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Industry still reeling from bad economy, experts say

Everyone from architects to designers, contractors and brokers affected

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The impacts of the recession on architects, interior designers, contracting firms and brokerage companies continue to be felt, but there are quite a few reasons to be upbeat.

The effects of the economic slow-down on the commercial real estate market was among the topics during a roundtable discussion sponsored by Pacific Building Group at The Daily Transcript offices last week.

"Our rates are still severely impacted," said Amy Morway, ID Studios principal. "There was a huge increase in activity in the first quarter, but there still is a long way to go."

Kevin Heinly, a managing director with the Gensler architectural firm, said large jobs are still few and far between.

"We are seeing a lot of small projects on a month-to-month basis, Heinly said. “It's been pretty choppy."

Architects and other service providers have been known to reduce their fees in an effort to undercut their competition, but Paul Schroeder, a principal with Architects Delawie Wilkes Rodrigues Barker, said such a "race to the bottom" becomes a self-defeating exercise.

"That's a game we try not to play," Schroeder added.

As for where the opportunities are, there is no single answer. Schroeder said while military projects tend to be winding down, multifamily projects are just gearing up as many are unable or unwilling to make that move from the apartment to the single-family home.

"We are also doing a lot of Indian gaming," Schroeder said.

Indian gaming projects designed by Delawie Wilkes include the work on the 160,000-square-foot Jackson Rancheria Casino east of Sacramento; the Agua Caliente Casino Resort in Rancho Mirage; and the Pechanga Casino (700,000 square feet) and Resort in Temecula.

Schroeder added that along with upgrading casinos and the hotels that might go with them, Delawie Wilkes has been repositioning stand-alone hotels that were impacted by the recession as well.

"Life science properties are also being repositioned as well," Heinly added.

When it comes to building out the vision, Jim Roherty, president of the Pacific Building Group construction management and contracting firm, suggested competition for the jobs and tenants has not abated. Roherty said with this reality, contractors must be willing to accept smaller jobs than they might have in the past.

Jerry Jacquet, a principal of the Meissner Jacquet property and asset management firm, said it is hardly surprising that smaller jobs are the bread and butter of many companies today.

"It all adds up. Clients are really careful about how they spend money these days," Jacquet said.

Morway agreed. "Most tenants have been holding onto their purse strings," she said, adding that her firm has landed an interior design contract for 180,000 square feet in three buildings she declined to identify. "We're still not completely in the comfort zone."

Roherty said the good news for contractors is while the jobs are generally smaller, most construction material costs are running at about 20 percent less than they were five years ago.

For those who would rather buy than build out a space, REITs continue to be able to outmaneuver most of the big asset players, with The Irvine Co. being a notable exception here.

Brian Galligan, Kilroy Realty (NYSE: KRC) regional asset manager, whose firm owns more than 5 million square feet of San Diego-area office space, said "REITs are so strong because they are the best vehicles for raising cash."

"They can raise cash quickly, don't have the reliance on loans, and they can be a little more nimble. They can be a white knight," Galligan said.

Galligan added that Kilroy has managed to raise more than $1 billion for acquisitions within the past two years. While some of those acquisitions were here last year, Galligan expects Kilroy will increase its presence in San Francisco and Seattle before refocusing here.

When asked why Kilroy has invested more in San Diego County office buildings than in any other market, Galligan said it had to do with a well-educated employee base, a strong biotech and medical presence, the military presence and the quality of life here.

Galligan said another secret to his firm's success is it doesn't buy properties in central business districts.

Kilroy, like any landlord, still needs to fill its buildings, and Galligan said it is gradually becoming easier as the economy improves.

Brunson Howard, an Irving Group vice president, noted that the fact that Qualcomm (Nasdaq: QCOM) continues to expand around its Sorrento Mesa headquarters is a very strong sign.

Kellie Hill, a Cassidy Turley vice president of project development, said she is encouraged that while some military work has been winding down, Northrop Grumman's (NOC) unmanned aerial vehicle program is as busy as ever, and needs to grow along the Interstate 15 corridor to meet the demand.

The commercial brokers who work to fill such buildings have done a lot of moving around lately, and some of the machinations have been at the top.

At the end of last year, John Frager, who had headed Cassidy Turley BRE Commercial here, was named executive managing director for CBRE's (NYSE: CBG) San Diego region. He succeeded Mark Read, who transferred to Voit Real Estate Services as its local executive managing director working out of the Irvine office.

Howard noted that these aren't the only changes. Commercial brokerage firms that seemed to start merging and otherwise changing allegiances around the time Cushman & Wakefield purchased Burnham Real Estate Services in early 2008 have seen many changes since.

Grubb & Ellis teamed up with BRE Commercial before those two entities parted ways, and Cassidy Turley also teamed up with BRE. Within the past few weeks, Cassidy Turley here has dropped BRE from its name but retains the relationship, and a U.S. Bankruptcy Court judge approved the sale of Grubb & Ellis to BGC Partners Inc. for an undisclosed sum within the past few weeks as well.

"We're not done with the M&A (mergers and acquisitions) process," Howard said.


Roundtable Participants

Brian Galligan, Regional Asset Manager, Kilroy Realty

Kevin Heinly, Managing Director, Gensler

Kellie Hill, VP of Project Development Services, Cassidy Turley

Brunson Howard, Vice President, The Irving Group

Jerry Jacquet, Principal, Meissner Jacquet

Amy Morway, Principal, ID Studios

Jim Roherty, President, Pacific Building Group (sponsor)

Paul Schroeder, Principal, Architects Delawie Wilkes Rodrigues Barker

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