City Grill

Stephen Friar
Regional Director of Planning, Western US
Hensel Phelps

Like much of the California region, San Diego has been a hot spot for the construction industry in the recent past.

“Over the past several years, San Diego has been a place of focus of the AEC community,” Friar says. “Project opportunities in health care, aviation, research, education and industrial markets have been abundant.”

Still, there are headwinds for the industry to contend with, although their severity is difficult to gauge.

According to Dodge Data & Analytics, construction starts in the San Diego region slipped by a third to just more than $8.9 billion last year following a gangbusters 2021. That trend mirrored the state, which saw construction starts last year total $52 billion, a 10% decline from 2021 figures.

In San Diego, starts are expected to hold steady through 2023 and increase slightly next year, data from Dodge shows. While the trend has held across most of the major construction categories, the overall market is expected to remain robust in the region.

“There is optimism surrounding the health care, higher education, DOD and city/county municipal work, and we expect the outlook to remain strong,” Friar says.

A good example of the opportunities in education is UC San Diego’s $537- million, 972,000-sq-ft Ridge Walk North project set to start construction later this year. Hensel Phelps is part of the design-build team that also includes EYRC and HMC. When completed, the Living and Learning Neighborhood will provide housing for more than 2,400 students as well as academic and supporting mixed-used infrastructure.

According to Hensel Phelps, the structures will all be cast in place at the site on the main campus and be self-performed, making it the company’s largest self-work project in Southern California.

The concerns clouding the construction outlook, according to Friar, have to do with the national economic issues. The boom in 2021 helped companies weather the industry’s woes that included materials shortages, cost hikes and labor issues. Now the question is how much inflation and possible interest rate increases may impact project financing.

“There has been some hesitation in the private sector in terms of projects being financed,” he explains. “Fed rate increases coupled with mixed economic data has caused some projects to pause.”

A scenario involving continued inflation and interest rate hikes would accelerate any pullback in the private market, Friar says. “So it may be a year or more before relief comes to private sector funding.”

Yet opportunities exist in far Southern California. Two of the largest starts to break ground in the state last year were in San Diego: the $400-million multi-mixed-use West tower downtown, the $310-million Phase II of the Aperture del Mar life sciences cluster and the $122-million headquarters for BioScience Properties.

Moreover, some non-building sectors, such as transportation, environmental public works and electric utilities—although comparatively smaller in the region —have shown steady growth since 2020 and are projected to continue to do so. These are a priority for the region to accommodate growth and trans-border trade while also meeting the state’s aggressive greenhouse gas emissions reduction goals.

To meet these needs, federal and state funding has been made available. The San Diego region has been the recipient of $421 million in IIJA funds, according to Caltrans. In May, San Diego Metropolitan Transit System (MTS) received its largest ever Transit and Intercity Capital Rail Program (TIRCP) grant from the state, totaling just over $60 million. Yet a county-wide transportation sales tax initiative failed to amass sufficient signatures to make it onto the ballot last year.

And despite the anxieties among private sector clients, Friar says, there are plenty of reasons to remain optimistic about the business prospects in the San Diego area.

“Despite some of this recent uneasiness, we still see a tremendous amount of opportunity in key markets,” he says.