Regardless of how bleak California’s current economic woes make the future appear, the demand for A/E services will increase.
Though John Soule, an Indiana newspaperman, actually coined the phrase “Go West, young man,” it was The New Yorker editor Horace Greeley who considered it his favorite motto for solving the problems of the day. Faced with dwindling market share these days, many A/E firms are looking to California as the “land of opportunity.”
Like those who stampeded across the plains after gold’s discovery, some firms will get there in time to stake their claim, while others might arrive to find a ghost town. In fact, a joke circulating among the state’s business community is “California is still one of the best places in America to build a successful small business. All you have to do is start with a successful large one.”
California’s impact on the national economy is significant. One of every eight U.S. residents lives there—if it were a country, its economy would rank 7th in the world. However, the dot-com bust of 2000 and skyrocketing energy costs have so radically afflicted the economy that the Golden State is now in the red. Legislators have failed to come to terms on a budget to resolve a projected shortfall of $34.8 billion dollars. In the meantime, just to keep the state afloat through the summer because of its 50th out of 50 status state credit rating, an $11-billion bridge loan will cost the state nearly $272 million in interest and fees—enough to build 35 elementary schools. Fed up with fiscal crisis, California voters mounted a successful campaign to recall current governor Gray Davis. If the recall effort proves successful, some are hoping that “The Terminator” will put an end to their financial woes.
However, the short-term effects are significant: cuts in social services, highway construction and education at all levels have already occurred. Faced with multi-million shortfalls, the 10-campus University of California system is increasing tuition 25 percent and the 23-campus California State system will likely follow.
At last count, the state had 2,789 architectural firms and 1,122 interior design firms, which represents more than $3 billion in fees … and more firms are still coming. Why is it then, that so many A/E firms are still flocking to California to join its already significant design presence? According to Lanie Geldert, Director of Business Development for San Diego-based Carrier Johnson, large national firms including HLW, HGA, Perkins & Will, and Ewing Cole Cherry Brott, have entered the California market in recent years and been very successful, joining established players such as Anshen + Allen, Gensler and KMD. Others such as HDR, SmithGroup and CarterBurgess assumed instant credibility by acquiring established California firms. “We see a lot of super A/Es merging as one giant conglomerate,” said Geldert. “A great marketing strategy is AECOM subsidiary, DMJM, who reinvented the firm’s image to become extremely competitive in their core strengths.”
Breuer Consulting Group, T3 Search and other leading recruiting firms are swamped with the demand for qualified healthcare, biotech and other R&D professionals as existing firms strive to strengthen their arsenal of technical professionals. Other leading healthcare and R&D firms are stealthily trying to enter the California market. Some who enter will not be successful. According to Geldert, a basic failure to embrace the underlying political, social and demographic underpinnings of this diverse and unique market leads some newcomers to fail. “Just because something is done a certain way in New York or Chicago doesn’t mean it will fly here. California is a unique place and local expertise is something that can’t be underestimated. Cultural nuances in San Francisco vary tremendously from those in Sacramento or LA,” she said.
Poor management is another reason firms fail. Says Geldert, “Those firms that recognize the importance of bringing in top leadership with savvy business development skills will fare better than others. Firms need to hire local people who know local government staff, who the players are and how to effectively compete with them.”
How are the institutional markets responding to the state’s financial woes? According to Geldert, the Cal State and University of California systems have initiated design/build contracts on several campuses to reduce capital outlays for construction costs. Using this system, the UC-Irvine campus has documented immense savings in both time and construction dollars. Cal State is now initiating a CM At Risk program to partner architects and general contractors early in the design phase to meet budget and time constraints.
In addition to the gubernatorial recall, what key political issues could most impact the future of design services? New fees and high taxes now rank California 49th out of 50 on a 2003 poll by the Tax Foundation on the business-friendly quality of the state’s tax system. Leaders in Sacramento have grown increasingly hostile to business. This month alone, there is a seemingly endless parade of detrimental bills winding their way through the capitol as legislators pursue legislation that could harm the commercial real estate industry. Bill AB 1015 would require the adoption of a statement on water supply availability and the latest round of floor debates include the expected passage of anti-development, anti-business measures such as SB 711 which creates new fees on landowners. For more information on pending legislation see: http://www.leginfo.ca.gov/
Is there hope for the future? Geldert says, “The recession continues but the LA, Orange County and San Diego areas are faring better than might be expected despite continued economic sluggishness in Northern California. Retail is very hot now as we haven’t seen cap rates this low in 30 years. Southern California continues to be bullish with K-12, healthcare, community college and multifamily housing projects, with experts predicting an increase in high-tech manufacturing later this year. The Southland’s biotech corridor from Ventura and LA to San Diego will see a double-digit increase in demand and a healthy long-term outlook for lab space.” Established sectors such as the movie industry and defense also continue to thrive. The Bay Area, with vacancy rates hovering above 30 percent and job loss in the tech sector continuing, might take longer than expected to rebound.
What’s shifting? “The biggest change occurring in California is the increase in mixed-used projects,” Geldert says. “What used to be a ULI fantasy is now a reality as developers scramble to get into the market. Infill projects are continuing at a staggering rate in San Diego, Sacramento, San Francisco and Los Angeles.”
So, what to consider if you’re bound for the Golden State? “The key to succeeding in penetrating a market niche in any part of the country is to commit to being a player in the local political arena and understanding the state’s regulatory requirements,” says Geldert. “For example, A/E firms that succeed in securing large public works projects in Los Angeles County are very politically savvy. A/E firms pursuing healthcare projects must have an in-depth knowledge of OSHPD regulations and seismic legislation pertaining to SB1953,” she said.
California is an enormous market, and despite population loss to neighboring states, immigration will continue to fuel the demand for education, medical, civic and service facilities. The state’s abundance of personal wealth and its temperate climate anchor it as a residential mecca. Regardless of how bleak its current economic woes make the future appear, the demand for A/E services will increase. Greeley was right after all: “If you have no family or friends to aid you, turn your face to the Great West and there build up your home and fortune.”
Kerry Harding is president of The Talent Bank, and a contributing editor to DesignIntelligence.