Daniel Walker

SOUTHERN CALIFORNIA—JLL recently released its construction outlook, highlighting major construction projects, key trends and wages in CRE construction for each of three Southern California markets: L.A., Orange County and San Diego. GlobeSt.com spoke with JLL executives in each of these markets to discuss the drivers behind CRE construction in their respective markets and the micro and macro factors influencing this sector—including the new federal tax plan.

GlobeSt.com: What stands out for you about the construction data collected for your respective markets?

Walker: Increased construction activity and labor shortages in Orange County have and will continue to be driving an increase in construction costs.

Kilpatrick: The market in San Diego continues to tighten, with limited resources and barriers including a shortage of affordable housing, which is preventing growth in this specific labor sector of the workforce.

Serra: Construction costs in Los Angeles are continuing to escalate, with no signs of a slowdown in the short term (12 months).

Julie Kilpatrick

GlobeSt.com: What do you believe is driving construction in your market?

Walker: The euphoric feeling of a strong economy and rising stock market are factors that are enabling companies to justify investment in growth or strategic relocations, which is driving new development and redevelopment.

Kilpatrick: San Diego has had a number of large users in the market over the past year and going into 2018/19, which is driving the construction industry. Additionally, the market has finally established itself as an engineering hub where younger talent is settling outside of Bay Area, Los Angeles and other coastal cities. San Diego is also experiencing an increase in funding for municipal, county and infrastructure projects over the next three to four years.

Serra: General prosperity continues to drive the Los Angeles construction market. Many tech firms are moving from Silicon Valley to a more “affordable” location. Additionally, while some firms will move out of state to Texas, many want to stay in California—and specifically L.A., which is still seen as a major tech hub.

Carlos Serra

GlobeSt.com: Do you see these drivers continuing in the near future, or are they likely to change sometime soon?

Walker: The Orange County economy will eventually slow down, but this year has started strong and looks promising.

Kilpatrick: I anticipate the construction market will remain strong in San Diego as rents and space restrictions continue to place pressure on other coastal areas in California and beyond.

Serra: I still see a strong Los Angeles market at least for 12 to 24 months. Commercial real estate is a lagging industry, so if things slow, it won't be until six to 12 months after the economic slowdown.

GlobeSt.com: How do you envision the new tax plan affecting construction in your markets over the next year or two?

Walker: In many cases, corporations' reduced tax burden will drive investment and strategic capital deployment, and that will continue to drive activity for real estate and construction professionals.

Kilpatrick: The impact of the new tax plan on the San Diego commercial real estate market will begin to unfold as institutional investors who have been anticipating and planning for these potential changes address how leases are structured and administered. One example is including parking and other previously itemized expenses inside the lease rate to help offset the tax code changes affecting expense write-downs.

Serra: Depending on the tax structure of general contractors, these firms should see additional tax relief with the reduction in the corporate tax rate. Most of our work is in the private sector versus the public sector, but there are some changes that will affect the public-sector construction side, from the financing side (bond financing) and energy related tax credits. From a micro level, the reduced ability to apply mortgage interest deductions for federal income tax purposes could affect housing affordability and in turn reduce new housing demand in certain markets. It's difficult to really assess the impact but it could have a negative impact on the residential construction market and a positive impact on the private commercial market.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.