Times-Delta reported that the city of Visalia and Tulare County were set to pay more than $1 million each in redevelopment funds for fiscal 2012, while the city of Tulare would have handed over more than $500,000 to keep its redevelopment program alive.

The paper reported:

Visalia City Manager Steve Salomon said the decision was expected but added that the ruling will also mean cities will need to get creative to redevelop blighted areas. “We may have to use new tools to help improve areas of the city,” he said. “There were very real things that this money helped with. We won’t be able to do as much as we did before.”

While SFGate is correct that the Supreme Court’s decision is a “relief” for the state on one hand, it is likely troubling on the other because the state now needs to address the billions of dollars in projects that were depending on the RDAs and are suddenly in absolute limbo.

Most likely, the state and the California Redevelopment Association (which represents RDAs across the state) will attempt to negotiate a compromise that helps the state achieve its fiscal goals, while keeping the program alive in some form.

It’s safe to say, though, that the court’s ruling solidifies that the state has the upper hand.

The redevelopment program has been a lightning rod for controversy after audits revealed questionable use of redevelopment funds, including for the upgrade of a luxury golf course, travel junkets, lobbyists and commercial developments that some argued are inconsistent with the program’s mission.

Often overlooked in this discussion of the value of redevelopment programs is that the issue pits RDAs against the interests of public schools. As the Supreme Court wrote in its opinion filed December 29, 2011:

Tax increment financing remains a source of contention because of the financial advantage it provides redevelopment agencies and their community sponsors, primarily cities, over school districts and other local taxing agencies. Additionally, because of the state’s obligations to equalize public school funding across districts and to fund all public schools at minimum levels set by Proposition 98, the loss of property tax revenue by school and community college districts creates obligations for the state’s General Fund.

The effect of tax increment financing on school districts property tax revenues has thus become a point of fiscal conflict between California’s community redevelopment agencies and the state itself, a conflict manifesting in the current dispute.

So as it relates to the AEC industry, the ruling may be a blow for residential developers, particularly those that work on affordable housing and urban renewal. But architects, engineers and contractors whose target markets include public schools and community colleges may find the pipeline for school projects a little fuller. (We repeat may, because the state has shown no inclination to use the newfound funds for anything other than offsetting its deficit problems.)

This is only one of the fascinating and evolving issues addressed in our 340-page 2012 AEC Market Guide to California.  

The report assesses the outlook across 40 individual markets and subsectors heading into 2012. When feasible, the report breaks down the markets by major metropolitan area and geography. It 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. The links and resources section is nearly 50 pages alone.

If you’re interested in ordering the book, click on the link to the right and order through our secure PayPal site.

2012 AEC Market Guide to California: Up in 2012

Monday, December 19th, 2011

Now that 2012 is almost upon us, economists and researchers have a far clearer view of what to expect in the coming year. Many of these experts have revised downward their estimates about the strength of the ongoing recovery.

While it may be true that the overall economy will continue its slow, sluggish rebound from the worst of the downturn, the welcome conclusion of The Expanded & Revised 2012 AEC Market Guide to California is that nearly every market served by the state’s AEC firms is improving at a healthy pace heading into the new year.

To be sure, 2012 will be another challenging year for our industry – nothing will come easily, especially away from the vibrant coastal gateways and high-tech centers. But overall, there will be more work in more markets across a wider geographic spread than we’ve seen in several years.

Here’s an excerpt from our introduction to the Market Outlook section of our 342-page newly expanded and revised 2012 AEC Market Guide to California:

If you look individually at each market sector served by AEC firms, you’ll find that most show at least the promise of improvement in 2012. Some markets even held up well during the downturn and continue to provide a solid amount of work for consultants.

So why does the overall California market seem so bad for so many firms in so many places?

Part of the problem is the “haves” and “have-nots” issue. During much of the downturn, the coastal gateway cities and technology centers at least held their own, while inland areas a little too far from the action or dependent on the “wrong” economic drivers (e.g., construction, natural resources) suffered.

According to some, the gap is widening. In the report, “California: Bifurcated and Buffeted,” UCLA Anderson Forecast Jerry Nickelsburg says, “Now that the U.S. economy has stalled, the differential between Coastal California and Inland California has begun to widen and the specter of long-term economic stagnation in Inland California has reared a not very pretty head.”

In terms of markets, many firms working on health care projects continued to thrive, but most that had grown reliant on private site development experienced dramatic reductions in revenue, backlog and profit.

John Withers, a consultant with California Strategies, LLC (Irvine, CA), says he’s never seen the market so fragmented in his many years in the business. “If you ask how the state of California is doing, you have to drill way down and look at it on a project-by-project and product-by-product basis. It’s a very uneven marketplace.”

Withers said an investment banker from another state recently asked him how things were going here, and he took an even more “micro” look. “I said, ‘you know, I can only answer that question on a neighborhood-by-neighborhood basis. Some segments are just dead; nothing is happening and everybody’s waiting for the turnaround. Others are doing quite well.”

With public-sector work, Withers says that he’s instructing his design and construction clients to make sure the funding for the projects they’re pursuing have a solid footing.

“For public-dollar projects, the key concept is having a dedicated revenue stream, something where no one can get their hands on the money,” he says. “You want projects with dollars that are earmarked and directed for a  particular purpose, not something from the [general fund]. Water/wastewater projects tend to be very stable now; they usually have a steady, dedicated funding source.”

Another issue casting a pall over the outlook is that the battered single-family housing market, which was the biggest single factor in the most recent, long construction boom, indirectly affects so many other markets. A depressed housing market has implications on publicly driven markets (e.g., tax receipts, voter sentiment) and privately driven markets (e.g., the connection between residential and commercial growth, particularly retail).

Two other enormous issues affecting the California market outlook remain unresolved as of this writing – high unemployment and the state’s budget woes. The outcome of these two issues will have a major say in the overall strength of the markets in 2012.

In the latter stages of 2011, the state’s unemployment rate improved markedly. Though still among the nation’s highest, California’s seasonally adjusted rate dropped a full percentage point from January through October. The state’s budget shortfall remains a concern, though promising results from tax receipts in November diffused the crisis somewhat. Foreclosures do appear to be continuing their recent upswing, which is troubling.

With this said, even some of the markets and places that have suffered the worst during the downturn are showing signs of life.

Investor-dependent markets such as the speculative office sector are reporting results that are moving the indicators in the right direction. New building is lagging, but the metrics that typically portend a return to construction activity are solidly in place and improving.

Inland areas in Riverside and San Bernardino counties, while still facing extreme difficulties, have seen encouraging signals as well. The Inland Empire, struggling with high unemployment and too many foreclosures, is considered by some to be a national leader in the rebound of the industrial market.

Surely, as an industry and a state, we’re still climbing from the depths of the downturn after reaching such highs in the middle of last decade. So while individual markets and geographic areas are improving substantially, the mood among many in our industry is still down.

The Guide spends the next 200 or so pages analyzing 40 markets and submarkets, gauging the outlook for each market in detail. This follows a section of nearly 50 pages that discusses 12 of the most pressing issues in the industry as it heads toward 2012. 

The Expanded & Revised 2012 AEC Market Guide to California is available now in both pdf and hard-copy formats. With your paid order, you will receive an e-mail containing a pdf file of the report the same business day. A hard-copy report will follow by U.S. Postal Service mail. The cost is $299, plus shipping. Just click on the button on the home page to order via our secure PayPal site. As always, it comes with a full money-back guarantee, so there’s no risk to you.

Indicators Point Toward Commercial Rebound, Bakersfield Office Revival

Friday, October 14th, 2011

The commercial real estate market turnaround is underway in a few select geographies, but the new development activity that is occurring is hardly enough to sustain all the AEC firms that once relied on the market for work. Recovery may be happening from a strict economic, almost intellectual standpoint, but in the real world the market is still struggling as we approach 2012, based on research for The 2011-2012 AEC Market Guide to California.

Yet, despite the lack of significant commercial development activity in most metropolitan markets, there is hope. Hassim Nadji, Managing Director, Research and Advisory Services with commercial real estate consulting firm Marcus & Millichap (Encino, CA), says that commercial real estate is on “a solid recovery trajectory.”

Nadji notes that commercial real estate is doing well when compared with its residential counterpart. “The degree of distressed home sales is still high, somewhere between 25-30%,” he said in a September interview. “In commercial real estate, even under distress, it still generates cash flow for the most part. The distressed sales are a lot less, in the 10-12% range.”

Nadji added, “Lenders are modifying and extending loans during the crisis, and the economy added 1.8 million jobs over the past 12 months, so commercial occupancies have stabilized and are beginning to improve. Investors are moving back into the market, taking advantage of low interest rates and the fact that pricing has reached bottom.”

Despite Nadji’s encouraging words, the recent release by ENR California of the list of the state’s top design firms illustrates just how far down the commercial market is when compared with a few years ago (see table below).

Top California Design Firms – Commercial Market

 

2011

Rank

Company 2008 Regional Revenue ($Mil) 2010 Regional Revenue ($Mil) Percent Change  
1 AECOM 53.77  32.51 -39.5%  
2 Gensler 48.48  27.63 -43.0%  
5 Ware Malcomb 10.18  7.61 -25.2%  
6 HOK 6.74  5.58 -17.2%  
10 SmithGroup 7.80  2.57 -67.1%  

 Source: ENR California (2011 rank is for 2010 revenue)

 To be fair, AECOM Technology Corp. (Los Angeles, CA) reported $41.1 million in 2007 commercial market revenue (a less-drastic 21% drop compared with 2010) and Gensler (San Francisco, CA) earned $29.7 million from the commercial market in 2007 (only a 7% drop to 2010), so 2008 may have been a better-than-average year in the commercial market for some firms.

 Still, the commercial sector has some distance to travel before it is again a dynamic, thriving market for California AEC firms.

Surprise Candidate for California Office Rebound?

In its most recent Office Market Trends report, which includes measures of 2nd Quarter 2011 vacancy rates among major national metropolitan areas, international commercial real estate firm Grubb & Ellis (Santa Ana, CA) reports that Bakersfield has the lowest vacancy rates among top California metros.

In the central business district (CBD), among 58 US metropolitan areas measured, Bakersfield ranked 8th nationally with a vacancy rate of 11.6%. The state’s 9th-largest city fared even better in the suburban market rankings, taking 3rd behind Long Island and New York City’s Outer Boroughs with a vacancy rate of 10.7%.

Given this indicator, could Bakersfield actually lead the office market rebound in California? Opinions are mixed.

“There are a lot of empty buildings here,” says Craig Hummel of commercial, industrial and agricultural real estate firm Craig Hummel & Associates (Bakersfield, CA). “I’d like to think the market is going to rebound, but I’m not sure if that’s a realistic outlook given all the absorption that would need to take place first.”

Hummel isn’t alone in his skepticism, and not all indicators are so positive. The home foreclosure rate in Bakersfield is higher than the state average – in August, 1 of every 159 homes received some kind of foreclosure notice according to real estate research firm RealtyTrac (Irvine, CA). The unemployment rate is above 10% and the retail vacancy rate stood near 12% in the 2nd quarter according to market research firm ReisReports (New York, NY).

Yet, even these indicators are moving in the right direction. The unemployment rate dropped by more than a percentage point from January to July, the foreclosure rate improved slightly from July to August and the retail vacancy rate is down from over 14% in 2009.

Because Bakersfield has traditionally been a center for the oil and agricultural industries, much of the employment in the city is not the type to fill office buildings. However, the city has recently added more technology, manufacturing and distribution firms to its mix, which could help spur demand for office space.

“The market here was never overbuilt, and once the oil companies start hiring at the executive level again, we expect to see a solid recovery in the office sector,” says Matthew Starr, vice president in the commercial office division of Grubb & Ellis’ Bakersfield office. “We’re bullish on Bakersfield’s office market.”

Is the Outlook Dimming for Obama’s Job Plan?

Friday, September 30th, 2011

Outlook Dimming for Jobs Plan? 

President Obama was in California early this week, speaking about his jobs plan at a Silicon Valley session sponsored by career-based social networking site LinkedIn. He then moved on to fundraisers in Los Angeles and San Diego.

One of the reasons we decided to revise The 2011-2012 AEC Market Guide to California before we even released it was because of the effect the Obama plan would have on California and the AEC Industry. Next year will have a very different look for both if Obama is successful in passing this plan or substantial parts of it.

Yet, with each Obama speech (and fundraiser), it appears less likely that anything meaningful will come out of his American Jobs Act (aka, The Obama Jobs Plan). This is because, in our opinion, the president is exhibiting either a stunning lack of political acumen or a shameful amount of political gamesmanship in the face of this prolonged economic crisis.

In the former case, it is delusional to believe that public opinion is a strong enough hammer to overcome the inevitable GOP opposition to the plan. Obama’s last stimulus plan received mixed reviews at best and his approval ratings have been on a steady decline. Does the Administration really think the president can rally enough support to force House Republicans to hand him a victory in this supercharged political climate?

On the other hand, if the goal is to create the campaign talking point “I tried to fix the economy but the GOP cared more about winning elections than helping Americans,” it’s a misfire because voters only remember what politicians did while in office, not what they tried to do.

Whether it’s simply naive or politically motivated, Obama’s approach doesn’t seem to be working.

This is too bad, because elements of the plan could help the U.S. and California economies, as well as the AEC industry.

Some argue that there is nothing meaningful in the $447 billion plan. Many of these critics are small-government, anti-Obama folks or political operatives with a clear agenda. Conservative economists who loathe the plan, such as former Reagan budget director David Stockman, are opposed to just about everything Obama proposes due to vast differences in economic and political philosophies. Their condemnation was predictable.

Liberal-leaning commentators, such as Paul Krugman, are more favorable to the plan, of course, with some calling for even more government investment and involvement.

Many middle-of-the-road economists and observers support at least some elements of the plan. Mark Zandi of Moodys.com, who once served as an advisor to Obama’s 2008 opponent John McCain, said:

“President Obama’s much-anticipated jobs plan is a laudable effort to support the struggling economy. The plan would go a long way toward stabilizing confidence, forestalling another recession, and jump-starting a self-sustaining economic expansion. If fully implemented, the Obama jobs plan would increase real GDP growth in 2012 by 2 percentage points, add 1.9 million jobs, and reduce the unemployment rate by a full percentage point, compared with current fiscal policy.”

As with the 2009 American Recovery and Reinvestment Act (ARRA), the Obama plan would almost certainly prop up the economy and the industry temporarily. The hope, as it was then, is that the rebound would be in full swing by the time the stimulus ran out of steam. This didn’t happen last time, but may have a better chance at this point in the recovery.

The White House says the plan, if implemented in its entirety, would do the following for California: a payroll tax cut for 710,000 firms, $3.96 billion in highway and transit modernization money, as much as $1.85 billion for local communities, $1.13 billion to community colleges and $2.81 billion for school infrastructure projects. (See the AEC Insight blog entry “Where the Work Will Be in 2012” for more on the effects of the Obama Plan on California.)

Zandi says that government action such as the proposal by Obama is necessary to overcome the current crisis of confidence among investors and the American public. However, he is not optimistic about its chances. “Given the current political environment, it is unlikely that much of what the president has proposed will become law, but nearly all the proposals have some bipartisan support. An extension of the current payroll tax holiday for employees seems most likely to pass. The proposed expansion of the employee tax holiday and the new payroll tax holiday for employers are also possible. The president’s spending initiatives, while worthwhile, seem like longer shots,” says Zandi.

If Zandi is correct, the measures most critical to helping the design and construction industries – the billions in investments in roads, schools and other infrastructure, as well as the aid to municipalities, and the infrastructure bank designed to spur more public-private partnership projects – have little hope of passing.

Should the infrastructure elements of the plan somehow pass, one area of concern for AEC firms – beyond the opposition’s contention that it may be a long-term drag on the economy – is the potential for other important infrastructure-related legislation to get lost in the political weeds. This happened with the 2009 stimulus; government programs that support transportation, public works and other markets critical to the industry still languish without resolution as Congress passes extension after extension to keep these programs on life support. 

What will it take to pass the Obama Jobs Plan?

If the president truly believes his plan will boost the economy and he wants the bulk of it to be enacted, he must make a political sacrifice. This isn’t 2009-2010, when he was fresh off election and had the public support and political might to do what he wanted (e.g., pass ARRA and the Health Care Plan).

He will need to compromise with Republicans on the issues most distasteful to them (i.e., raising taxes, increasing debt) and make sure that they are in position to receive an appreciable amount of credit should the plan succeed. Maybe Obama’s team is working with Republicans and skeptical Democrats in the background to craft such a compromise. Otherwise, there is no way this plan could overcome the political implications of handing Obama a solid, recovering economy – temporary or otherwise – on the cusp of an election year…especially with a candidate as vulnerable as Obama appears to be.

California’s Best Markets for 2012 (Excerpt)

Monday, September 19th, 2011
Where the Work Will Be in 2012
(From the AEC Insight E-Mail Newsletter, September 13, 2011)

For most California AEC market sectors and service areas, 2012 will be vastly better than 2011. Not that the bar was set very high, but better is better.

Certain public- and private-sector client segments will recover faster than others, so it is important to know which geographic areas, industries and project types are best positioned for the strongest recovery.

We discovered several promising candidates during the course of our research for The 2011-2012 AEC Market Guide to California, including the following:

The City of Dublin.  If you work in Northern California and you’re not talking with people in the Dublin area, you’re missing an opportunity.

One of the fastest-growing cities in the region is seeking to expand its total area by annexing the neighboring 1,450-acre Doolan Canyon property for development. The city’s commercial climate also appears to be improving, with business leasing activity strong – including an announcement by business software provider Taleo that it is expanding its space and adding 200 employees.

Unemployment is very low (6.6% in June), and housing permit activity year-to-date through June 2011 is more than 100% higher than it was during the peak of the housing boom (average of June YTD permits for 2005-2007). Its strong school system is a draw for families looking for a place to settle. Recently improved business incentives are helping fill retail vacancies that began to plague the city a few years ago. Plans for a new charter high school and expansion of the city’s water infrastructure are in the works.

Even some of the city’s problems – a relatively high foreclosure rate and a potential battle with neighbor Livermore over the Doolan Canyon plan – could spell opportunity for AEC firms. 

Large Infrastructure Projects. While some states are rejecting high-speed rail – and the federal money that comes with it – California continues to move forward with its plans to build the politically charged high-speed rail line. On September 9, the California High Speed Rail Authority drew more than 800 representatives from Central Valley businesses to a forum discussing how small business can grab a piece of the $6 billion that will be spent on construction of about 120 miles of high-speed rail lines from Fresno to Bakersfield.

Even if HSR falters, other large infrastructure projects show promise. On September 12, the California Public Employees’ Retirement System (CALPERS) announced that it was investing an additional $800 million in large infrastructure projects in the state – including airports, roadways, water/wastewater systems and energy. And President Obama’s Jobs Plan, should it (or any version of it) pass, would likely result in at least a short-term boost in the state’s infrastructure funding. Obama’s initial plan calls for $3.96 billion in highway and transit modernization money for the state.

San Bernardino Schools. The Obama Jobs Plan has a lot more to offer California. The White House says that in California, under the American Jobs Act, 710,000 firms will receive a payroll tax cut, while as much as $1.85 billion could go to revitalize local communities, $1.13 billion to community colleges and $2.81 billion for school infrastructure projects.

Some would likely benefit more than others in the Obama plan, including San Bernardino schools. According to the Press-Enterprise, “San Bernardino City Unified School District would be a big winner under President Barack Obama’s job-creation plan. The district, one of 11 in California and 100 around the country singled out for direct funding, would receive more than $60 million for school construction and modernization projects if Congress approves the package as proposed.”

Obama’s proposal faces a political fight and is unlikely to pass in its current form, but the potential for significant amounts of money to pour into a single school system should have the attention of AEC firms working in the K-12 sector.

The other 10 California school systems with money earmarked in Obama’s plan, according to the Press Enterprise, are Los Angeles ($743.5 million), Fresno ($97.5m), San Diego ($91.8m), Long Beach ($75.5m), Sacramento ($46.9m), Oakland ($42.4m), Stockton ($39.0m), Santa Ana ($36.2m), Bakersfield ($34.7m) and San Francisco ($29.8m).

For much more insight into these and the other most promising markets in California, order The 2011-2012 AEC Market Guide to California on the AEC Insight Home Page.

Falling in Line with Social Media Marketing

Thursday, September 1st, 2011

The following is an excerpt from The 2011-2012 AEC Market Guide to California, found in the chapter “A Dozen Game-Changers for AEC Firms.”

California is the Motherland for social media companies. Google, Facebook, Twitter and LinkedIn are all headquartered in the state. In a survey by B-to-B listing firm NetProspex (Waltham, MA) identifying the top 25 “most social” cities in the US, 7 were in California, including 3 of the top 4 (San Francisco, San Jose and Ventura). NetProspex based its ranking on the percentage of businesspeople active on social networks.

The AEC industry, conversely, is one of the least social, according to the same survey. Not a single AEC firm is found among the top 100 social firms in the country, and no industry component – not A, not E, not C – is in the top 50 most social industries.

Is this reaffirming the stereotype that the AEC industry is slow to adopt change? Or is it a case of an industry instinctively recognizing that the potential return is insufficient to justify the investment?

The answer to both questions is “probably.”

The truth is that most AEC firms will find that there is some marketing and public relations value to being involved in social media marketing. In particular, the business-focused LinkedIn, along with the more social Twitter and Facebook, offer marketing and PR potential to AEC firms (with the latest entry, Google+, on the horizon and closing fast).

The key is to not expect too much. Social media should be one prong in a multi-pronged marketing program. Developing a social media presence is unlikely to propel an AEC firm from anonymity to superstar status overnight (although that’s pretty much what happened with building code and engineering review services firm Naffa International (Fresno, CA), which rode founder Imad Naffa’s social media strategy to a massive increase in notoriety and workload).

Further, there’s only a remote likelihood of making a direct connection on a social network that leads to new work – at least at this point in its evolution. At minimum, you can expose your firm to a larger group of potential clients – or more likely, to their marketing and PR folks – and capitalize on the built-in publicity you get, albeit fleeting, by building a list of “followers” and occasionally providing them with information about what your firm is doing.

There are additional side benefits, however. A social media marketing program often leads firms to develop content that it can use in other areas (e.g., a blog post revised into an article in an external newsletter that becomes a magazine piece). It can also re-energize a marketing program, and help a firm assess, streamline and define its marketing and PR approach.

If you’re still a novice on the social media marketing scene, here are some steps you should immediately take to improve your social media standing. (If, on the other hand, you’re making your 10th Facebook update of the day and have 2500 followers on Twitter, you can probably skip the next few paragraphs.)

1.      Please understand this – social media is not a fad.  If you think Twitter exists only so middle schoolers can talk about how much they hate homework and that LinkedIn is primarily a job board, you might as well be the guy in the 1940s who said that television would never catch on. Social media as a business tool is here and it’s only going to grow. So even if you don’t actively participate in any social network, personally or in business, you or someone in the upper echelon of your firm need to be familiar with the most popular social media programs. At minimum, as we hurtle toward 2012, social media should be part of the marketing planning conversation in every AEC firm.

2.      Protect your brand. You can acquire social media identifiers in the same way you do domain names, with one difference – with social media, it’s free. Start with Facebook and Twitter, the two most basic and popular sites. On Facebook, you (or someone who has a Facebook account) should set up a page with the firm name, then try to acquire the Facebook URL via the site http://www.facebook.com/username/. If the name is still available, you should be able to secure the URL, even if you never fully activate the page.

With Twitter, it’s even easier. When you register, you’re asked to create a unique user name. The key here, though, is the word “unique.” If the user name you want is taken, you’ll need to set up some type of variant. All Twitter user names are 15 characters or less and can only include numbers, upper- and lower-case letters and the _ sign. No spaces. Once you sign up, you have secured the URL containing your user name (mine are http://twitter.com/aecinsight and http://twitter.com/thejagg_group).

If you do nothing else, do this. It takes almost no time, it costs nothing, and you never know when you might want or need these tools. If you need help, ask the nearest person under 30 to show you how to do it… or that middle schooler complaining about homework on Twitter.

[In the next few days, I’ll post more from this section of The 2011-2012 AEC Market Guide to California, including additional recommendations for more advanced firms, as well a discussion of California AEC firms and owners engaged in social media.

IPD, SB1953 and Other Acronyms Driving the California Health Care Market

Friday, August 19th, 2011

Just finished a wide-ranging interview with Bob Mitsch, vice president of facility planning and development for Sutter Health. Bob discussed his organization’s experiences with and commitment to integrated project delivery (IPD), the innovative contracting and project delivery method that Sutter is often credited with creating. He also spoke about the outlook for the health care sector as it pertains to the design and construction industry, as well as the attributes he looks for in an architecture, engineering or contracting firm.

Bob’s interview, along with much more on the health care market, AEC industry trends, and the outlook for the California design and construction market will be documented in The 2011-2012 AEC Market Guide to California.