Construction Continues To Improve, But Are We In A Boom?

Story #1 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015.

Cranes, cement trucks, and street closures seem to be everywhere these days, especially in city centers such as San Francisco and Los Angeles. After the meltdown of 2006, real estate development went into hibernation for almost six years. It took a while to awaken from its slumber – and by some measures construction activity is still well below pre-2006 levels – but by 2013 it was obvious that a turnaround was underway. The industry continues to rebound and improve every year.

The construction industry’s resurgence is helping both commercial and residential projects as confirmed by David LeVelle, President and CEO of BKF Engineering who writes in Engineering News-Record California: “2016 is shaping up as a great year for the South Bay/San Jose construction and development economy . . . Residential development is in full swing, and commercial office and corporate campus construction is also strong. We have designed many tech campus projects that are coming on line including Netflix, Facebook and Google facilities. These projects also increase the demand for housing. We believe mixed-use projects represent the future trend toward higher density, walkable communities and less reliance on the car.” (ENR California, November 24, 2015).

On December 1, 2015, the following headline appeared on the AGC of America website: “CONSTRUCTION SPENDING LOGS ROBUST MONTHLY AND YEAR-OVER-YEAR GROWTH IN OCTOBER WITH GAINS IN RESIDENTIAL, NONRESIDENTIAL AND PUBLIC CATEGORIES” with the caveat “[t]otal is Highest since 2007; Latest Increases Suggest Contractors Will Have Plenty of Work in 2016 But Concerns Escalate Regarding Availability of Sufficient Skilled Workers for Existing and Future Projects.”

This headline from Reuters on December 16th: “U.S. housing starts surge, permits hit 5-month high.”

New Single-Family Home Sales – Better But Still A Far Cry From 2006

In a piece appearing on July 17, 2015 in HOUSINGWIRE, Trulia’s Chief Economist Selma Hepp noted “this will be the best year for the housing market since the recovery began.” Sales of new single-family homes remain well below historical averages and pale in comparison to 2005 when according to the U.S. Census Bureau around 1.3M new homes were sold. It looks like around 600,000 new homes will sell this year compared to the low point in 2011 of only 270,000 new home sales.

According to an October 22, 2015 press release from the National Association of Home Builders: “Steady employment and economic growth, pent-up demand, affordable home prices [Ed. Note: not in California] and attractive mortgage rates will keep the housing market on a gradual upward trend in 2016. However, persistent headwinds related to shortages and availability of lots and labor, along with rising materials prices are impeding a more robust recovery…”

The takeaway is that things continue to improve but are still far short of where they were many years ago.

Multi-Family – Better But Fighting Claims of Gentrification

Condo construction on the West Coast continues to grow, especially in urban areas with infill. At least one developer believes multi-family is the wave of the future, at least in San Diego. In an article appearing October 4, 2015 in the San Diego Union Tribune, Cornerstone Communities Chairman Ure Kretowicz said: “I think … large suburban single-family-home communities are going to be a dinosaur,” and “I think the future for San Diego is going to be in attached product in one form or another.”

The San Diego Association of Governments has projected that most of the half-million homes built over the next 30 years will be in multi-family arrangements.

It’s not all wine and roses in San Francisco, however, where condo construction has lead to a revolt in places such as the Mission District, which in turn lead to a city-wide discussion about a moratorium on new construction. According to an ABC7News piece from June, one local resident summed up the situation with these words: “They’re building condos, not for the people of the Mission, but for the techies, the hipsters…” Another piece from USA Today in June: “Fancy high-rises are planned to take over dilapidated street corners, including one that tenant activists have dubbed the ‘Monster in the Mission,’ a 345-unit building with rents projected to start at $3,500.”

Despite some bumps in the road and political grandstanding, builders remain optimistic overall – despite a recent drop sentiment. On November 19, 2015 the Multifamily Production Index (MPI) by the National Association of Home Builders increased one point to a level of 56 for the third quarter of 2015. This is the 15th consecutive quarter with a reading of 50 or above. The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. Any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Commercial/Health Care – Stunning, World Class Projects

On August 3, 2015, the AGC of American website had this headline:

“CONSTRUCTION SPENDING IN JUNE GROWS AT FASTEST RATE SINCE 2006 AS ALL MAJOR SEGMENTS POST YEAR-OVER-YEAR GAINS; WORKER SHORTAGES MAY DERAIL GROWTH”

By all appearances, the headline is absolutely correct. On October 29, 2015, the San Francisco Business Times published a list of the 75 largest Bay Area construction projects in 2015. A more impressive list would be difficult to conceive. The published contract values of these projects total around $13 billion dollars. This is in the Bay Area alone.

Ironically, the Apple Campus, which is estimated to be $5 billion dollars, is not even on the list because of Apple’s notorious secrecy. This campus is built in a ring with a nature refuge in the middle. The project is said to have 3.7 miles of curved glass that will wrap around the building and museum-grade stone-infused flooring. The project received some bad press earlier this year when Apple surprisingly decided to terminate the JV responsible for the building core and shell. Confidentiality agreements prevented the disclosure of information relating to any design or construction problems at the project and even prevent the JV from acknowledging it had a contract with Apple.

On June 9, 2015, the Silicon Valley Business Journal took a stab at what may have triggered the development:

“Apple’s multibillion-dollar project — which is said to employ first-ever construction methods — is among the most ambitious and expensive private office developments ever attempted by a corporation. While drone flights over the site have shown rapid progress, the Foster + Partners-designed project — dubbed Apple Campus 2 — hasn’t been without difficulties. I reported last month on rumors that the schedule may have slipped; Bloomberg reported in 2013 that costs had ballooned, thanks partly to Apple’s exacting demands.”

A few other projects deserve mention. Stanford is building a new $2 billion dollar 812,000 square foot hospital with 368 beds using a McCarthy and Clark Construction JV. This is just one element of Stanford’s “Renewal Project” for its health and science facilities. When adding these additional projects, the total improvements will cost a staggering $5 billion dollars.

According to Stanford’s website the “Renewal Project is building larger, more modern facilities to advance medical research, train the next generation of physicians and scholars, and meet growing demands on the hospitals that apply the highest standards of comfort and safety.” The project commenced in 2013 and is scheduled to be completed in 2017.

The Brooklyn Basin project on the Oakland waterfront is an East Bay game-changer. According to the San Francisco Business Times: “Infrastructure work has begun on Oakland’s largest active real estate project, the $1.5 billion Brooklyn Basin development that will transform the city’s southern waterfront into 3,100 housing units and 200,000 square feet of retail.” Signature Development Group and its Chinese financial partner Zarsion Holdings are developing the project. The first building of roughly 300 units will break ground by the second quarter of 2016, and occupancy is scheduled for 2017.

Finally, and thanks to the efforts of the Webcor/Obayashi JV, the Transbay Terminal rose out of the ground in downtown San Francisco in 2015 after several years of excavation, shoring, pile driving, foundation work, and insufferable street and lane closures. This $4.5 billion project will have one million square feet of space and a four acre roof garden and replaces the old concrete monolith from the 1930’s that looked like it was designed in the Soviet Union.

The project is envisioned to be the “Grand Central Station of the West” in the heart of a new transit-friendly neighborhood and will connect 11 transit systems and future High Speed Rail from San Francisco to Los Angeles/Anaheim. The project will also have a 61-floor tower – known as the Sales Force Tower – that will eventually be the tallest building in San Francisco. The general contractor on the tower is a joint venture between Clark Construction and Hathaway Dinwiddie Construction.

On September 7, 2015, the Los Angeles Business Journal published a list of the 50 largest construction projects in Los Angeles. Just like in Northern California, the list is staggering in scope and cost, coming in around $10 billion dollars.

The Los Angeles projects are diverse and world-class. The most significant project is the $979M Wilshire Grand Center being built by Turner. The Wilshire Grand Center is designed to be a 73-story skyscraper in the heart of Downtown, Los Angeles. The project will be completed in 2017 and will boast a 900-room InterContinental hotel. It will be the tallest structure in the Los Angeles skyline.

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December 18, 2015