A rekindling of once-dormant development projects has been a boon to Orange County’s architecture and engineering firms in the past year and a half.
Developers shelved many projects during the recession due to a mix of factors, including a collapse in home prices and a bleak outlook for the real estate sector.
Affected architects and engineers, along with builders, had to redeploy staff or cut jobs while putting revenue projections on hold.
Some of the stalled projects are making their way back, according to local firms.
“It’s a great day when that happens,” said Dan Heinfeld, president of LPA Inc. in Irvine, the largest architecture firm in the county, with $46.3 million in OC billings for the 12 months through June. It has 42 licensed architects in its local office.
LPA was founded in 1965 in Orange and moved to Irvine in 1990. It has expanded over the years to offices in San Diego and Roseville, with an office in San Jose opening next month. The firm works on public and private projects, including educational facilities, corporate offices and civic centers.
“We have seen projects that were put on hold in just about all those categories restart,” Heinfeld said, citing renovations at San Diego State University as an example.
Work on the school was put on hold in July 2009 and restarted in March 2012.
More recently, LPA’s work for the ExplorOcean oceanography museum in Newport Beach, shelved in January 2012, started again early this year.
Heinfeld added that the restarts could sum up to about 10% of the firm’s revenue.
“While it’s not an amazing number, it is a good sign,” he said. “I think everyone’s feeling a bit better about the economy, and some of the public institutions are moving ahead.”
LPA projects started getting stalled in 2009, perhaps “later in the cycle” than for other firms, according to Heinfeld.
State Work Dried Up
That was in large part because state agencies, including public schools, already had bond money in hand to proceed with their projects—money that kept those assignments going until about 2010, when the state’s “financial crisis put pressure on all of the institutions, and they weren’t able to move forward,” Heinfeld said.
Others, such as Tustin-based engineering firm Hall & Foreman Inc., experienced the effect a couple of years earlier when the recession began.
“Starting in 2007, when things started to unravel and free fall through 2008, we had all sorts of development-related projects that were put on hold,” said John Hogan, Hall & Foreman’s chief executive. “Many remained that way for a number of years,” costing the firm “several million dollars’ worth of fees.”
The company primarily provides civil engineering and land surveying services.
It ranked No. 34 on this week’s Business Journal list of engineering firms, with $3.8 million in OC billings for the year through June, up 6% year-over-year (see list, page 41).
Projects Bounce Back
Hall & Foreman recently saw some projects come back to life, including Sendero, a residential neighborhood Rancho Mission Viejo LLC is developing in South OC. The development opened its first homes to the public in June and recently drew new funding for its next phase, which calls for 3,000 single-family homes and apartments. Investments of $100 million came from the California Public Employees’ Retirement System and others.
Hall & Foreman was “heavily involved” in the engineering design of the project from its beginning in the early 2000s. The community was ready for construction by 2006, but the developers decided to pause then.
“Wisely, I guess,” Hogan said. “And then around 2009 or so, the developers began to relook at the land plan for Sendero” and picked it back up.
Project halts in general are challenging, but even more so when they happen abruptly, leaving firms with extra staff, according to Hogan.
Firms typically try to assign the staff to other projects, but “in many cases, there was nothing to redeploy them to,” Hogan said.
Hall & Foreman ended up “considerably” reducing staff for a few years through 2009. Executives say it’s picked up hiring since then, including by calling back employees who had been laid off, and it now has nearly 70 employees, including 31 in OC.
A project Irvine-based architecture firm Danielian Associates Inc. was working on was “deserted” for several years after the original developer went bankrupt.
“It was supposed to be a seniors community in Calimesa,” said John Danielian, principal of the firm, which ranked No. 13 on this week’s list, with $9 million in billings in the 12 months through June.
The project in Riverside County began in 2004, with plans for an initial set of about 40 homes and a 22,000-square-foot clubhouse.
“It was never really finished, maybe about 80%, when [the developer] went bankrupt,” Danielian said.
Then Highpointe Communities Inc. entered the picture.
The Aliso Viejo-based land developer acquired the bank-owned title of the property last year from Wells Fargo and started work on it again, completing the first set of 44 homes, which went to market in July, and readying about 260 lots for future building.
“Our current plan is to go to market with 40 to 60 lots in the mid-fourth quarter this year,” said Steve Vliss, chief executive of Highpointe. “We expect to see new products in the ground in the second quarter of next year. We’re going to finish the community up.”
Danielian said it’s “always nice to see some of these projects come back to life,” though the company typically doesn’t recoup all of the costs.
Imperfect Recovery
“There’s a loss there,” he said. “We have many other projects that are still dead and don’t know if they’ll ever come back. But there is a bit of revenue, and it’s really about finishing up the project. We like to see our projects come to fruition. It’s rewarding.”
A side benefit of thawed projects comes in introductions to potential business partners.
“These foreclosed projects are eventually purchased by other homebuilders, and a lot of times, those are companies we haven’t done business with yet,” Danielian said. “It’s a great opportunity to work with new homebuilders. It has worked out and broadened our customer base. … Most of the time, they’re credible homebuilders that have capital to finish up those projects.”
Recent project restarts generally have been concentrated in the Inland Empire.
That’s primarily a function of market trends during the early 2000s, according to Dean Palumbo, vice president of Canada-based engineering firm Stantec Inc.
“For Orange County developers and design firms, western Riverside and San Bernardino counties offered a significant amount of open and available land to develop large-scale, masterplanned communities,” Palumbo said. “The combination of unprecedented market activity, open geography, and the ability of buyers to lock into [attractive] mortgages … paved the way for overproducing.”
Palumbo oversees the firm’s Southern California operations from its Irvine outfit, which recently relocated its office to accommodate a growing staff, which is now at 124.
OC, by comparison, had less easily-developable land, which means the recession affected it less, Palumbo added.
Some of Stantec’s largest project comebacks are in Ontario, Calimesa and Hesperia, according to Danny Craig, a company spokesperson.
“Our Southern California environmental team has attracted two to three new projects weekly over the past six months,” Craig said, “all from a roster of OC-based developers for projects evenly split between Los Angeles and Orange counties.”
Stantec had $17.5 million in local billings for the year through June, a 31% increase year-over-year. Companywide, its billings totaled nearly $2 billion in the same period.
Challenges remain for local firms as the industry looks for opportunities in the economic recovery.
“We’re still seeing tremendous pressure on pricing,” Hall & Foreman’s Hogan said. “We’re not able to get the same fees that we were able to back in 2005 and 2006. There’s still a lot of competition.”
Heinfeld said that when some of its projects come back, LPA also has to factor in new standards in the state’s energy codes for buildings.
Overall Economy
More importantly, though, it’s a matter of how the overall economy is faring, he said.
“So much of our business is based on consumer confidence and how people feel about things,” he said. “Right now, it’s a very, very slow recovery. In previous recessions, coming out in recoveries, we’d see 6%, 7% growths (industrywide). This is a very gradual recovery, but at least there is a recovery.”
