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Construction Starts Coming Back

The construction industry is just now starting to recover from the ravages of the COVID-19 pandemic but it will be at least another year or more for construction to return to pre-pandemic levels.

Those were among the findings of a national construction outlook from the commercial brokerage firm JLL.

Some San Diego contractors said that JLL’s findings are in line with what they’re seeing, although Jim Roherty, president and CEO of the Pacific Building Group, said that San Diego wasn’t as hard hit by the pandemic as some other metro areas.

“I don’t feel we’ll fare as bad as some of the major places, like New York City, San Francisco or Seattle that are pretty dramatically affected,” Roherty said. “We are seeing that commercial office is being affected dramatically but we still have such a strong life science and defense, the high techs, the Google and the Apples, those folks are coming to town. They’re adding a bit of stability to our San Diego market.”

Rebounding

Roherty said some office buildout projects have been postponed because of the pandemic when companies with expiring leases got extensions so they didn’t have to move.

“We believe that later in 2021 we could see a pretty good rebound because landlords are not going to keep renewing leases a year at a time forever, so at some point, people are going to have to move which is going to provide new construction,” Roherty said.

Jeff Bingham, CEO of Bingham Construction, said business was dead at the start of the pandemic but “we’re starting to see an uptick.”

“A lot of companies had kind of put their real estate needs on the back burner. Now we’re starting to that they are coming back and looking for new space,” Bingham said. “I think it’s going to be a slow revival at least until the election’s over. From that point, depending on the politics involved, we’ll start to see an increase in volume and activity and start to recover on the commercial side.”

Bingham said his company is working on medical office projects in Orange County and has projects pending in downtown San Diego and Mission Valley.

Varying Market

Dominica Correia, a vice president of JLL in San Diego, said recovery in the construction industry will vary by market sector.

“With large developments on the commercial side, I’m not seeing those pick back up,” Correia said. “Industrial is still moving forward, still in demand, as well as the biotech, life science. Developers in that area are still moving forward. The demand is higher.”

Office and retail markets are the slowest sectors, but Correia said that “there has been some movement” in the office sector.

“It’s just not a great amount compared to where we used to be and where we hoped it would be,” Correia said. “I don’t see it getting back to normal fairly soon, unfortunately.”

Outlook

JLL in its report said that nonresidential construction is expected to be down 10% to 15% for the full year in 2020 compared to 2019 with construction starts stabilizing for the rest of the year.

Adding to the uncertainty is whether government agencies will have to cut back on projects to offset budget deficits caused by the pandemic.

The industry is expected to shift back to growth mode in late 2021, JLL forecast, but “it will be benchmarked from the new, lower baseline set in 2020.”

“As a result, growth will end up well below any long term forecasts that predicted steady 3% growth from 2019 to 2024, as the industry will effectively be skipping or delaying one to three years of growth,” JLL projected.

On the plus side, JLL said that the cost of construction materials that has dropped are likely to remain lower than they were heading into 2021. Construction jobs also bounced back in May and June but were still far below what they were pre-pandemic.

“I do agree with the report that for the past few months and the next six to eight months, construction prices will go down a little bit. There is less demand so certainly that’s going to cause some pricing to go down. I don’t think it’s going to be dramatic. We have some owners thinking prices are going to be down 20% or 30% and they’re not, they’re just not. It’s trying to manage expectations that there’s going to be huge bargains out there,” Correia said. 

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