Bay Area construction industry is setting the pace for rest of country.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY 2015
Since the start of the economic resurgence in 2010, construction cranes have increasingly become fixtures in the ever-transforming skylines across the Bay Area from San Francisco to Oakland and down the Peninsula to San Jose.
The proliferation of cranes in the Bay Area and other major markets nationwide has prompted the independent global property and construction consultant Rider Levett Bucknall to take formal stock. According to RLB, 23 tower hoists marked the San Francisco skyline as of May—about the same number as what was tallied a few months earlier for the firm’s first North American Crane Index report.
[quote]There has been no slowdown in construction within the San Francisco marketplace. Many buildings have begun topping off, but they have been followed by many others taking root.[/quote]
“There has been no slowdown in construction within the San Francisco marketplace since our count in November of last year,” the report said. “Many buildings in [the South of Market district] have begun topping off, but they have been followed by many others taking root.”
Nationally, the construction industry is still in recovery mode with some markets seeing activity slowing down. But the building bonanza in the Bay Area has reached a point where companies are turning down work or needing to bring in labor from outside the region because of the sheer volume of projects that users want completed quickly. Even an escalation in construction costs has not stalled construction in the Bay Area.
“We’re definitely setting the pace for the rest of the country,” said Mike Humphrey, the San Francisco regional manager for DPR Construction.
Other markets where DPR has an office, such as San Diego, Phoenix and Houston, are stable and healthy but not anything like the Bay Area, Humphrey said. “The Bay Area seems to continue to be a boom market,” he said.
The United States Construction Perspective first quarter 2015 report by commercial real estate services firm JLL indicated as much. The construction industry “is still in the early stages of its recovery and will continue to grow in response to overall economic growth,” the JLL report said.
According to JLL, the number of office construction starts nationwide increased from 11.6 million square feet in the first quarter of 2012 to 20.8 million square feet for the same period this year. Construction is particularly strong in San Francisco, the Southeast and the Northwest but has eased up in Houston and the Northeast, the report said.
Part of the drivers behind the Bay Area surge involves all the leading technology companies based in the region, such as Google, Facebook and LinkedIn, Humphrey said. “They have major campuses in the Bay Area and are competing for talent,” he said. “They’re using their workplaces as recruiting tools.”
John Marmesh, a partner with San Jose-based TICO Construction Co., had the same take. “Corporate users want to differentiate themselves in the design of their buildings,” Marmesh said. “It goes back to recruiting and how to get the best engineers.”
Catherine Stoupas, a San Francisco-based senior project manager for RLB, pointed out that the development demands coming from the tech sector, in turn, are fueling the appetite for additional housing, hospitals, schools and other types of construction.
In San Francisco, the tech-driven commercial construction is “currently climbing into the skyline while proposed office projects exceed the city’s capacity for allowable office space usage fivefold,” the RLB report said. “The technology boom that now reaches beyond Silicon Valley and into San Francisco is also exacerbating the housing crunch being felt throughout the Bay Area, which is leading to additional development pressure for housing stock.
“The greatest concentration of cranes is within the Transbay redevelopment district with the largest looming examples at the Salesforce Tower, 350 Mission St. and 181 Fremont St. The health-care sector is also seeing development in the Mission Bay/Dogpatch district with the expansion of UCSF Mission Bay.”
Today’s users also can’t get into their buildings fast enough. “They want it quickly built and to get in,” Marmesh said.
For instance, TICO has a high-tech client that is asking for a project in Silicon Valley to be finished by year-end. In response, Marmesh said, TICO has “committed and supplied” the labor necessary to meet that demanding schedule.
But such a commitment has become more challenging to do now compared to normal years because of a labor shortage partly resulting from so many workers already busy on various jobs. “It’s probably the busiest I’ve ever seen,” Marmesh said. “It’s great for the trades, but it’s hard to find labor.”
Some construction companies are going to Sacramento or Modesto to find workers for projects in San Francisco, Stoupas said.
Those in highly specialized trades such as electrical and glazing are also in great demand but low supply, Humphrey said.
At times, construction firms end up passing on projects because of their heavy workload coupled with a potential client’s unrealistic deadlines. One high-tech assembler wanted TICO to finish a project quicker than what was deemed reasonable, Marmesh said. So TICO did not take the project.
“All contractors have a reputation to keep,” he said. “If we feel a project is not realistic, there’s no reason why TICO should associate with something like that.”
The industry—which RLB estimated to have grown nationally to $982 billion in the fourth quarter of 2014 from $943 billion early that year—has been experiencing a rise in construction costs, but that’s not slowing down contractors and subcontractors.
Labor and material expenses may be increasing, Stoupas said, but companies are enjoying “bigger profit margins” than before because of all the work they’re landing.
Expenses rose 6.1 percent in San Francisco over the course of 2014—compared to Las Vegas’ 3.6 percent, New York’s 4.4 percent and Honolulu’s 13.3 percent, according to RLB’s first quarter 2015 report on U.S. construction costs. The national average increase was 5.5 percent.
Part of the reason for the rising costs is “the fact that the construction industry in 2015 is smaller than it was prior to the start of the recession,” according to RLB. “As construction activity picks up, this smaller-sized industry is, in some areas of the country, struggling to keep up with demand. Although the actual costs of labor and material continue to increase slowly, the gap between demand and supply leads to upward pressure on bid prices as increasing construction activity chases static resource availability.”
Photography courtesy of RLB