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Building surges but falls short of recovery

Improved residential construction alleviates commercial competition, though both face challenges

Posted: May 16, 2013 2:00 a.m.
Updated: May 16, 2013 2:00 a.m.

AMG & Associates Inc. construction crews work on the new site for Los Angeles County Fire Station 156 on Copper Hill Drive in Santa Clarita in 2011. Photo by Jonathan Pobre

 

The residential and commercial building markets have shown improvement since the start of this year, with a more dramatic building increase since March and expected continual growth through the year, local industry experts said.

The commercial and industrial building market has struggled to recover over the last few years. Locally, industrial vacancy rates are low, while office rates remain high, reducing the demand for new office space, according to the Santa Clarita Valley Economic Development Corporation 2013 outlook guide.

New commercial and industrial investment in Santa Clarita fell dramatically in 2012 – hitting the lowest level on record – to $1.6 million, about 65 percent less than the previous low in 2010. As of February 2013, however, about 600,000 square feet of commercial and industrial space was under construction, according to the SCVEDC.

Expected employment growth throughout the Santa Clarita Valley, as well as expansion of the Henry Mayo Newhall Memorial Hospital campus, lend to a better commercial and industrial year than 2012.

In the residential market, homebuilders started work in February on single-family homes at the fastest pace in five years. And in March, new home construction broke the 1 million mark for the first time since June 2008, according to the National Association of Homebuilders.

And permits for future construction are near a five-year high.

Housing starts surged 47 percent from March 2012 to March 2013. Yet over the same period, the industry's employment grew just 3.7 percent.

Though both markets show the promise of recovery, the necessary growth for a healthy market is not without a slew of challenges.

 

Residential building

Though old building projects are being recovered and new communities are in construction, improvements are still not strong enough to show a healthy market in Santa Clarita or statewide.

Since the housing bubble burst, the building industry has been under-producing homes to keep up with the growing population.

“Most companies during that time lost 70-80 percent of their workforce, and a lot of companies went out of business,” said Holly Schroeder, CEO of the Building Industry Association of Southern California’s local chapter. “But the population kept growing. There’s a pent-up demand for new housing.”

It’s been a very long time since Santa Clarita has seen a significant amount of construction,” Schroeder said.

“Even with the elevated levels of new building, we’re still well below a healthy level,” she said.

California estimates set a healthy market rate at about 200,000 new homes built per year, Schroeder said. Last year, about 40,000 new homes were built in California.

In Santa Clarita, 2,500 to 3,000 new homes per year would show a healthy, recovered market, Schroeder said. During the peak of homebuilding, 4,029 residential units were permitted, according to the SCVEDC outlook guide.

Slightly more than 300 homes were built locally in 2012, Schroeder said.

“This year, I expect the market to exceed 2012 levels but still fall far under normal levels,” Schroeder said.

Construction projects that that have slowed or stopped completely in past years are now restarting, and several summer building projects will help bolster 2013 levels.

“We are growing according to future plans that have been laid out by county and city,” Schroeder said. “We have a well-thought-out plan, and we are now able to fulfill it more quickly.”

Residents can expect new home communities in the Valencia master plan area, as well as projects in the Plum Canyon area and Fair Oaks area near Canyon Country.

It looks like a good summer at this point, but the local market still has a way to go before it reaches that 3,000-home mark, Schroeder said.

 

New home challenges

Several existing challenges, as well as impending policy changes, could pose a threat to what growth the market has seen, Schroeder said.

Nationwide, builders and the subcontractors they depend on are struggling to hire fast enough to meet rising demand for new homes.

Builders would be starting work on more homes — and contributing more to the economy — if they could fill more job openings.

The shortage is most acute in areas where demand for new homes has recovered fastest, notably in Arizona, California, Texas, Colorado and Florida.

There are some reports of labor shortages in Santa Clarita, Schroeder said. But the shortage is not as severe locally as in other parts of the state or country.

“A lot of people left the industry or left the area after the economic downturn. But I don’t think the labor shortage will measurably restrain builders’ abilities to bring homes to market,” she said. “It could create hiccups here and there, but I don’t think it will create a real systemic problem.”

Other immediate challenges pose more of a threat to local recovery than the labor shortage, Schroeder said.

Lumber costs, volatile fuel prices and the limited supply of new homes may drive up prices, Schroeder said.

Low inventory rates in the resale market are increasing competition to the point of bidding wars.

“There aren’t a lot of existing homes on the market right now, so there are fewer options for people looking for homes,” Schroeder said.

The process of purchasing a resale is unclear in comparison to new home buying, and foreclosures can be complicated and unpredictable, Schroeder said.

“It makes new homes a very attractive option for new homebuyer,” she said.

Though the state of the resale market may make new homes more tempting, building still isn’t occurring at a fast enough rate to meet demand.

“New home building has fallen behind our population growth, and there are not enough homes to meet demand,” Schroeder said.

Impending legislation could complicate gains in the industry, as well, Schroeder said.

“All the things that are happening in Washington, D.C. could pose challenges to us here,” Schroeder said. “There are several policy changes currently under consideration that will affect homebuyers.”

“The homebuilding industry is a very large part of the California economy and the economy of our valley,” Schroeder said. “In order for us to fully recover, we need the housing market to get back to a healthy level for the long-term.”

 

Commercial building

While homebuilding surges, commercial construction benefits from decreased competition as former residential professionals migrate back into their native market.

“Over last few months, the housing industry has been picking up steam, and that recovery helps the commercial sector,” said Albert Giacomazzi, president and CEO of AMG & Associates Inc., a Santa Clarita-based general contractor.

With about 80 percent of their work in publicly-funded commercial building, AMG projects have run the gamut from more than a dozen fire stations, a NASA facilities support center, children’s and senior centers to renovations to area schools and universities, with some built locally.

When the market crashed in 2008, unemployment in the construction industry skyrocketed, and housing starts plummeted. Residential construction workers migrated into commercial building, especially to public projects, he said.

“Competition radically changed. Where we used to compete with four to eight bidders for a project, we were competing with 30-40,” Giacomazzi said.

Residential builders flocked to the public industry because there were still some jobs available.

“That was the only place that had money at the time,” Giacomazzi said.

The public sector absorbed an influx of inexperienced contractors, bidding cheaply because they didn’t understand the complexity of the project, he said.

“They grossly underbid and went into default, walking off the projects and not completing them. Owners would have the bond company complete the project, and projects were delayed,” Giacomazzi said.

Owners started demanding pre-qualification documentation that proved the contractors had the financial capacity and professional experience to complete the project.

“The pre-qualification process has limited competition, as well,” Giacomazzi said. “You can still see a large number of bidders, but not all public contractors have the financial capacity to provide the adequate bond.”

With residential building on the upswing and the opportunity in the public sector tightening, Giacomazzi has seen the 2008 migration trend reverse, relieving competitive pressure on certain types of public projects.

“There’s been improvement in the market overall, and the last six months have shown the most improvement,” he said.

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