San Diego on the Rise: Breaking Down the Future State of America’s Finest City

Jason: Welcome to the latest episode of the construction insiders podcast, where our host Jessica Bush talks with industry experts about nutrients, best practices, and how to successfully deliver construction projects in today’s market, whatever your role on a project, we think you’ll find these discussions interesting and worth your time.

Jessica: All right, well, thank you, Jason. It’s been a while, but we were back, and we were kicking off our insider’s podcast. Once again, I have with me today talking all things, San Diego, we have Brooks or I cough and we have Matt Reed, Brooks handles our San Diego market. He oversees what’s going on and making sure everything is moving in the direction it should with our team, with our clients. He’s just our go-to guy here in the model. In this Southern California region, we also have today, Matt Reed. He is our lead PM for the San Diego region. So, he gets in the weeds, sees what’s going on, what’s shifting and what’s keeping an eye on to make sure that our clients see the, the future that’s coming. So, thank you both for joining us today. We will start with just some basic. Kind of overview of what’s going on in San Diego. I know a lot has changed since we last did one of these podcasts on the market with everything we’ve experienced in the last couple of years. So, you know, with that being said, really just to jump in here, when you’re looking at San Diego as a developer, for example, what is enticing and there’s people talking about this recent boom locally, where did that come from? What are you guys seeing on the ground? Where are we at this moment, San Diego?

Matt: So that’s a great question. You know, San Diego is such a great location in general, right? It’s some of the best weather in the country. What makes San Diego such a great place to live is the lifestyle that it provides. And that flows right into white becomes such a great development community. Because. Intellect people who have that intellectual property and who are the thinkers and the scientists and the people that are developing COVID viruses and those sorts of things. They want to live in places where they can have high wages and they can have a lifestyle that fits their beaches and sunshine, 72 degrees all year and San Diego fits that to a T.

Jessica: Provides the balance.

Matt: Absolutely.

Jessica: In terms of, you know, being a developer. Where is this recent boom coming from?

Matt: The recent boom has been because of the housing crisis. California has declared a housing crisis in there. Isn’t there aren’t enough homes. There, there aren’t enough affordable homes. San Diego in particular has never been one where wages have kept up with cost of living. And after COVID. We saw you know, dramatic inflation as many of the listeners I’m sure are experiencing through construction costs and land costs and even with home prices. So, in addition to that we’ve seen a dramatic change in retail, how individuals are shopping. We’ve seen a dramatic change in how people are working. And that’s causing disruption in the market, makes developers think. And they think about what the future is, and they get creative. Exactly. And they start taking risks because that’s what developers do. They take great risks, and they receive great rewards.

Brooks: And I think to piggyback on that, we see the change in the landscape based on how appealing it is to live here. We see all those opportunities that the developers. Can’t get enough of in coupled with the growth that we’ve seen in housing and the changes in retail and the changes in office. Number three, biotech, and pharma, or primarily biotech and research market diagnostic market in the country. So that life science is always played a huge role in San Diego. And even more now. And I feel like ever we’ve been in this market for a long time. I mean, you know, one of the, one of the earliest up markets that we got into in the U S this is probably the hottest, we’ve seen that piece of the industry, and it’s been like that for years. And I know this is not new news, but it’s exciting.

Jessica: Well, and Brooks, speaking of not being new news, the education systems we have here, the higher education, I mean, that has to add some stability to things. Is that helping hurting, not impacting the boom. How do you see that?

Brooks: I mean, it can only help, right. Again, research plays a huge role in life science in, in all kinds of pieces of the industry. So having topflight universities right here in our backyard, San Diego State, UCSD, USD several other highly taught community colleges and districts that it really developed over the years. They again, make it one more reason for it to be attractive, to be in San Diego. I won’t claim to know where UCSD is ranked, but I know it’s up there near the top and people say, not only can I go there and get a great degree, but I can also live that lifestyle. And then I can just be offered a job that allows me to stay in that market in biotech or life science. Yeah. And I can, I can start the path on that on. And that lifestyle that we talked about. So not only people relocating to the market or already in the market, but also those who start in the market and just grow family’s here.

Matt: And Jessica, to that end, we see that with the spending that’s happening on campuses, right? UCSD plan to spend in excess of $6 billion over the next seven to 10 years on infrastructure improvements. And that just makes it more attractive for the pre-med students. You know, for the students to come here, plus the lifestyle you can’t ever forget about the lifestyle that also provides such a, such a benefit to a student that wants to come here.

Jessica: That’s why we’re all here. It’s the balance, the work, the lifestyle, all of it. I’m talking about that. You know, we talk whatever and being local and loving it. And the people on the ground that, that know this market, but what about the developers that are coming from out of state? And you know, I’m sure just every day in your job doing all the, the project management work with the clients, you probably see that all the time. How, how are you kind of handling that, getting them acquainted with the market and kind of the shift of it all?

Matt: Well, the best thing about coming is, is our people. And like me and many others, we have former developers. We have former architects, we have former owners, right? So, we, we experienced that, and we have real knowledge of how that works, but to answer your question to come in from the outside and to get into the San Diego market, you as a developer, you must have a land position in many other states in any many other development communities. Land is not. A big deal. If, if you know, you, you want to take your business and you want to move a little bit further into the suburbs, which we’re seeing a migration right now of, of workforce wanting to leave downtowns the downtown areas. You can’t do that in San Diego because there is no land right there. Exactly. They’re not making anymore. So that makes it particularly difficult because most, all the land is already on. And if you don’t have a land position, you don’t have the opportunity to do that deal.

Brooks: I think coupled with that, that’s something that we’ve talked about a lot is what is strong network of relationships there are in San Diego in the development community. It’s a very relationship based and construction economy. And. A lot of these well-positioned developers and clients of ours have been here a long time. They know how things work. So, a new developer coming in, seeing the enticing propositions that we’ve talked about between lifestyle, opportunity, development opportunity, and life science and all that good stuff. It’s not easy to come in and see I’m the new guy in town because these people have been doing it well for a long time.

Matt: And we get, we get contacted all the time. By general contractors and other industry professionals that might be an orange county or Los Angeles. And they look to us to say, how can I get into San Diego?

Jessica: Okay. Interesting. And so, talking about the market you know, healthcare, life sciences, those are, those are things we keep hearing. So, what are some of the most notable projects in development right now? What are people’s eyes on? What does, what does that look like? What’s that what’s the impact for region those projects

Matt: In San Diego that’s an easy question. IQ HQ, right downtown. They are, they are what’s happening in San Diego and are the biggest mover and shaker. In the development community, taking a big risk, taking life sciences and the, and the biotech hub, which used to be Torrey Pines and shifting itself. And that is a, that, that, that is a brilliant move and a big risk move for them. To that end, it’s going to change the dynamic of downtown it’s going to cause for. Higher end hotels to be developed because of the influx of travelers it’s going to cause for office space to, to take on much more of a creative look, much more of a rather than just plain classy office. It’s going to need to take on a little bit more of a, of the San Diego vibe that you see in other make it more attractive for that intellectual property. So, it’s that that one development alone is going to change the face of downtown San Diego

Brooks: And it’s already spurred additional development in that same vein with Horton Plaza. So, we see these developers, they, you know, IQ HQ, might’ve been with the rad development. Might’ve been the first to the table, but again, they’re seeing the opportunity there. It’s exciting for downtown. We saw the great revitalization that came to parts of downtown with the ballpark was built Petco, and this is going to do similar things for Harvard drive in the waterfront that district there.

Matt: Without a doubt.

Jessica: We talk about the shift of life science going downtown. What’s going on with multifamily, what’s going on with hospitality? Where do we see those going? Are they moving and how are they affecting the market?

Matt: Multi-family is hotter than ever. I think, and single family where we have seen in the last 30 to 45 days, a drop in the average home price. We’re starting to see that. They a single family stay on the market a little bit longer. But what’s interesting about the single-family product versus the multifamily is that it really doesn’t change the multifamily need developers receive bonus incentives through Senate bill 330 to add density to their developments, as long as they provide low-income and very low-income options.

Jessica: And that’s all over the news locally about finding spaces.

Matt: That’s San Diego they’ve introduced you know transit priority areas, which provide you additional density, bonuses, and parking incentives. The complete communities overlay program, which primarily follows. The transit priority areas provide even additional bonuses. So, it’s a very, very attractive market and it’s all driven on the land price, because if you don’t buy the land right. And if you don’t get that metric exactly correct. And can’t provide the, the reasonable density bonuses for the property. It just won’t work. So, it’s a very interesting dynamic and relationship between the two, but and then lastly Governor Newsome just introduced for single family property. Not only can you put ADU’s, but you can now split your property into four.

Jessica: I just got that email from my city. That was very interesting.

Matt: You can see the demand is there. It will always be there at least for the foreseeable future. And that will continue to drive the housing need in San Diego.

Jessica: Have a chain reaction or does it with hospitality. How are we seeing that shift at all in the market? Or how are you feeling with that?

Brooks: I think with hospitality, it might not have a direct correlation with multifamily and high density, residential housing, but ultimately if more people can live here, more people come to visit them, potentially. It’s one way to look at it. But I think more, some of the other sectors we talked about. With life science and kind of the draw for lifestyle and, you know, specific, specific expertise and professions in this market are what are going to ultimately drive hospitality to the next level, you know, supporting developments downtown. You know, we talked a lot about life science downtown, but you know, Serrano Mesa and the Torrey Pines area. Those are still very hot redevelopment type of Areas for life science, where developers are coming in and building either new campuses ground up, which are kind of further farther building new campuses from ground up that are kind of farther and fewer between now. But we also see repurposing of existing assets. So, what I’m getting at is all those projects that are still coming online. They’re going to need. Places for people to travel and conference. And, you know, as we see it continue to things like the convention center, that’s, that’s still going to have to change, you know, San Diego, I don’t think is going to be willing to give up what they’ve built as a, you know, portfolio for events at that convention center, just because of its size constraints. You know, the hope is that we can find a way to get that solution and adapt and change.

Matt: And look at all the signs that are happening right. The airport expansion, right? With the, with the terminal expansions and right. We have the, we have the busiest single runway in the world. And there’s no talk of shared use. Like there was 10 years ago at Miramar. I write that that conversation is completely over. But the, and you see it at UCSD with the infrastructure improvements, like we talked about. So, if you look at the signs, the signs are all saying that development will continue.

Brooks: Yeah.

Jessica: And so, a topic that, you know, I guess we can’t, we can’t avoid cause we’re still in it. Let’s talk about the post COVID recovery. How do we compare as a community to other Southern California neighborhoods, communities, regions? What does, what does that look like? Has that impacted us on a day-to-day job level? What did, what does that look like? Where are we at all that?

Brooks: Coming as an organization had the add the flex, just like everyone else went on. COVID hit, you know, March 2020 was a, was an interesting time for us specifically in San Diego, we were excited about moving into a, into a new office in four days later. We all had to go home and, you know, we follow the protocols to maintain safety for our team here in SD. And really to figure out where we were going next. And at the immediate challenges that we saw from our clients, where we need some certainty around something, we didn’t know exactly where we were going to find that certainty, but like we do, you know, you start to research, and you start to dig into to what we what our client’s needs really were. And we found that not everybody was going to shell their project or stop their project.

Brooks: It was really. Okay. If I delay or pause, whereas the cost impact, primarily we focused a lot on cost analyses and studies. We look deep into commodity markets and labor trends and things like that that were changing every day. Right. And I think that’s where we found the most value for our clients. We didn’t see a huge slowdown in our business. We just had to react to the changing requests.

Jessica: But talk about a time to be an expert and needed. Right. I mean, it’s been the last two years of where our clients are, at least from my perspective, relying heavily on us and really trusting what our data would, our research, what our experience is telling us. Because no, one’s had to go through this before, but now it’s been almost more important than ever to really have our team. And our experts and like, you know, Matt, you were saying earlier, we pull from the architects from. The developers from all these different kinds of sectors and specialties and bring them all in house so that when things like this do happen, they’re beyond unfortunate. But we had a team here with all different types of education and perspective and experience. And I bet that was helpful to our, to our clients.

Matt: Absolutely. Our clients. looking for answers when COVID hit and when lumber was going through the roof. Right. And, you know, we told them that wasn’t sustainable. That’s not that wasn’t inflationary factor. That was not a sustainable it’s simply had to do with, with the supply and demand of what was going on. And, and that has now come to be true. Brooks, I think lumber has come down. Basically, to pre COVID levels.

Brooks: Yeah, absolutely it so looking back at our, our market data, like Matt alluded to, we didn’t see it as a sustainable trend for, for lumber, for what copper was doing for what steel eventually did concrete, some other, you know, major building components. But we just needed to try to figure out when, and, and we did see in the third, you know, late third quarter, early fourth quarter, and made a big shift in the market. You know, I always joke that it’s a, it’s a very relatable thing for someone to now be able to go into home Depot and buy two, two by fours instead of just one that day, because the price has changed, you know, by over 50% it was a scary thing for a while, but being able to give clients confidence around the fact that this is a blip on the radar, not a trend, a long-term, you know, issue was, was really.

Jessica: So, talking about commodities and trends, is there something you guys are looking at right now, keeping an eye on, you know, is, is lumber kind of, can we move on from lumber? We still watching lumber. Is it, what is it right now that we’re nervous or keeping an eye on?

Brooks: I think everything right. That’s our charge. And it’s a low-hanging fruit answer, but really that’s, that’s what we do. We have a team of construction economists that work here at coming. They focus. They gave us pricing insights on a weekly basis. That we ask our team across the nation and internationally to digest and think about so that we can inform our clients. I think some of the concern has shifted away from specific commodity prices and focused more on lead times durations and supply chain.

Jessica: Interesting. Okay.

Brooks: And as part of that, you know, we are doing the same to flex with that new concern, and it’s not a new one. It’s been there for a while, but. You look at the port of Los Angeles and the backlog of cargo ships that are sitting out there in the bay waiting to be offloaded. You know, the number changes from day to day, but it was, you know, 65, then it was 85 and they offloaded a few. And that’s, that’s a major thoroughfare for goods and things coming into the country.

Matt: That’s a great point, Brooks. And to your point with the supply chain, the developers and the contractors that are, that are ahead of the curve right now, or are thinking about ways to shorten the duration of a project. And one of the big factors, one of the big materials that we’re talking about right now is CLT. It’s mass timber. It’s approved in California for seismic. It’s being used up in the Northwest quite a bit. And it not only provides for reduction in carbon footprint of a building. But it provides for expedited structural, a structural system of a building. It can cut three to four months off of a construction schedule. And when you’re looking at $150,000 a month, per general conditions in general requirements for a general contractor, those numbers start to add up. So, there’s one big trend we’re seeing, and we’re seeing clients ask us again as Cumming once again. What are the advantages and risks?

Matt: Well, we just gone through a very successful project. I believe it was down in Nashville. The national warehouse was mass timber and seeing all the benefits where it was coming from, how to get it there on time with all the changes in the market.

Jessica: It, it was interesting to see that, but we, now we have that successful project under our belts again, and now able to share kind of those lessons learned.

Matt: Yep. We, and that’s the beauty of, of what the coming organization has. Right? We’ve got a worldwide breadth and we can, we can hear those case studies that are coming across the country and apply it to and give our developers and our clients the comfort to know that here’s a case study of here’s what’s occurred. And they love that. That’s real value. Yeah.

Jessica: And so, talking about you know, labor and commodities, I think that can jump to just general construction costs right now. How has that, if at all affecting development, are we just riding kind of the wave and seeing what happens? Are we kind of putting different suggestions out there?

Matt: You know, we do see you know, Across the country have different risk profiles, right? Some are big risk takers. Others are more risk averse, and they all exist in the world. And the risk averse are, in some cases are pushing the pause button. And they’re saying, we want to wait till things. We want to give it six months. We want to see if, if things settle a little bit more The and then we have others that are pulling the trigger and paying outrageous amounts for land and can see the costs, but they realize that California’s California in California, real estate has never gone down or trended down in the history of real estate in California. So, they see that, and they recognize that yeah, there might be some dips and there might be some valleys to get through. But in general, it’s a very positive market to keep investing in.

Jessica: Because we’re out of land as you mentioned earlier.

Brooks: And the return on investment, they could still see it. So, it’s still worked through a proforma, and they can still develop, you know, all the due diligence that they need to work through to, to make an informed decision. And we’re a big part of helping with that at an early phase. But the value, the value is still there. Even with high prices for most project types, the need being so prevalent, the value is still there. There don’t get me wrong. There’s sometimes that we offer our opinion on, on cost and it causes our clients to either have major pause or just like Matt alluded to rethink what they’re doing or change their program or something like that. But for the most part, we’re seeing projects find a way to, to get to get built, which is just great.

Jessica: Those are some of the, I hate to use the word challenges with this market, but you really must be smart about kind of that ROI and that cost breakdown. Especially right now, really navigating that risk, but I’d like to end on a positive note, and I know as a market it is one of a kind and it, there’s a reason it’s a hot market. That it’s a reason that we’re sitting here today. So, what does the future look like for San Diego?

Matt: Without a doubt. The future is very bright in San Diego. Like we said, many times now they’re not making any more land. San Diego remains to rebound from any economic or real estate. Dip happens. It’s one of the first in the country to rebound and Southern California is as well. But we see these areas. And these sectors office retail, industrial hospitality, multifamily and we see them changing in, in various ways, both because of the way our workforce has changed with, with COVID-19. Some policy changes that have happened up in Sacramento and with the way that the construction industry is changing and having to evolve a bit to accommodate for all these things. And like I said before, change means dollar bills for developers because they can be creative and they can, and they can make a difference and they can create and make places to work that people love to love to work at. That’s a horrible sentence, but nonetheless, that is San Diego. And it’ll continue to be there. You know, San Diego is a military town. That’s the one thing we haven’t mentioned, right? It continues to be well; it’s never going to leave. And, and that continues to be a nice balance for San Diego to become so over expensive that it doesn’t make sense.

Jessica: Another reason that there is stability here with the military, the Navy and Marines and all of that, it provides a little bit of a calming nature.

Matt: Absolutely. Absolutely. Yeah.

Brooks: I think just to add to that, Matt did a great job, summing it up where the future what the future looks like for San Diego as a construction economy, as an economy in general, it is strong and it’s it. The military is a huge piece of our business here in San Diego, working for entities like NAVFAC and, and owners and, and the related projects around that space. Wide reaching implications. And it’s not always the most a high-profile or well-publicized work, but it really is a huge part of the economic structure engine that is San Diego. And then the last piece that I want to say is that healthcare has remained very strong. Healthcare is a piece again of our portfolio in San Diego has been exciting. The last couple of years, we saw that as kind of. A real kind of buoy to our business way back in the recession as well. So, we know that healthcare will continue to see us through as well as the military. So just a couple nods to those pieces of the industry. Because they’re, they’re always going to be important in saying I go

Jessica: Well, wonderful. It’s been a pleasure and insightful to it to kind of hear you guys’ take on the market. What we should, you’re looking forward to for the future and we’re keep going in a good direction. So, it all sounds positive. And I just want to thank you guys taking the time. I know you guys are slammed, so yeah. Thank you.

Matt: Thank you. It’s good. It’s been great.

Jason: If you enjoyed this episode of construction insiders, we encourage you to check out our website at https://cumming-group.com/. That’s https://cumming-group.com/, where you can find our full knowledge library under the insights tab. It’s all great stuff. We’re passionate about it. And we hope you’ll check it out. Thanks for listening.