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Tuesday, Sep 26, 2023

Infrastructure Boom

Economy: Firms confident about federal spending surge.

Despite fears of recession, some Valley contractors are expecting a boom in their business, thanks in part to last year’s massive federal infrastructure spending legislation.

Sylmar-based Tutor Perini Corp., which specializes in public works projects, stands to be one of the biggest local winners from the anticipated surge in infrastructure spending. The company recently reported it was expecting to place bids on several multibillion dollar projects.

“Demand for our services is continuing to increase meaningfully, beginning later this year when the funding from the federal infrastructure bill begins to flow,” Tutor Perini Chief Executive Ronald Tutor said in the company’s most recent earnings call.

Other general contractors are expected to pivot to infrastructure work as their other lines of work slow.

Meanwhile, another Valley company – Canoga Park-based general contractor Parker Brown Inc. – expects to capitalize on an unfortunate byproduct of economic slowdowns: givebacks of office space as professional service sector and other companies downsize their physical space needs. Parker Brown specializes in commercial building tenant improvements.

Looming slowdown

These companies appear to be well positioned amidst what is shaping up to be a broader contraction in construction in Southern California and across the nation. Some local companies report they are already seeing the first signs of this as projects they had bid on or were preparing to bid on getting pushed back.

According to Dodge Data & Analytics, a unit of Hamilton, New Jersey-based Dodge Construction Network, the value of construction contracts for projects that started work during the first four months of this year in Los Angeles and Orange counties was down 22% from the same four months last year, to about $5.2 billion.

Non-residential construction took the hardest hit, down 41% during those four months. Residential construction was down 8%, while non-building construction – primarily public works, infrastructure and energy projects – was down 13%.

These figures are from before the recent rapid rise in interest rates that triggered the current round of recession fears. And they are before the bulk of the infrastructure spending enabled by last year’s legislation gets into full swing.

The falling number of construction starts documented by Dodge reflects another pair of trends that over the past year have bedeviled project developers and construction contractors: inflation and supply chain disruptions. Skyrocketing costs for construction materials have busted construction budgets, forcing project developers to scale back or postpone their plans. Supply chain issues have also forced postponements.

A spokeswoman for Dodge Data & Analytics said construction-start data for May and June were not yet available on a regional basis.

Infrastructure boom ahead?

Few signs of this slowdown are evident at Tutor Perini. 

In the company’s first-quarter earnings teleconference call in early May, chief executive Tutor was bullish on the firm’s chances of winning major contracts on multibillion-dollar infrastructure projects over the rest of this year. 

Tutor said that in a three-week period in late May alone the company expected to submit bids on two highway projects in Maryland totaling $3 billion, a $350 million bridge replacement project in New Jersey and a $2.5 billion monorail replacement project at Newark Liberty International Airport.

“(With the) sheer enormity of all the work we’re bidding – $6 billion in the next three weeks and probably an additional $10 billion by the end of the year – we expect and hope to grow our backlog substantially,” Tutor told analysts on the earnings call.

What’s more, Tutor told analysts, three of the four projects that the company was to have bid on in late May each had only one other bidder, meaning the odds were good that Tutor Perini would win much of the additional work.

The company has since entered a “quiet period” before its next earnings announcement at the beginning of August and offered no additional comment on whether it actually submitted those contract bids.

Tutor Perini is not the only company hoping to gain from this expected surge in infrastructure spending.

Shifting to public sector work has been a standby for construction contractors during recessions and economic slowdowns. But this time, the shift may be even more pronounced, thanks to that $1.2 trillion infrastructure spending bill that President Joe Biden signed into law in November.

Tenant-improvement surge?

New infrastructure construction isn’t the only area expected to benefit amidst the looming slowdown. So are niche markets like tenant improvements.

“With all the shifting work patterns we’re seeing because of the pandemic, we are expecting that when leases expire companies will be giving back lots of space,” said John Parker, co-founder and chief financial officer of Canoga Park-based Parker Brown. “When that really starts happening, landlords are going to want all that space coming back to them fixed up to market to new tenants – and that’s where we come in.”

Parker said more than a third of his company’s work is in tenant improvements – and not just for office space. He said the firm has been working with Sawtelle-based industrial property owner Rexford Industrial Realty Inc. on tenant improvements for properties Rexford has recently acquired. “That’s a lot of work for us right now,” he said.

But Parker said there remains a major difficulty: supply chain delays that have resulted in key materials for tenant improvement projects – such as air conditioning units – not arriving in time.

“We’re no longer starting jobs unless and until we’ve confirmed the supply chain,” he said.

In some cases that might mean months or even quarters of delays – in effect converting immediate projects to backlog status. But, Parker said, that can also have a potential benefit.

“If, as it seems likely now, a slowdown is coming, then we will go into that period with a substantial backlog of projects that had been delayed due to supply chain issues,” he said. “We can work down that backlog.”

But for other general contractors, project delays don’t have such a silver lining.

These contractors report some projects they have either recently been awarded or are bidding on are being pushed back by developers because of rising interest rates and concerns the markets for their projects may not be as robust as initially forecast.

“Projects are simmering more, in effect sitting on the drawing board,” said Jit Pahilajani, executive vice president for Webcor Builders, a unit of San Francisco-based builder Webcor.Similarly, at Pasadena-based general contractor C.W. Driver Cos., a Pomona multifamily project the company had bid on has been pushed back.

“We priced it a year ago, but the budget went up about 12% over the past year, due in part to rising interest rates,” said Karl Kreutziger, C.W. Driver’s president. “The developer decided to delay the construction start, since the budget was higher than their pro-forma would allow.”

Cutting costs, shifting projects

But both Pahilajani and Kreutziger said they have yet to see project delays hitting across the board. They said the impact has been most pronounced on projects that are either in the bidding process or in preliminary design phases. Projects in which groundbreakings have already taken place are going ahead.

They added only certain construction markets are being hit, such as new office and retail construction. However, both said they expect the slowdown will become more widespread in coming quarters. And they are taking steps now to prepare.

At C.W. Driver, Kreutziger said a year-long effort to consolidate offices is now wrapping up.

“While we’re reducing our office square footage a bit, it’s really about a culture shift, due to the signs were seeing of a pending slowdown,” he said.

The company is also trying to find shorter-term projects that can be slotted in as larger projects begin to encounter delays or get shelved entirely. Kreutziger gave the example of tenant improvement projects.

Webcor, meanwhile, is preparing to shift more of its focus to infrastructure projects.

“We are now looking at large design-build projects in the public sector in L.A. County,” Pahilajani said. “This includes education and most especially airports and aviation.”

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