Good News Friday from NGKF – Metro Job Recovery

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

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

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

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 The forum was also “live-tweeted” via @mfamaforum and blogged at


Fremont Boom on the Horizon?

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

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 (, 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

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.


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.


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.”


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.


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

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

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

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.