Construction And Development Trends And Challenges Discussed By Local Build Professionals

Trends driving construction reflect an amenities war in multifamily, an emphasis on sustainability in office and the response to particular challenges, including rising costs, increased fees and regulations. 

Moderator and owner at C2 Building Group Josh Chesnut (pictured right with Tony Ditteaux) asked panelists to discuss trends in the market today and how they’re affecting deals at Bisnow’s Annual San Diego Construction & Development Forum last week.

“Right now in multifamily, we’re in a war of amenities," said Trammell Crow Residential president of construction Tony Ditteaux. "It’s who can one-up on the next deal. We have dog spas, bike kitchens, outdoor kitchens, video walls…it’s amazing and it’s fun.

“The rental product we’re building today is nicer than any of the condos we built in the last cycle—the finishes, the amenities,” he added. “Our tower here has a rooftop pool with views of Coronado, the ocean and the ballpark—it’s really upscale!” Tony was talking about TCR’s The Alexan, a 313-unit, 19-story luxury apartment tower in Downtown’s East Village neighborhood, which is in the works.

“People want this, they’re willing to pay for it,” he said. “There’s a hospitality aspect that people really enjoy and like the idea that they can lock it and leave it.” Tony also suggested people take pride in being able to entertain guests outside by the pool.

Kilroy Realty Corp SVP for development and construction Robert Little said sustainability is a major thrust in today’s office market. “Tenants are looking for it, demand it,” he said, noting Kilroy got in front of the whole green construction, sustainability push from the start.

Kilroy was awarded 2016 Energy Star Partner of the Year Sustained Excellence Award, and ranked first in North America in 2015 in all sustainability categories by the Global Real Estate Sustainability Benchmark, the global real estate industry’s most rigorous standard for sustainability performance. Robert said 56% of all Kilroy buildings are Energy Star certified and 40% of them are LEED Platinum or Gold.

Good indoor air quality, light transmission, open collaborative spaces, reduction in landfill waste in construction processes, reduction in greenhouse gas emissions and location efficiency are now among office tenant prerequisites, he continued. He said tech firms especially look for locations where they can co-locate with infrastructure, public transit, bike share, restaurants and other amenities. “Like Tony was saying, the play is the same for office tenants,” Robert added.

“You can’t build a regular office building anymore,” Tony said. “You have to have an outdoor kitchen there, and all other the things with it.”

“Baby Boomers and Gen-Xers are looking at what they need to do to attract Millennial talent,” said Cisterra Development principal Jason Wood. He said people in the '90s used to talk about creating live/work/play environments, but it was “all talk. Today, we’re actually doing it.”

Cisterra is in the process of entitling two projects, 7th & Market, a mixed-use project in Downtown’s East Village, and The Preserve at Torrey Highlands, a 450k SF Class-A office project off Highway 56 in Carmel Valley.

Pictured are Jason Wood, Robert Little, Tony Ditteaux and Josh Chesnut.

In answer to a question about the biggest challenges panelists are facing in their deals, they cited commodity price escalation, rising construction costs, and keeping design and construction in step with each other to make budget.

Fixed costs, including land, permits and other fees, are big challenges and fees are going up. “Cities are increasing their fees across the board, and land costs continue to rise, so fixed costs are a big challenge in making deals pencil—that and the time it takes to get permits and start construction,” Robert said.

He is well aware of these issues, as the lead on construction of Kilroy’s One Paseo Carmel Valley, a 1.18M SF mixed-used development, which has taken years of working with the city and community and a complete redesign to win approval to break ground later this year.

“It just takes too long, it costs a lot of money, and I feel like we don’t get the service from the city that we deserve,” Tony said, saying it takes at least a year to get through the entitlement process and obtain permits. “The utility companies are another huge issue in our business." He said the first thing his company does when starting a new project is reach out to the utility company, because “you’re out a year or more…and it’s a painful process.”

Jason equated development of a project to hosting a pizza party, where once all your guests get their fill of pizza, you hope there’s a piece left for you. Pointing to the risk, Josh suggested developers never know if there’s going to be a profit left for them after everyone takes their share.

“People assume with a big project that there’s plenty of money to throw around,” Jason said, “but that’s not always the case, because big projects can also be big financial flops.”

Addressing their biggest concerns going forward, Tony cited the Level 3 School Fees. He said the California Building Industry Association has filed a lawsuit against the California State Allocation Board, because it recently authorized school districts to triple developer school fees.

“You can imagine how many deals that will kill, because it’s easily a few million dollars per deal we already pay for school fees,” he said. “So I urge you to vote in November for the $9B school bond issue, which would replenish school allocations across the state. If that doesn’t happen, these new school fees are going to go into effect, and it’s really going to affect our business.”

Robert mentioned the new MS4 stormwater regulations mandated by the California Water Quality Control Board. He said the regulations impede planning on Kilroy sites, as they involve a lot of geology, infiltration and groundwater replenishment.

“There is a high cost for some of these regulations, not just in installing the components, but in designing and engineering,” he said, explaining this is a problem because the board doesn’t have set standards yet, so the designers and engineers don’t really know what they’re looking for. “The board has come down on them with fines and isn’t communicating with them, so this has been a really big challenge and poses uncertainty and risk for us.”