After a five-year run where double-digit increases in business were the norm, Orange County’s tenant improvement market fell back to Earth last year.
The 20 largest tenant improvement contractors here posted $460 million in revenue in 2008, according to this week’s Business Journal list. That’s a 6% drop in business from 2007.
It’s the only time the industry’s seen a decline in business since the Business Journal started the list in 2002.
As a result, many tenant improvement companies are discounting their rates to try to pick up more business.
Last year’s results stand in stark contrast to what was seen here the prior five years, when companies averaged close to 10% annual growth.
This week’s list of tenant improvement contractors ranks companies by work solely done in OC in 2008, whether they are based here or elsewhere.
The list includes a handful of builders that have tenant improvement practices, but not builders and other property managers that don’t derive a sizable portion of their revenue from that line of work. Five companies on the list have revenue totals that were Business Journal estimates.
The revenue decline on this year’s list was more noticeable at the top. Of the eight largest companies on this years’ list, only one,KPRS Construction Services Inc. of Brea,reported a year-over-year increase in revenue.
Bright Spot
KPRS posted $48.6 million in tenant improvement business in 2008, a 16% in-crease in revenue from a year earlier. That boosted the company from No. 4 to No. 2 on this year’s list.
Among large projects, the company’s handling work for the biggest office relocation seen in OC in several years, for Beckman Coulter Inc.’s new headquarters in Brea. The 500,000-square-foot project, which will see the maker of medical diagnostic and research products relocate from nearby Fullerton, is scheduled to be completed later next year.
During the past year, tenant improvement work has been the among the best-performing business segments for the company, according to KPRS officials. Business has been “surprisingly strong,” said Kevin Ivey, head of business development for KPRS.
KPRS’ tenant improvement work last year made up about 40% of its overall construction revenue, which in total saw about a 35% drop last year.
Retaining the No. 1 spot on this year’s list by a hair is Long Beach-based Turelk Inc., which counts an Irvine office. The tenant im-provement-focused company reported $48.7 million in work here in 2008, which was about a 5% decrease from a year earlier.
Local projects Turelk is working on include the 181,000-square-foot Spectrum-area headquarters under development for Taco Bell Corp. The building previously served as Ford Motor Co.’s West Coast headquarters.
Companies on the Business Jour-nal’s list reported working on 14.9 million square feet of OC projects last year, a 10% drop from the prior year.
Those totals average out to about $30 per square foot for work done here last year, compared to $29.50 per square foot the prior year.
The increase in price per square foot averages stands in contrast to the general pricing trends seen in OC’s tenant improvement and construction world during much of the past year.
Most industry watchers report that general contractors and other tenant improvement vendors are pricing their services at more competitive rates than have been seen in years.
There’s been a 15% to 20% drop in tenant improvement costs alone since last summer, Ivey said.
“We’re forecasting continued downward pressure for the rest of the year,” Ivey said last month.
Some are beginning to wonder if the costs are falling too much.
“We’re concerned that (all the) contractors and subs can’t perform at the price” they are quoting for projects, said Stewart Navarre, managing director for project management in Southern California for CB Richard Ellis Group Inc.
The failure rate of general contractors, subcontractors and suppliers is growing at an alarming rate, CB Richard Ellis’ project management group is telling clients. They’re recommending project leaders perform an increased level of due diligence when selecting general contractors and their subcontractors and suppliers.
Navarre said that in general, pricing is off 20% to 30% from a year ago. That drop is fueled by both the tenant improvement firms’ competitive pricing and industrywide decline in the costs for products such as steel and copper.
Many contractors are just “buying work” for their employees until the market turns around,which most are hoping is next year, said Navarre, who works out of the company’s Newport Beach office.
“It’s desperate out there,” he said.
