Evidence is mounting that the San Diego construction industry is not immune from the effects of current economic conditions. Local developers and general contractors are beginning to detect a looming downturn.
We are witnessing delays in projects that have already been initiated along with some in 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 marketplace forecasts and surveys.
Many projects are in an apparent holding pattern, sitting on the drawing board awaiting authorization to proceed. The delays stretch into months and longer in some cases, depending on location, supply requirements, and overall sophistication of the project.
It is worth noting that, in construction, prices estimated a year ago have risen as much as 12% this year alone, the result of rate hikes and limited product availability. The prices for construction materials have soared, forcing many developers to rethink their plans or suspend projects.
In Los Angeles and Orange counties, this has led to a 22% decline in project starts for the first four months of 2022 compared to last year. That represents about $5.2 billion worth of construction.
At my company, Webcor, signs of these challenges are evident but not yet widespread. So far, the impact appears most pronounced on projects in the bidding process or in preliminary design phases, while those projects that have already broken ground are continuing as planned.
We also see specific market sectors affected more than others. New office and retail projects have slowed or stopped altogether. We expect this trend to accelerate in the months ahead.
Whether we are bound for a full-blown recession remains to be seen, but the current slowdown is undeniable. Developers and builders are considering the courses available to them to remain busy and profitable.
Shorter-term projects represent one solution. Rental leases expire regularly, and property owners frequently contract out tenant improvement work on behalf of incoming tenants, though supply chain issues affect this work as much as any other.
After the 2008 recession, our firm began a diversification program that has seen us expand from almost purely commercial building to a substantial amount of public work, which is largely unaffected by economic downturns.
This includes infrastructure work, including two significant projects in Los Angeles and San Francisco. The $1.2-trillion infrastructure bill signed last November by President Biden could infuse the market with even more dollars for this kind of construction.
In Southern California — including here in San Diego — general contractors are looking closely at large design-build projects that run the gamut from aviation and education to life sciences and military. Some firms are actively working in several of these sectors, have other projects in the pipeline, and are pursuing new opportunities that fit these niches.
Even when money is tight, clients continue to seek upper-tier general contractors and builders whose experience and expertise can fulfill their needs. It also helps to have the skills to innovate ways to meet client requirements under harsh economic conditions.
We thus remain optimistic, especially here in San Diego, home to a plethora of projects planned for residential, educational, housing, life science, and research and development. And, of course, every economic downturn is inevitably followed by an upswing.
Local builders who are able to weather the current storm and maintain the best talent and expertise will be well positioned to take advantage of the boom that is sure to follow.
Cecilia Kucharski is vice president and regional manager of Webcor in San Diego.