A shift to an office landlord’s market and a flurry of building sales failed to slow contractors working on tenant improvement projects last year.
The 20 largest tenant improvement contractors working in Orange County posted $373 million in revenue here last year. That’s up 19% from a year earlier.
It is a similar gain compared to last year’s list, when the largest contractors showed a 20% increase in annual revenue. The Business Journal ranks contractors based here and elsewhere by work done in OC.
Companies on the list boosted employment by 9% to 666 workers during the past year.
Just two of the companies on this year’s list showed revenue declines in 2005. Two others were Business Journal estimates.
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The gains in revenue came despite only a modest increase in projects. The total square footage of work done by the companies on the list was 13.3 million square feet in 2005, a 4% increase from 2004.
Clients are spending more per square foot, contractors said, which is a sign of their confidence in the local economy. Rising construction costs also are being passed on to the clients, which impacted revenue.
Bullish forecasts for next year are being projected by many of the companies, which often book work for larger clients as far out as 18 months ahead. Projects can last 10 to 12 weeks for larger clients.
“Business has been strong, and I don’t see any slowdowns,” said Michael Howard, founder and principal of Los Angeles-based Howard Building Corp.
Howard Building notched the No. 1 spot on this year’s list with a near doubling of revenue to $60 million. The company’s local office is in Costa Mesa.
Market Changes
Continued strong business doesn’t mean there aren’t changes afoot in the industry.
“The market is still as active as it has ever been, but it’s definitely changing,especially with properties changing hands (so frequently),” said Scott Wetzel, president of Irvine-based Ticon General Contractors, No. 4 on the list with an estimated $30 million in revenue last year.
Sales of a number of high-profile office buildings are bringing new landlords to the mix. That means any relationship the contractor had with a building’s old landlord is suddenly put in flux.
At the recently sold Irvine Center Towers, “The Irvine Company does things differently than (former owner) Transwestern. It’s a challenge for us to stay on top of those changes,” Wetzel said.
“It’s a relationship business,” he said.
The rapid improvement in the office market has some speculating that it could negatively impact contractors. Landlords in a strong office market generally have less incentive to pay for major refurbishments of second-generation space in order to attract or keep tenants.
“Landlords are giving less and less allowances out,” said Greg May, senior vice president for the Newport Beach-based office of commercial brokerage Grubb & Ellis Co.
Landlords aren’t inclined to do more than provide new carpet and a paint job for some offices, May said. And with rents already rising, some tenants may not want to put their own money into the space, he said.
A few years ago, a landlord in a class A office building might have been willing to provide tenant improvement allowances in the range of $25 to $30 per square foot. Now, it might be hard to get a landlord to agree to allowances in the $12 to $15 per square foot range, May said.
“Some tenants are becoming more willing to live with space that’s less than perfect,” he said.
On the other hand, some landlords are spending more money on renovations of older, class B-type buildings. The goal: refresh them and their sales value, Wetzel said.
Another big change for many contractors: Mortgage companies that provided a lot of their business the past few years have all but stopped expanding locally. In some cases these companies are giving back space for sublease, which could provide some additional business, contractors said.
Contractors that focus solely on tenant improvement work made up most of this year’s list. The Business Journal also includes a few general contractors, but only those whose tenant improvement work accounts for a big chunk of their revenue.
Howard Building moved up one spot to No. 1 on its big revenue gain during the past year. The company has done a lot of work on upscale space for law firms in OC and Los Angeles.
The Irvine office of Sedgwick, Detert, Moran & Arnold LLP is a Howard Building client. The contractor also is in the midst of a multiphase project for Google Inc.’s offices in Irvine, and it’s doing work for Microsoft Corp. offices owned by the Irvine Co.
The Irvine office of Turelk Inc., the No. 1 company for the past three years, fell a spot despite boosting revenue to $53 million last year, a 6% increase.
Long Beach-based Turelk worked on 1.7 million square feet of projects last year, the most of any company on the list.
Rounding out the top were No. 3 Newport Beach-based DBAC Inc. at $33.8 million, Ticon and No. 5 Seattle-based Howard S. Wright Constructors, with $25 million in revenue at its Irvine office.
