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Friday, Apr 19, 2024
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Builders Cautiously Optimistic About Long-Term Industry Outlook

CONSTRUCTION: Backlogs of Public Sector, Housing, Education Projects Helping Local Companies

SAN DIEGO COUNTY – At least two of San Diego’s biggest construction companies see good times ahead for the region’s building industry.

“I think San Diego is actually headed towards its heyday,” said Zack Hammond, San Diego general manager of Suffolk Construction.

Zack Hammond
San Digo General Manager
Suffolk Construction

“We’re at the forefront of a big building boom,” Hammond said, adding that Suffolk is forecasting that San Diego’s construction market will increase 8%, year-over-year, for the next three years, reaching an annual market of $8 billion to $9 billion.

“Some developers are hoping and foreseeing a correction in the same way that we did after the mortgage-backed security crisis. That could happen in some markets,” Hammond said. “We’re actually seeing that happen nationally in some markets, in some product types, but I don’t think we’re going to see it here in San Diego.”

Hammond said life science construct has slowed “but it will come back.”

Hammond said that developers from places like San Francisco, Boston and New York, where the market is weaker, are starting to come to San Diego looking for work.

“We’re actually seeing that with design teams as well,” Hammond said.

Among Suffolk’s ongoing projects is a $145 million Hillcrest building by Cedar Street Companies in partnership with Quartz Lake Capital, with 301 apartments, a $43.5 million performing arts center at Liberty Station by the NTC Foundation and Cygnet Theatre, and a 23-story apartment tower in Bankers Hill by Floyd Properties & Development that will have 260 apartments.

Equally enthusiastic about the outlook for San Diego’s construction business was Robert Betz, executive vice president of McCarthy Building Companies.

Betz said that there’s been a bit of a slowdown in private sector construction projects, but that’s been made up for by public sector spending, especially for health care projects.

“I’m talking billions of dollars of new healthcare (projects) coming out over the next two years,” Betz said, adding that health care providers like the University of California San Diego have major projects to meet a 2030 deadline to comply with seismic safety standards.

Robert Betz
Executive Vice President
McCarthy Building Companies

“Where the private sector is kind of in a lull, the public sector, and I’m including all healthcare in that, has seen some dynamic increase in activity that’s going to keep everybody busy for the immediate future,” Betz said. “I think if the feds would help us out a little bit, lower some interest rates, we could see the private sector come back, sooner rather than later.”

Coupled with a sharp decline in venture capital investment in San Diego life science companies, high interest rates caused some projects to be put on hold, Betz said, but he said McCarthy pivoted to find other work, “so it really didn’t hurt us from a volume standpoint.”

McCarthy Construction’s ongoing projects include the Gaylord Pacific Resort & Convention Center in Chula Vista, Scripps Health La Jolla Tower II hospital tower, the UCSD Triton Center, and the Bioterra life science campus by Longfellow Real Estate Partners in Sorrento Mesa.

A new El Centro police station is among the latest projects by San Diego’s Barnett-Reese Construction. Photo courtesy of Barnhart-Reese Construction

Signs That ‘San Diego’s Still a Good Investment’

Scott Sass, business unit leader of DPR Construction, said that he’s “super busy.”

DPR’s primary markets in San Diego are life science, healthcare and higher education.

Scott Sass
Business Unit Leader
DPR Construction

“We’ve got some really big opportunities that we’re chasing,” Sass said. “We have some significant backlog for this year,” adding that, “We’re probably going to be higher in revenue than we were in 2023.

“We’ve got good backlog for 2025, but we don’t expect to be at the same level that we’re at this year,” he added.

On the downside, Sass said some life science projects were shelved.

Mat Semic, principal and president of Latitude 33 Planning and Engineering, said that some projects that had been planned as life science are being retooled, particularly in Sorrento Mesa and environs.

“That market was saturated,” Semic said. “There was a gold rush for the next attractive tenant, and it outpaced the demand of the market.”

Mat Semic
Principal & President
Latitude 33 Planning and Engineering

Overall, Semic said that his company is doing better in 2024 than it did last year and has a backlog of at least 18 months of work, in part because Latitude 33 has diversified.

“We’re seeing a few markets that are very encouraging, in fact, better than they have been in the past few years,” Semic said.

Healthcare, higher education, defense and aviation with the construction of a new Terminal 1 at San Diego International Airport are among those that remain strong, Semic said.

Residential homebuilders also have projects in the design and permitting stage, Semic said.

“It’s a good sign that San Diego’s still a good investment,” Semic said.

Andre Childers
President
Pacific Building Group

Andre Childers, president of Pacific Builders Group, said he’s “cautiously optimistic” about San Diego’s construction market for the rest of 2024, heading into 2025.

“There’s a lot of uncertainty with an election year, interest rates – some items out of our control – but there’s also some optimism in terms of activity, certainly on the design side of things, that we’re seeing,” Childers said. “We’re optimistic that the worst is behind us.”

Childers said that Pacific Builders Group has a strong backlog of work.
“We have a couple of large projects that are anchor projects, and we have a steady flow of tenant improvements starting in the next couple of months,” Childers said.

Cedar Steet Companies, in partnership with Quartz Lake Capital, plans to build a $145 million Hillcrest apartment project.
Rendering courtesy of Cedar Street

High Interest Rates Bring Ebbs and Flows

Economist Gary London, senior principal of London Moeder Advisors, had a reserved outlook for the near-term construction outlook.

“I think this is going to be a choppy year with respect to interest rates,” London said. “High interest rates are going to mostly inform activity going forward. The deals are going to experience narrowing feasibility issues over the coming year, which undoubtedly is going to slow the construction cycle.”

Gary London
Senior Principal
London Moeder Advisors

At the same time, London said that construction will move forward on apartment projects that have already been financed.

“The apartment industry is going to remain fine, but I don’t think we’re going to see nearly as much (construction) as we’ve seen in the last few years,” London said.

Alan Nevin, director of economic research at GAFCON, said that he’s counted ongoing apartment construction at dozens of sites throughout San Diego County.

Alan Nevin
Director, Economic Research
GAFCON

“The reality is that there’s enough in the pipeline that’s actually building right now that will take care of our demand level for a couple of years,” Nevin said.

They include apartment projects in Oceanside, Mission Valley, National City, Chula Vista, Clairemont and Valley Center, Nevin said.

In Mission Valley alone, Nevin said that Hines just broke ground for construction of nearly 1,000 apartments.

“There’s a lot going on,” Nevin said.

Mike Mahoney, Western Region president of Ryan Companies, said that the multi-family market, which is one area that Ryan specializes in, has slowed for the moment, but remains strong long term “just due to the housing imbalance and housing shortage we have in San Diego.”

Mike Mahoney
Western Region President
Ryan Companies

Mahoney said that Ryan Companies will break ground in April on a 278-unit multi-family project in Otay Ranch, but he said that about a third of Ryan’s clients have put projects on hold.

“It’s interest rates, it’s capital, it’s construction costs – the formula doesn’t work for a lot of developers right now,” Mahoney said. “When the fed decides to cut interest rates somewhere between 50 and 75 basis points, I think some deals will start unlocking.”

A basis point is 0.01%.

Doug Barnhart
Chairman
Barnhart-Reese Construction

Doug Barnhart, chairman of Barnhart-Reese Construction, said that two market segments that his company works in – healthcare and public works – are doing well.

Barnhart-Reese earlier this year was awarded contracts to build the $6 million Sharp Moore MountainView Hospice Home in Poway and a $40 million police station in El Centro and completed construction of a $25.5 million medical office building in Murrieta.

Similarly, Matt Gates, president of Erickson-Hall Construction Company, said that public works and education projects are keeping his company “pretty busy.”

Matt Gates
President
Erickson-Hall Construction Company

“We’re doing a lot of school work and essential services – a fire station for North County Fire Protection (District) as construction manager, design-build contractor for Vista, building a fire station there, San Diego Unified (School District), America’s Finest Charter School,” Gates said.

Kirt Gilliland, a senior vice president and San Diego market lead of project development services for JLL, said that he’s starting to get calls from architectural firms looking for work, which could be an indicator of a slowdown to come.

Kirt Gilliland
Senior Vice President
JLL

Unlike Hammond and Betz, Gilliland said that, “I don’t see a lot of projects on the horizon for the next three quarters, maybe four quarters.”

“The office market still hasn’t come back. We’re seeing people downsize. If they have 50,000 square feet, they’re downsizing to 30,000 square feet,” Gilliland said.

Bright spots for new construction are affordable housing projects, K-12 and college projects, and local government projects like fire stations, according to Gilliland.

“All of that stuff is going really well,” Gilliland said.

Andrew Bohnert, vice president and general manager of Project Management Advisors, said that some companies are using this time to work on project design and permitting, anticipating an improvement in financing looking past 2024.

“Certainly, there are some projects across the industry that have been put on hold or put on pause, but there’s opportunity there for owners who want to continue forward to test their strategy and to get to milestones that leave them poised to act when the markets change or interest rates come down,” Bohnert said. “I’m certainly optimistic about the long-term outlook in San Diego.”

Andrew Bohnert
VP & General Manager
Project Management Advisors

Although interest rates have caused some projects to be put on hold Mike Berryhill, vice president and San Diego division manager of Swinerton Builders, said that there are workarounds.

Mike Berryhill
Vice President & San Diego Division Manager
Swinerton Builders

“Some developers have enough internal equity or maybe have owned the land for many years, and they still have very good opportunities for successful projects,” Berryhill said. “We feel that these market conditions will be changing by the end of 2024 and into 2025 and we will be seeing a lot more momentum in the industry.”

Immediately following the COVID-19 pandemic, construction companies reported that they had trouble getting equipment because of supply chain issues and that the cost of labor and materials were rising at a rapid pace.

That has eased, although company executives said that there are still supply issues for things like electrical equipment.

“It’s not across the board like it used to be,” said Sass of DPR. “There are still some different materials and pieces of equipment that are still problematic, but for the most part, that’s calmed down.”

Things like lumber spiked, but that’s moderated,” said Mahoney of Ryan Companies. “Now you’ve got labor that’s still tight. There’s a lack of a skilled workforce out there.”

Building code updates have also added to overall construction costs, Mahoney said.

An added wrinkle to the labor market is that San Diego’s high housing costs have made it harder for companies to recruit workers from outside the region and even keep those they have, according to Gilliland of JLL and Semic of Latitude 33.

“We’re losing the skilled workforce when we need more,” Semic said.

A new hospital tower for Scripps Health is among the ongoing projects by McCarthy Building Companies. Photo courtesy of McCarthy Building Companies
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