In our latest blog series, Cumming’s construction industry experts share timely insights with a regional focus. Our inaugural spotlight in the series explores construction trends in California’s major metropolitan areas.

California, the 4th largest economy in the world, has a complex relationship with accommodating urban growth and development as well as solving logistical challenges that support the diverse economy. In counties such as Los Angeles, planning overlays that were designed for automotive-led life styles and sprawl in the 1940’s are being revised and modernized to accommodate modern living and  infrastructure needs. Many California cities are amending zoning laws to allow multifamily residential development in hopes of promoting more affordable housing and more livable cities.

Inflation remains a concern across the state, driving costs higher and increasing pricing volatility in the construction space. Labor is also a challenge, as a rising cost of living – in a state already more expensive than most — prompts skilled laborers to find more affordable states to live and work. Added to this is a complex network of city approvals and challenging entitlement processes that include diverse regulations and coastal compliance that can provide obstructions to development that are not encountered in other states such as Texas.

Despite headwinds of a slowdown in tech, anemic post-pandemic return to office and hybrid work, and new tax initiatives to support affordable housing, which is inhibiting property transfers, the underlying demand for modern urban lifestyle and infrastructure is strong.  This is leading AEC stakeholders to look at creative solutions to the state’s needs, from repositioning underutilized office assets to hospitality and residential uses and improved transportation from the ports to rail.

Los Angeles

Costs have continued to increase in the LA region as a result of inflation, labor shortages, global supply chain disruptions, variability of commodities and equipment pricing, and overburdened government agencies slowing the process of approvals. A number of these inflationary aspects have been driven by post-pandemic demand surges that are starting to settle, and headwinds of a slowdown are expected to improve the labor demand/supply skills match gap, while recovering supply chains slow materials cost inflation.

These factors have led to continued volatility in price certainty and a shorter shelf life for estimate accuracy than in previous years.

There are a few additional factors impacting the Los Angeles construction market:

  • Unique threats like earthquakes and wildfires, combined with a higher-than-average cost of living, have deterred prospective residents.
  • As a result of layoffs associated with large tech companies, developers of large mixed-use projects in heavy tech locations are starting to put projects on hold – a trend that will continue into 2023.
  • The shift towards hybrid and remote work has led many companies to downsize their current office space or eliminate their presence entirely. The result is roughly 40-50% vacancy in urban downtown areas (occupancy rates are higher than lease vacancy), leaving an opportunity to convert vacant office space into residences and other uses.
  • Amendments to the city code and compliance with seismic ordinances could add billions of dollars in renovations alone, particularly in change of use.
  • As California looks to become a leader in sustainability, LA is expected to invest heavily in transit infrastructure.

Sacramento

Adding an average of 16 residents each day, Sacramento is California’s fastest-growing city. Officials are taking a proactive approach to accommodate these new residents while attempting to mitigate sprawl – with mixed results so far. Sacramento officials are hopeful that the city can retain its population by offering residents something they cannot get elsewhere in California: relatively affordable housing and shorter commute times.

The construction industry has so far done a good job of building new housing, with the residential sector making up more than half of all new developments. The city is set to pivot to the infrastructure sector in the next two years, as roads and bridges across the area need to be modernized. To meet this demand, contractors in Sacramento have been drawing in labor from nearby markets. The city is proactively re-master planning the civic center and outlying areas, which is also driving growth in needs for healthcare, residential and schooling needs.

San Diego

San Diego is in many ways a microcosm of the rest of California. Decades of expansion and single-family zoning laws caused the city to grow outwards instead of upwards. However, land available for development is disappearing fast due to the mountains surrounding San Diego – prompting developers to push for higher-density housing.

Despite this continued gap between housing needs and availability, many developers and investors are waiting for financing rates to come down. Once that happens, we expect to see a surge in multifamily residential projects.

Life Science development in San Diego is also going strong into 2023, and although San Diego is a strong market in this area, there is a strain on skilled resources — leading manufacturers and researchers to look at other locations in the US. These developments are also being impacted by cost increases, a strained contracting pool, and overburdened government agencies.

San Francisco

The San Francisco Bay Area added an average of more than 100 residents to its population every day over the last 20 years. That population growth, coupled with restrictive zoning laws, has created a sprawling city in which residents may have to commute two or more hours to work.

Lately, however, local jurisdictions have made progress in addressing the area’s lack of housing, and the region’s continued appetite for large-scale projects. As barriers to new permits are removed, new projects will enter the pipeline, with the residential sector comprising the bulk of construction volume throughout the 2020s.

However, inflation remains a concern here like in many other cities, and the Bay Area tech scene is currently suffering a slowdown. As a result, we’re seeing an impact on office and data-center development as well as reduction in demand for residential development, causing some developers to reduce starts. Tech balance sheet issues are also causing a reduction in CAPEX spending in some areas.

Despite the slowdown in tech, Bay Area developers have reason to be optimistic in other sectors, including healthcare, which remain strong and poised for growth. The public sector remains a high demand area, particularly schools and education, with the highest earning areas contributing to significant available funds for development.

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