Pumping the Public Sector : Architects, Builders, Unions Brave Federal Bureaucrats and Local Governmentfor Lucrative Projects, Leases
A slump in the real estate market has Orange County’s developers--many of them staunchly conservative, entrepreneurial types--turning more and more to an unlikely source of business: government.
Architects and builders and planners are going after government business like never before now that few new office buildings are being built by private interests.
The building-trades unions are counting on public works projects to help their members get by--building a road here, constructing a public library there.
Landlords are looking to government to fill vacant offices in upscale buildings where--until recently--you were about as likely to find an Eskimo as a government bureaucrat.
For instance, the Resolution Trust Corp. said recently that it will move into 150,000 square feet in a Koll Co. building near John Wayne Airport. A little earlier, the Federal Deposit Insurance Corp. said it would take seven floors of an Irvine Co. building in Irvine. The FDIC, in fact, was a little touchy about its stylish new address and officials didn’t really want to talk about it all that much.
These two federal agencies are expected to be growth businesses in the next few years as they sort out the flotsam and jetsam left by the crash of the thrift industry.
Local government is an equally important player in the new commercial market. The biggest office lease signed in the county last year was inked not by a Fortune 500 corporation but by county government, which will pay $30 million over 10 years to rent 172,000 square feet in a converted warehouse in Santa Ana.
“Traditionally, government offices used to be centrally located around a courthouse,” says Scott Perley, manager of the Irvine office of broker Cushman & Wakefield. “Now they’re growing and they don’t have the money to build new buildings, so they have to lease space on the open market like everybody else.”
That’s meant more business for Hutton Development Co. in Santa Ana, a unit of Japan’s Tobishima Corp. Hutton is building two eight-story office buildings in Santa Ana for the Sheriff’s Department’s forensic science unit and the county’s Environmental Management Agency.
And many developers who once built factories or office towers are trying to stay afloat by managing those buildings for the new owners in return for a fee. And who has a lot of property that needs looking after? Why, the Resolution Trust Corp., of course. The RTC, a federal corporation, oversees all the buildings that the nation’s failed savings and loans had invested in.
As the custodian of the largest real estate portfolio in the country, the RTC is expected to be a major player in real estate through much of the 1990s.
To be sure, government isn’t the only place the industry is hunting up more business. For instance, Newport Beach’s Koll Co., a major office developer, is building resorts in Mexico. Local architects increasingly get on a jet and go to Japan or Europe to drum up work. Birtcher, another big developer in Laguna Niguel, is going to build houses.
But people in the real estate business say government looms larger as a customer these days, even though doing business with City Hall often means more red tape and bureaucracy than most freewheeling developers are used to.
The industry is looking to government to help it through the slump because government spending tends to increase even during recessions. Federal, state and local agencies are still building roads and leasing office space.
And in Orange County, where freeway construction has lagged behind many of the state’s other urban areas, a sales-tax increase will raise $3 billion over the next 20 years to finance even more freeway improvements, commuter rail and other transit projects.
People at the Koll Co. say the property-management side of the business--now far busier than the development side--is going after RTC contracts to manage buildings in the West and Midwest. So far, it has won one contract and a subcontract, and been shut out on two.
With all the regulations and paperwork, bidding for the contracts can be expensive as well as time-consuming. On the other hand, the RTC holds millions of square feet of buildings that need managing. And real estate companies can’t be too selective in the current slump.
At McCarthy/Pacific in Irvine--the West Coast branch of a St. Louis construction company--sales rose 13% last year to $356 million even while the construction business was in the dumps. Much of the increase, the company says, is attributable to a jump in its public-works business. Some of the strongest markets are schools, government offices and hospitals.
Another fertile hunting ground: universities. McCarthy is building a $19-million science building at Cal State Fullerton and one costing $33 million at UC San Diego. McCarthy says it began to focus on public-works projects about a year ago. Without this business, things would be even tougher.
At Langdon Wilson Architecture Planning, one of the county’s largest architectural firms, government business is also more important than ever. The firm, like most in the area, laid off about a third of its people in the past year. Langdon Wilson once designed many of the Koll Co.’s office towers in the heady days when credit was easy, rents were high and developers were still building offices. Now that developers have built far too many towers, Langdon Wilson is doing things like designing a new $72-million city hall for Phoenix.
But all this public business can’t make up for the huge amount of private work lost when the orgy of building stopped. Many developers and architects may never do so well as they did in the 1980s. And even though California’s need for for more roads, schools and libraries will continue to grow with its population, it’s an open question whether the money will be there to fund all that construction.
And government work doesn’t come easy.
“We started five or six years ago working on this public side of the business,” says Ernest C. Wilson Jr., a partner at Langdon Wilson. “And we’re just now getting to the point where it’s paying off. It takes a lot of time.”
Most people in the real estate business just aren’t accustomed to doing business with the government, and their initial exposure to the bureaucracy “can be very frustrating,” says Michael L. Meyer, managing partner of the Newport Beach office of consultants Kenneth Leventhal & Co.
It can be worth it, however, as Meyer has learned.
Now that Leventhal’s usual clients, the developers, aren’t doing many deals, Leventhal has switched to advising them on how to work themselves out of difficulty with the stuff they’ve already built.
But a a big chunk of the firm’s new business is with the RTC, for which Leventhal is doing accounting and consulting on billions of dollars worth of real estate.
