87.5 F
San Fernando
Tuesday, Mar 5, 2024

Building Abundance

General contractors in the Valley region are riding high these days on a wave of construction hitting the greater L.A. area – and there’s no end in sight. Apartments, hotels, university buildings, detention centers, schools, sports stadiums and commercial renovations are boosting project volume and revenue, delivering record years to large and small contractors alike. The plentiful activity, however, has aroused concerns about labor shortages, rising material costs, land availability, project flipping and the greater presence of foreign investors that has prompted some firms to turn down certain projects because they can afford to be more selective. Chuck Darway, vice president of Acco Engineered Systems, a national general contractor of heating, ventilation and air conditioning systems in Glendale, called the boom in the downtown L.A. area a “renaissance” because of the diverse types of structures going up. He said Acco has had five steady years of record revenues, and attributes much of it to the local building boom. Take, for example, the $1 billion Metropolis in downtown L.A. with 1,800 mixed-use condominiums, a 350-room hotel and retail by Shanghai’s Greenland USA, the American division of Greenland Group, one of China’s largest real estate developers. Then there’s Oceanwide Plaza by Beijing developer Oceanwide, also with condos and a hotel, rising across from Staples Center. And the 73-story Wilshire Grand Center developed by Korean Air, which could become the tallest building west of the Mississippi, is underway. “From the L.A. market, we’re getting the highest totals we’ve ever seen in terms of revenue,” Darway said. “We saw a 36 percent increase from last year to this year in the Los Angeles and Southern California local markets, and 18 percent the prior year.” Multifamily expansion In 2015, new housing permits exceeded 34,000 in the Los Angeles, Long Beach and Anaheim areas, the highest since before 2005, according to the Census Bureau. Although that dipped slightly in 2016 to 32,000, the number still represented the largest amount of new permits since 2006. In a survey by the California division of Engineering-New Record, an online magazine for contractors, respondents reported an overall increase in 2015 revenue of nearly 20 percent over the prior year, and a three-year surge of 46 percent. Leading the building boom is multifamily, mostly apartments. That type accounted for the greatest number of new housing permits in the Census data. The apartment building boom has showered gold dust onto McCormick Construction of Burbank, said Chief Executive Michael McCormick. The firm has 1,600 residential units in backlog – double its 2016 volume. It is building the five-story 241-apartment mixed-use Talaria at Burbank atop a Whole Foods Market, and then will move onto Variel and its 277 apartments in Canoga Park, followed by preconstruction work on a 739-unit residential complex in Hollywood. “This is a building boom, if you compare from 2007 to 2012,” McCormick said. “I think a lot of it is driven from pent-up demand. Especially for for-rent living units, there is huge demand.” Non-residential is also undergoing heightened activity, making this cycle more diverse than the pre-recession growth surge when residential building dominated. New commercial construction permits, led by retail and industrial construction, have had steady increases since at least 2010, according to the Census Bureau. The new work includes hotels, medical office buildings, public and private schools, detention facilities, non-housing structures on university campuses and sports and entertainment venues. The Glendale division of PCL Construction Inc., a general contractor headquartered in Denver with offices across the country, is the busiest of all its locations. “It certainly is a boom, and certainly dramatic,” said Jack Sample, vice president of California Buildings. “We’ll do more volume this year than we’ve ever had, and I’ve been in Los Angeles for 30 years.” The company has been busy building or renovating sports and entertainment venues for UCLA and Cal State University, Dodger Stadium and the Los Angeles Football Club soccer stadium in Exposition Park. Also driving the construction market are numerous school bond measures that voters approved statewide in last November’s general election. Many passed to construct new classrooms or repair existing facilities. Still other drivers of the growth spurt include state grants that have been awarded recently to build new detention facilities. Both have boosted work for Bernards in San Fernando. “We have a lot of multifamily, mixed-use, kindergarten through 12th grade (projects), detention centers, hospitality, senior living, health care, student housing and higher education academic projects in the pipeline,” said Steve Pellegren, executive vice president. “We expect this to continue for at least the next few years.” Charles Pankow Builders Ltd. in Pasadena said its recent growth has stemmed from public and private projects on apartment buildings, hotels, offices and data centers and administration buildings for community colleges. It’s typical for the big contractors to see record growth at the top of the cycle, but with so much work to go around, even smaller contractors have a share in the bounty. Medical office and entertainment facility renovations helped boost revenue at S3 Builders in Burbank by 140 percent between 2014 and 2015, said Principal J. Marc Rapisardi. Last year slowed down, but revenue still grew 20 percent, and Rapisardi expects similar growth this year. In Valencia, last year broke records at Forza Construction Inc. The nine-year-old general contractor has projects for custom homes, multifamily, small-lot subdivisions, tenant improvements and low-rise offices. Work included a significant renovation of a Westlake Village shopping center. Co-owner Christian Deceuster expects revenue this year will likely match last year – and maybe exceed it. “We’ve got big things bidding,” Deceuster said. “All it takes is for one of them to land and we’re there.” Growing concerns As the workload has grown, so have concerns from contractors about issues they say are playing a bigger role than in previous growth cycles. The presence of foreign developers and capital behind mostly new, mixed-use projects is significant for the contractors. According to a spring report from Naiop, the Commercial Real Estate Development Association in Herndon, Va., foreign investors’ dollar value in direct U.S. property investments hit a record $91 billion in 2015. Deals involving foreign investors increased to 17 percent of total deal volume for the U.S., from 10 percent the prior year. The L.A. area ranks third in attracting foreign dollars. Money from overseas can worry contractors because it puts at risk the large amount of money firms must put up to start a project – materials, labor and contract bonds. For a firm his size, Klorman Construction’s Chief Executive Bill Klorman said that can total up to hundreds of thousands of dollars over a two- to three-month period before the Woodland Hills firm starts to get paid. “You’re concerned about where the developers are getting their money from, can they make payments on time, how is the bureaucracy set up so we can be assured we will get money at the right time,” Klorman said. “Some developers get started before they have the money, while some get it in short gap loans that don’t come through. All it takes is a couple of projects that are not able to pay on time.” Darway, of Acco, also said he sees money coming from many more countries now – Canada and China. He added that Chinese developers from different parts of the country are competing with each other “to have their money and their name on the next big project.” As a result, the company is careful to pick its clients, he said, turning down projects when it can’t pinpoint exactly the money source, or it can’t validate that there is money to go through with the project. Another concern when working for developers not from the area – and particularly those from overseas – is their unfamiliarity with construction site standards, particularly for L.A. projects. Safety standards, pricing and protocols aren’t as strict overseas, Darway added. “Los Angeles has a different way to execute those standards than those global markets,” Darway said. “Go outside, and restrictions aren’t as tight.” Many of the firms stick with developers they know, and those who they believe will continue to be a source of business in the near future. One is Peter Loeb, project executive at Charles Pankow Builders. The company’s recent revenues have increased modestly but could have been greater had it not turned away developers who didn’t pass its vetting process, as well as projects it didn’t have the staff and management resources to execute. “If it’s a brand new (private) entity – that’s usually not our first choice,” Loeb said. And “if they (public entities) don’t have a track record of partnering – that’s a huge red flag for us.” PCL Construction Services is also exercising care in choosing developers, Sample said. It prefers those with long track records of building rather than the one-off developer, so the two can form a long-term partnership, he added. Some firms said another trend they are seeing is land owners flipping properties much quicker than they did in past busy times. Darway of Acco said land – particularly in Hollywood and Downtown Los Angeles – is being sold as soon as there’s a basic concept plan of what to build there and before the land is fully entitled. Selling land at that stage impacts contractors who’ve done the design/build work because often the new owner hires new contractors to build the project. “We do get paid for preconstruction services by developers but it’s a loss leader – we don’t make money,” McCormick said. “The building part is lucrative.” He’s trying to stick with projects he can build as the general contractor as well as perform the preconstruction work. Rapidly rising construction costs – rebar is up 35 percent this year according to Klorman with Klorman Construction – are another concern for builders that has contributed to their shrinking profit margins, in keeping with basic supply and demand. But Rapisardi of S3 Builders said narrower profit margins is a market correction, in a way, and it’s culling newer general contracting firms like those that sprang up during the last building boom, started by accountants, brokers and retail managers who just wanted a piece of the pie. “This time around, the tighter budgets and subsequent more challenging profits have created a resistance to new entry,” he explained. Lastly, the building boom has also shrunk the labor pool. Firms started hiring about two years ago and many have returned to or exceeded their pre-recession payroll numbers, but future hiring prospects have many firms concerned they won’t find enough skilled workers. Cyclical planning PCL Construction is now partnering with other builders more than it has in the past, Sample said. It joined forces with Morley Builders Inc. in Santa Monica to renovate the Los Angeles Memorial Coliseum and with Turner Construction Co. of New York to build a new airport terminal at the Los Angeles International Airport. “We wouldn’t have had resources to take on $1.3 billion (LAX terminal) without giving up most other opportunities,” he added. AMG & Associates Inc. in Santa Clarita will have it easier when it competes for public projects like school construction and repairs or construction work at military bases – its bread and butter jobs – now that the many contractors that jumped into its market are jumping back out to go build apartments, said President Albert Giacomazzi. The firm just bid on a school construction project in Lancaster against only two or three other bidders, compared to the 13 or so bidders common on bid projects in 2014 and 2015. This year, the firm will build a new school, finish a seismic upgrade to a parking garage, renovate a community college’s science building and add onto and renovate parts of another community college, as well as build new chapels, he added. Pankow, Loeb said, is pursuing projects with a new direction that it believes will take it though future down cycles. The firm is targeting infrastructure work through public/private partnerships, a delivery model known as P3, in which Pankow would design, build, finance, operate and maintain what it builds, holding ownership for the long-term – 30 years or so – before returning the property to the public entity. “That’s one way we see expanding not only the current workload, but also preparing for any corrections in the marketplace,” Loeb said.

Featured Articles

Related Articles