Builders Scramble to Find Scarce Commercial Business
These are tough times for commercial developers and construction companies. At the moment in the San Fernando Valley, there’s only one speculative office project--totaling just 20,000 square feet--under construction, according to Grubb & Ellis Commercial Real Estate Services. The situation is similar for industrial and retail projects. Leasing isn’t any better off.
Over the past three months, more office tenants moved out of office space in the San Fernando Valley than moved in, Grubb & Ellis reports.
What’s a developer to do?
Different companies are using different strategies to stay in business and keep their staff employed. Some are bidding on public works projects, others are focusing on asset management--i.e. property management. Still other developers are concentrating on workouts, the term used when dealing with a problem real estate loan. And others are trying to find their niche in so-called build-to-suit deals for companies that want their space custom built.
“The big work out there is government work,” said Edward Johnduff, administrative services manager for the city of Thousand Oaks. He’s helping coordinate bids for the city’s $63-million Civic Arts Plaza, which started construction in January.
“There really isn’t much private development available. We’re the only game in town in eastern Ventura County,” Johnduff said.
The result, he said, is that every phase of the civic center project has had a long list of competitive bidders. “Overall, we’ve saved almost $2.5 million against our budget estimate,” Johnduff said. The bidding is low, he explained, because in addition to the 208,000-square-foot civic center, the only other work available nearby is freeway work.
“Developers are scrambling for any business,” said Bruce Frasco, senior vice president at the Sherman Oaks office of Beitler Commercial Realty Services. New building permits continue to fall every month, he said, and there’s hardly any financing available to build. The only two current projects he could think of for the construction industry in the San Fernando Valley were a new parking facility at Tarzana Regional Medical Center and the planned Metro Rail stations in Valley sites such as North Hollywood.
However, when commercial developers start bidding for public works projects, they must compete with established firms that specialize in that field.
“We’ve always been focused on public works,” said Ron Tutor, president of Sylmar-based contractor Tutor-Saliba Corp. The strategy of working on public projects such as Metro Rail has helped Tutor fare better during the recession than builders who are only now trying to shift from private-sector to public-sector work. “They don’t have a lot of choices,” Tutor said.
Because of all the competition for public works, “there’s not a lot of profits being made,” Tutor lamented. But that’s to be expected when private-sector building is almost nonexistent, he said. “In the Valley, there’s very little happening.”
As for developers who hope to act as consultants or managers for public projects, Tutor predicted bleakly: “They won’t be saved by public works.”
“In the public sector, there are 20 to 30 bidders for each project. It’s pretty tough to get that kind of work,” said Robert G. Larson, associate vice president at Oltmans Construction Co. in Thousand Oaks. But his company still plans to try.
Oltmans’ construction revenues are down from $195 million in 1990-91, he said, to $75 million in 1991-92. “We haven’t geared ourselves to public projects, but we’ll be forced to zero in more on that kind of work.”
Oltmans is offsetting some of its lost business by focusing on build-to-suits. Unlike speculative projects built without firm commitments from tenants, a build-to-suit is constructed with usually one committed tenant in mind.
Examples include 52,000 square feet of space for Lockheed Advanced Development Co. in Palmdale, a 110,000-square-foot warehouse/distribution facility for Borden Service Corp. in Chatsworth, and facilities for Chocolates A La Carte and Farmers Insurance Co. in Sylmar.
Almost every developer and real estate broker in the Valley is also aiming for a chunk of the available business in asset management. This can involve simply managing a building or getting involved in the more complex elements of a workout when a project is in trouble with a lender or in the hands of the Resolution Trust Corp.
“The cash cow has become management,” said Michael Zugsmith of Zugsmith-Thind Commercial Real Estate Services in Encino. “Most developers have a management staff for their own properties already, so it makes sense to expand those operations.” Examples of this sort of expansion are the Voit Cos., out of Warner Center, and the Koll Co., which manages a number of commercial properties in the Valley.
Many developers are also cutting their profit margins as a way to keep people employed. “Asset management makes sense as a way to cover yourself while the economy is down,” Zugsmith said. “People are trying to figure out how they can make a buck and cut overhead.”
Whether these alternatives will be enough to keep most developers and construction companies in business is still questionable. There just isn’t enough government, build-to-suit and asset management business to keep many developers and construction firms solvent. “There are a lot of developers that are downsizing,” said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County. “Not everybody is going to survive.”
