Evidence is mounting that San Diego’s construction industry is not immune to the effects of current economic conditions. Local developers and general contractors are beginning to sense an impending downturn.
We are seeing delays in projects that have already been launched as well as in some at the proposal stage. These delays are attributable to rising interest rates, supply chain challenges and revisions to project plans based on the volatility evident in forecasts and market surveys.
Many projects are apparently on hold, sitting on the drawing board awaiting clearance to proceed. Delays span months and longer in some cases, depending on location, supply needs, and overall project sophistication.
It should be noted that in construction, prices estimated a year ago have increased by 12% this year alone, the result of rate hikes and limited product availability. Building material prices have skyrocketed, forcing many developers to rethink their plans or put projects on hold.
In Los Angeles and Orange counties, this resulted in a 22% drop in project starts for the first four months of 2022 compared to last year. This represents approximately $5.2 billion in construction work.
In my company, Webcor, the signs of these challenges are evident but not yet widespread. So far, the impact appears to be most pronounced on projects in the tendering or preliminary design phase, while projects that have already started are proceeding as planned.
We also find that specific market sectors are more affected than others. New office and retail projects have slowed or come to a complete halt. We expect this trend to accelerate in the coming months.
Whether we are headed for a full-scale recession remains to be seen, but the current slowdown is undeniable. Developers and builders consider the courses available to them to stay busy and profitable.
Shorter term projects are one solution. Rental leases expire regularly and landlords frequently subcontract tenant improvement work on behalf of incoming tenants, although supply chain issues affect this work as much as any other.
After the 2008 recession, our business embarked on a diversification program that allowed us to move from almost purely commercial building to a substantial amount of public works, which is largely unaffected by economic downturns.
This includes infrastructure work, including two major projects in Los Angeles and San Francisco. The $1.2 trillion infrastructure bill signed last November by President Biden could inject even more dollars into the market for this type of construction.
In Southern California, including here in San Diego, general contractors are taking a hard look at major design-build projects that run the gamut from aviation and education to life sciences and technology. ‘army. Some companies are actively working in more than one of these sectors, have other projects underway, and are looking for new opportunities that fit these niches.
Even when money is tight, clients continue to seek out general contractors and top-level builders whose experience and expertise can meet their needs. It also helps to have the skills to innovate to meet customer requirements in tough economic conditions.
So we remain optimistic, especially here in San Diego, which is home to a plethora of projects planned for residential, education, housing, life sciences, and research and development. And, of course, every economic downturn is inevitably followed by a recovery.
Local builders able to weather the current storm and retain top talent and expertise will be well placed to capitalize on the boom that is sure to follow.
Cecilia Kucharski is Vice President and Regional Director of Webcor in San Diego.