As fears of a recession mount, some local contractors are already anticipating a downturn in their business.
These contractors report that some projects they have either recently won or are bidding on are being pushed back by developers due to rising interest rates and worry that the markets for their projects may not be as resilient as originally forecast.
“Projects are more simmering, they’re practically sitting on the drawing board,” said Jitendra Pahilajani, executive vice president of Webcor Builders, a San Francisco-based unit of Webcor. Pahilajani is currently the senior executive at Webcor’s downtown Los Angeles office.
“These projects are moving forward — in some cases by months, in some cases more,” he added.
Similarly, Pasadena-based general contractor CW Driver Cos. pushed back a Pomona multi-family project the company had bid on.
“We set the price a year ago, but the budget has increased about 12% over the past year, in part due to rising interest rates,” said Karl Kreutziger, president of CW Driver. “The developer has decided to delay the start of construction as the budget was higher than its pro forma allowed.”
These delays appear to be part of a trend that has picked up speed this year. According to Dodge Data & Analytics, a unit of the Hamilton, NJ-based Dodge Construction Network, housing starts in Los Angeles and Orange counties in the first four months of this year fell 22% from the same four months last year to about 5, 2 USD back billion construction output.
Hardest hit was non-residential construction, which fell by 41% over the four months. Residential construction fell by 8%, while non-building construction – mainly public works, infrastructure and energy projects – fell by 13%.
These figures predate the recent surge in interest rates that triggered the current round of recession fears. They reflect another pair of trends that has plagued developers and contractors over the past year: inflation and supply chain disruptions. Skyrocketing costs for building materials have blown building budgets and forced developers to scale back or postpone their plans. Supply chain problems have also led to project delays.
A spokeswoman for Dodge Data & Analytics said construction start dates for May and June are not yet available regionally.
But both Webcor’s Pahilajani and CW Driver’s Kreutziger said they haven’t yet seen project delays across the board. They said the impact is most pronounced on projects that are either in the bidding process or in the preliminary design phase. Projects where groundbreaking has already taken place are pushed forward.
They added that only certain hardware stores are affected, such as B. new office and retail buildings.
Reduce costs, postpone projects
However, both said they expect the slowdown to become more widespread in the coming quarters. And they are taking steps now to prepare.
At CW Driver, Kreutziger said a year-long effort to consolidate offices is now coming to an end.
“While we’re reducing our office space a bit, it’s really about a culture shift as we have seen signs of an imminent slowdown,” he said.
The company is also trying to find shorter term projects to fit in when larger projects are delayed or canceled altogether. Kreutziger named tenant fit-out projects as an example.
In fact, a local construction company specializing in such work is already preparing for an expected boom.
“With all of the changing work patterns we’re seeing because of the pandemic, we expect companies to give back a lot of space after leases expire,” said John Parker, co-founder and chief financial officer of General in Canoga Park contractor Parker Brown Inc. ” If that really happens, landlords are going to want all of that space that’s being returned to them repaired to market to new tenants — and that’s where we come in.”
Parker said more than a third of his company’s work is on tenant improvements — and not just office space. He said the firm has been working with Sawtelle-based industrial property owner Rexford Industrial Realty Inc. on tenant improvements for properties Rexford recently acquired. “It’s a lot of work for us right now,” he said.
But Parker said there remains a major problem: supply chain delays, which have meant critical materials for tenant improvement projects — like air conditioning — do not arrive on time.
“We will not start any more jobs unless and until we have confirmed the supply chain,” he said.
In some cases, this can mean monthly or even quarterly delays – meaning immediate projects are placed in backlog status. But, Parker said, there may be a potential benefit.
“If, as now seems likely, a slowdown is imminent, we will enter that period with a significant backlog of projects that have been delayed due to supply chain issues,” he said. “We can reduce this backlog.”
Is the infrastructure boom coming?
At Webcor, executives are eyeing another area they expect to boom in the coming quarters: infrastructure.
Shifting to the public sector has been a stopgap for contractors during recessions and economic downturns. But this time, the shift could be even more pronounced thanks to the $1.2 trillion infrastructure bill President Joe Biden signed into law in November.
“We are now reviewing large public sector design-build projects in LA County,” said Webcor’s Pahilajani. “This includes education and especially airports and aviation.”
Expectations of an infrastructure boom are even more pronounced at Sylmar-based Tutor Perini Corp., which does most of its work in the public infrastructure market.
Speaking on Tutor Perini’s first-quarter earnings conference call in early May, Chief Executive Ronald Tutor expressed optimism about the company’s chances of winning major multi-billion dollar infrastructure projects later this year.
“Demand for our services continues to increase significantly, beginning later this year when funds from the federal Infrastructure Act begin to flow,” Tutor said in the earnings call. “These funds are expected to be allocated over the next five years and spent over the next 10 years.”
Tutor said that in a three-week period alone in late May alone, the company is expected to receive bids for two freeway projects in Maryland totaling $3 billion, a $350 million bridge replacement project in New Jersey and a monorail replacement project in the United States Valued at $2.5 billion, Newark Liberty International will transfer the airport to a railroad station three miles away.
“(Given the) sheer size of all the work we are offering – $6 billion over the next three weeks and likely another $10 billion by the end of the year – we expect and hope to significantly increase our backlog,” Tutor told analysts on the earnings call.
Additionally, Tutor told analysts that three of the four projects the company was due to bid on at the end of May saw only one other bidder each, meaning there was a good chance Tutor Perini would win much of the additional work .
“We’re seeing a huge surge in new work and new contracts right now,” he said.