As fears of a recession mount, some local contractors already are seeing a downturn in their business ahead.
These contractors report some projects they have either recently been awarded or are bidding on are being pushed back by developers because of rising interest rates and concerns the markets for their projects may not be as robust as initially forecast.
“Projects are simmering more, in effect sitting on the drawing board,” said Jitendra Pahilajani, executive vice president for Webcor Builders, a unit of San Francisco-based Webcor. Pahilajani is currently the top executive at Webcor’s downtown Los Angeles office.
“These projects are being pushing out – in some cases by months, in some cases more,” he added.
Similarly, at Pasadena-based general contractor C.W. Driver Cos., a Pomona multifamily project the company had bid on has been pushed back.
“We priced it a year ago, but the budget went up about 12% over the past year, due in part to rising interest rates,” said Karl Kreutziger, C.W. Driver’s president. “The developer decided to delay the construction start, since the budget was higher than their pro-forma would allow.”
Slowdown taking hold?
These delays appear to be part of a trend that has been gathering steam this year. According to Dodge Data & Analytics, a unit of Hamilton, N.J.-based Dodge Construction Network, construction starts for the first four months of this year in Los Angeles and Orange counties were down 22% from the same four months last year, to about $5.2 billion worth of construction work.
Non-residential construction took the hardest hit, down 41% during those four months. Residential construction was down 8% while non-building construction – primarily public works, infrastructure and energy projects – was down 13%.
These figures are from before the recent rapid rise in interest rates that triggered the current round of recession fears. They reflect another pair of trends that over the past year has bedeviled project developers and construction contractors: inflation and supply chain disruptions. Skyrocketing costs for construction materials have busted construction budgets, forcing project developers to scale back or postpone their plans. Supply chain issues have also forced project postponements.
A spokeswoman for Dodge Data & Analytics said construction-start data for May and June were not yet available on a regional basis.
But both Webcor’s Pahilajani and C.W. Driver’s Kreutziger said they have yet to see project delays hitting across the board. They said the impact has been most pronounced on projects that are either in the bidding process or in preliminary design phases. Projects in which groundbreakings have already taken place are going ahead.
They added only certain construction markets are being hit, such as new office and retail construction.
Cutting costs, shifting projects
However, both said they expect the slowdown will become more widespread in coming quarters. And they are taking steps now to prepare.
At C.W. Driver, Kreutziger said a year-long effort to consolidate offices is now wrapping up.
“While we’re reducing our office square footage a bit, it’s really about a culture shift, due to the signs were seeing of a pending slowdown,” he said.
The company is also trying to find shorter-term projects that can be slotted in as larger projects begin to encounter delays or get shelved entirely. Kreutziger gave the example of tenant improvement projects.
Indeed, one local construction company that specializes in such work is already gearing up for an expected boomlet.
“With all the shifting work patterns we’re seeing because of the pandemic, we are expecting that when leases expire companies will be giving back lots of space,” said John Parker, co-founder and chief financial officer of Canoga Park-based general contractor Parker Brown Inc. “When that really starts happening, landlords are going to want all that space coming back to them fixed up to market to new tenants – and that’s where we come in.”
Parker said more than a third of his company’s work is in tenant improvements – and not just for 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 has recently acquired. “That’s a lot of work for us right now,” he said.
But Parker said there remains a major difficulty: supply chain delays that have resulted in key materials for tenant improvement projects – such as air conditioning units – not arriving in time.
“We’re no longer starting jobs unless and until we’ve confirmed the supply chain,” he said.
In some cases that might mean months or even quarters of delays – in effect converting immediate projects to backlog status. But, Parker said, that can have a potential benefit.
“If, as it seems likely now, a slowdown is coming, then we will go into that period with a substantial backlog of projects that had been delayed due to supply chain issues,” he said. “We can work down that backlog.”
Infrastructure boom coming?
At Webcor, executives have their eye on another area they expect to boom in coming quarters: infrastructure.
Shifting to public sector work has been a standby for construction contractors during recessions and economic slowdowns. But this time, the shift may be even more pronounced, thanks to the $1.2 trillion infrastructure bill that President Joe Biden signed into law in November.
“We are now looking at large design-build projects in the public sector in L.A. County,” Webcor’s Pahilajani said. “This includes education and most especially airports and aviation.”
Anticipation of an infrastructure boom is even more pronounced at Sylmar-based Tutor Perini Corp., which does most of its work in the public infrastructure market.
In Tutor Perini’s first-quarter earnings teleconference call in early May, Chief Executive Ronald Tutor was bullish on the company’s chances of winning major contracts on multibillion dollar infrastructure projects over the rest of this year.
“Demand for our services is continuing to increase meaningfully, beginning later this year when the funding from the federal infrastructure bill begins to flow,” Tutor said in the earnings call. “That funding is anticipated to be allocated over the next five years and spent over the next 10 years.”
Tutor said that in a three-week period in late May alone, the company expected to submit bids on two highway projects in Maryland totaling $3 billion, a $350 million bridge replacement project in New Jersey and a $2.5 billion monorail replacement project from Newark Liberty International Airport to a rail linkup station three miles away.
“(With the) sheer enormity of all the work we’re bidding – $6 billion in the next three weeks and probably an additional $10 billion by the end of the year – we expect and hope to grow our backlog substantially,” Tutor told analysts on the earnings call.
What’s more, Tutor told analysts, three of the four projects that the company was to have bid on in late May each only had one other bidder, meaning the odds were good that Tutor Perini would win much of the additional work.
“We’re undergoing what we think is going to be a huge surge in new works and new contracts,” he said.
