Construction Archives

November 20, 2023

Commercial contractors need a banking partner at their side to navigate opportunity and risk

By Rebecca Fabisch Miller, Executive Vice President and Commercial Banking Director, River City Bank

With a still-vibrant level of activity and reasons for optimism, Northern California’s commercial contractors remain healthy and strong. Many contractors in the region enjoy a strong backlog in the near-to-medium term.

But longer term, questions remain, as they always will in this cyclical – if not sometimes volatile – industry. Faced with fluctuating economic conditions, continued rising interest rates, inflation, a tightening labor market, and unpredictable volatility in the coming years, planning for the more-distant future remains a challenge.

The regional construction industry, estimated at $9.1 billion in 2023 and expected to increase next year, is still likely to fall short of the levels it reached in 2021, according to recent projections. That makes strategic planning difficult, especially for contractors who must weigh the capital costs and minimum level of liquidity they should maintain on their balance sheet.

As an experienced banker with a diverse portfolio of contractor clients at River City Bank, I know the industry has been here before. I’ve seen up close what works, and what doesn’t in positive but uncertain times. And with the western part of the U.S. the only area in the nation to see an increase in construction backlogs this year, I’m also optimistic in the short term.

Still, there are several areas that commercial contractors should prioritize to maximize opportunities and minimize unexpected risks in the long term.

Leveraging cash flow

For the first time in decades, deposits can generate additional revenue. If you’re a commercial contractor with funds sitting in the bank, you can finally earn a meaningful return on your deposits. In fact, River City Bank has several programs that allow its clients to maximize their deposits, while ensuring that up to $150 million has full FDIC insurance. Money market accounts and certificates of deposit can deliver especially attractive interest rates these days. Even retention accounts can generate sizeable income.

Keep in mind, though, that with interest rates rising, commercial contractors should also be careful with capital expenditures. Take care to manage excess cash carefully and avoid incurring unnecessary debt in a period of economic flux. Now is the time to consider renting and/or incurring short-term leases if new equipment is needed to work through the current level of backlog.

Develop a hiring pipeline

Today’s economic environment is unusual in that it is marked by low unemployment. This is critical in the construction industry, where the unemployment rate has fallen below 4% and hiring skilled workers is a challenge.

It’s important to develop a hiring pipeline so you don’t end up overpaying for talent as you compete for new employees. You might consider an example from another industry. At River City Bank, for instance, we recruit at university job fairs and offer a voluntary “banking academy” to teach commercial banking to college students and develop the next generation of talent. We also have a robust summer internship program that often results in a job offer.

That approach can work in any sector. The Sacramento Region Builders Exchange, for example, has similar efforts to entice new people into skilled trades. Contractors would be smart to invest in youth programs and leadership training now to build for the future. One potential source of workers is the new charter high school for the trades in Sacramento, which opened this year.

Plan for succession

Nobody wants to work forever. Contractors need to plan for succession, so when they do turn over the company to new owners, the company doesn’t miss a beat or a client. Some of the best transitions I have witnessed had a succession plan in place as early as 15 years prior to the sale to the new generation of owners.

Contractors need to identify the next generation, then coach and mentor them for their respective future leadership roles. Mentorship programs help create an environment of sharing years of knowledge from the folks about to retire with the newly-hired, younger employees.

As part of this planning, companies should work with their bank early to figure out an appropriate debt structure to facilitate a company sale. Owners don’t want to walk away from something they’ve spent years building without adequate compensation, but they also need to leave behind something of value that can survive.

Your bank is your partner

Many commercial contractors don’t think of using their banker as a true strategic partner, the same way they would with their surety, CPA, and attorney. But they should. If you’re changing your corporate structure, for example, you call your lawyer. Similarly, any operational strategy you pursue will affect your finances. When that happens, you should talk to your bank.

At River City Bank, we have the experience and a portfolio of relationships large enough that we’ve seen the pitfalls and benefits of many strategic actions. Among the many things we’ve learned is that it’s important to stick to what you know. We’ve seen companies bid on larger jobs or those outside of their normal course of work only to lose money because they lacked expertise.

At our bank, we also focus on what we do best – and that is work with you to find solutions for your business. The construction industry is challenging enough. It’s important to find a partner that can help bring stability and success for years to come.

To learn more about our commitment to nonprofit organizations in our communities, or to inquire how we might provide services that support your mission, please visit us here or contact one of our relationship managers at (916) 567-2899.

With assets of over $4.3 billion, River City Bank is the largest independent and locally owned and managed bank in the Sacramento region. With a 50-year track record of success, eight branches, an office in San Francisco, and a presence in Southern California, the bank is rated as one of the strongest in the country.

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Rebecca Fabisch Miller has spent her 30-year commercial banking career in Sacramento, working as a relationship manager and regional director at several major banks. She earned her MBA from the University of California, Davis, and has an undergraduate degree in international business and marketing from California State University, Sacramento. She is the treasurer for the California Forest Foundation and has been involved with many local charities.

December 2, 2022

Supply-and-Demand Imbalance Creates Industrial Real Estate Frenzy

By Dan Franklin, Director of Commercial Real Estate, River City Bank

Often operating in the background, the industrial real estate sector is in the midst of monumental shifts.

The pandemic radically changed the way consumers receive goods and services. Increased online ordering and an explosion in data streaming have resulted in increased demand for warehouse space fulfilling retail orders direct to consumers and data storage centers to support streaming services.

At the same time, warehousing and production operations, which for many years functioned based on “just-in-time” delivery models, have shifted toward much larger supply inventories to function in the unpredictable supply chain environment revealed by the pandemic. And logistics providers now need more distribution centers to move goods around. All of this has contributed to a tight industrial real estate market and record-setting growth in rental rates.

Just ask Chuckie Lyons, owner of El Segundo-based real estate development and management company Lyons and Lyons Properties, which manages approximately 70 industrial properties spanning more than 800,000 square feet, all in the Los Angeles region. Although Lyons has been in business for decades, he’s still surprised by the strength of the industrial real estate sector today, particularly in his region, where the aforementioned trends are the most pronounced.

“I’ve never seen rental growth like this,” he told me recently. “I see it as population and internet-driven retail demand, coupled with a limited supply of industrial-zoned land due to decades of cities downzoning their industrial-zoned land to retail and residential.”

Just how hot is this industrial real estate market? Consider that vacancy rates are the lowest in the nation at close to zero, and rents and sale prices have seen double-digit increases over the past several years. Research shows a 19.1% increase in price per square foot year-over-year in Los Angeles County alone, according to a report from CoStar Group.

Properties close to the major West Coast ports like Oakland, Los Angeles, and Long Beach have been primary beneficiaries and have seen the biggest gains. But there are spillover effects for industrial properties outside these core markets, too.

Unprecedented Tight Supply

Lyons established his firm in 1979, right after the 1976 passage of California Proposition 13. He remembers the property tax rate in the city of Los Angeles being 2.7% in the mid-1970s. Prop. 13 cut that rate to 1% – a huge cut to the government property tax base – plus it drastically limited future increases in California property taxes. That led to cities forming redevelopment agencies to incentivize developers to build more retail and residential to increase those cities’ retail sales tax to replace the lost property tax revenue. Since 1976, Lyons estimates there is 25% less industrial-zoned land left in the greater LA/Orange County/Inland Empire area cities, and yet the population there has more than doubled.

This situation isn’t likely to improve anytime soon. In general, new development takes a year or two before it’s ready for occupancy, and given the demand dynamics, any new construction is quickly absorbed. Desirable areas like Southern California lack land that could be developed for industrial use, given zoning laws. And because of the specific physical requirements that industrial tenants have, like necessary space for loading and unloading, it’s hard to retrofit older buildings to meet those demands.

Developers are working hard to increase supply where they can, but most of those new development sites are in the outlying areas such as the eastern Inland Empire. Very few are in the more populated and port-adjacent coastal California areas where there is the most demand.

Insatiable Demand for Space

Demand for industrial real estate started to outpace the available supply well before the pandemic. Call it the “Amazon effect.” The shift toward e-commerce has meant that companies need more warehouse space to accommodate more goods being shipped. COVID-19 accelerated that trend beyond expectations. In the first quarter of 2021, e-commerce sales jumped 46.7% over the year prior and have continued to grow from these elevated levels.

From an industrial real estate standpoint, that means the economy needs more industrial spaces to support this additional online activity, everything from warehouses to distribution centers to data storage, and even flex spaces that can accommodate a range of activities. At the moment, there just isn’t enough supply to meet this surge in demand.

An Overheated Rental Market

Naturally, the tight supply of industrial real estate coupled with huge demand means that rents are rising rapidly, creating an unusual rental market.

“There are last-mile area industrial properties in LA with lease contracts now expiring that were written five years ago. Those leases typically called for fixed rent increases of 3% a year. The current market lease rate in most of those buildings is close to double over the last month’s contract rent of those five-year deals,” Lyons said.

Tenants have responded in a number of ways. For example, some tenants are trying to make commitments to lease space earlier in the process, or they might be leasing more space than they need today as a cushion against future supply constraints. “I’ve also seen current tenants attempting to lock in leases as long as possible well in advance of the expiration of their current leases,” Lyons mentioned.

Landlords have responded with strategies of their own. For example, some are moving away from the industry practice of pre-leasing space that is coming available. Instead, they might try to wait until a building is almost ready for occupancy before setting rental rates in case market rates are higher at the time of delivery.

Lyons also uses different incentives to get tenants to renew leases early. “We sometimes do that to increase our borrowing capacity so that we generate capital to do new deals,” he explained.

But not all landlords are in a position to pass on inflated asset prices to tenants. When purchasing an occupied industrial building, current tenants are already locked into existing leases, typically three to five years, and they may not have the same relationship with tenants to get them to renew early. In those instances, property owners might have to wait until those leases roll over to institute rental rate increases. Will these tenants be willing to pay such elevated rents as their leases roll over, or will they consider moving to smaller markets where they can rent for less?

Near-Perfect Conditions for Appreciation

Rapid rental growth fueled by lack of new supply and incredible demand – coupled with tremendous liquidity remaining in the markets following the enormous federal stimulus during the pandemic – has caused market cap rates in this region to fall 23% over the past year to just 4.15% based on current market rent, according to reports from CoStar Group. And what makes this trend even more impressive is that it occurred during a time when the 10-year Treasury yield essentially doubled from ~1.5% to ~3%. This would normally cause cap rates to rise to allow CRE investors to maintain the same equity risk return premium. The fact that it went the opposite direction suggests industrial real estate investors see minimal downside and a lot of upside potential in industrial rents.

“Everybody is seeing how quickly industrial rents are going up, and there is no vacant industrial land, so they’re betting on that and buying up existing buildings,” Lyons told me.

Other Industrial Markets Also Performing Well

Photo of Lyons & Lyons Properties signage

For developers like Lyons who’ve been in the business for many years, the past few years have been very good. The investments they made several decades ago are paying off with higher rents as tenants have fewer choices. Lyons is close to 100% leased for his properties. But it’s a different story for those looking to add to their portfolios. Finding properties that aren’t environmentally challenged or overvalued has become a Herculean task.

As prices continue to soar in preeminent areas of Southern California, smaller markets are starting to see an uptick in demand. The Inland Empire, near Los Angeles County, has been a primary beneficiary. But so, too, have other Western locations like Phoenix and Salt Lake City, which are farther from ports but have more affordable spaces.

Not surprisingly, prices have increased. In the Inland Empire, where absorption rates are low because of a dearth of supply, asking rents more than doubled over the past year and rose 13.7% in the second quarter alone. In Salt Lake City, average asking rents were up 25.5% since the start of the pandemic as of this year’s second quarter as total vacancies dropped and are now hovering at just more than 2%.

Proceed with Caution

The market dynamics driving the frenzy in industrial real estate show no signs of letting up, and industrial investors should have no problem leasing space in the near term.

But a career banker would be remiss to not also call out the risks. The future is always uncertain and trends can reverse, sometimes abruptly and dramatically. A recession induced by inflationary concerns could slow down or reverse these trends, and rising interest rates could materially increase cap rates and, therefore, deflate values.

Many industrial properties being purchased today already have negative operating leverage whereby the cap rate is lower than the interest rate on the debt. Without rental rate growth, this type of investment is destined to be a dog in the portfolio.

Buyers should tread carefully. They’d be prudent to be selective in their tenant mix and build in appropriate rent increases to cover these elevated prices. And when it comes to debt, it’s key to avoid overleveraging in this unique market and consider mitigating interest rate increases, perhaps by financing assets with long-term, fixed-rate debt.

Dan Franklin manages all of River City Bank’s commercial real estate origination activity throughout California and the western United States. Since joining the bank in 2008, Dan has served in various commercial banking roles, including years as Commercial Banking Director, Business Development Officer, and Relationship Manager. A recipient of the Chartered Financial Analyst designation, Dan received his undergraduate and MBA degrees from the University of California at Davis.

October 23, 2019

Client Profile : Northgate Ready Mix

CEO Troy Soiland runs Northgate Ready Mix, a family-owned and operated business. After buying the name of the company and the client list from the previous owner in 2010, Troy also purchased three trucks and sought to modernize and rebrand the business. Almost immediately, he began searching for a larger location and shrewdly began investing money during a time when economic growth was at a standstill. What started as a three-truck, five employee operation has grown to 30 trucks and 39 employees.

Located in Windsor, CA, Northgate supplies quality concrete throughout the North Bay. Created with premium, locally-sourced aggregates and sand, Northgate’s product is created with its state-of-the-art computerized plant. The process ensures batch consistency and also facilitates the use of the latest admixtures.

We caught up with Troy and were able to speak with him about Northgate Ready Mix and his family’s ties to the community. He talked to us about the rapid growth of his company and how much has changed since he bought the use of the company name and customer list nine years ago.

The Soiland family has solid ties in the North Bay. Can you tell us a little bit about the family’s business history and how it has helped shape the surrounding communities?

The Soiland family has deep, deep ties to the North Bay building community, and it spans three generations. My father was a pipeline contractor, sand and gravel operator, quarry operator, and a land developer in the Marin and Sonoma County region. He was also politically active locally.

Besides Northgate Ready Mix, our extended family is involved in four different quarry operations, an asphalt supply company, a general engineering company, two different composting and topsoil companies, two portable concrete and asphalt recycling companies, two different heavy equipment repair and maintenance companies, a major commercial building contractor, and an industrial property management company. I have siblings who serve on local bank boards and planning boards of local government.

Each of these related businesses is owned and operated by the individual family members who work in them. We are not one big company. Growing up, we were given tools and provided opportunities, but all businesses sprung from personal inspiration and motivation. Very little was inherited.

Northgate Ready Mix is family-owned. How many people from your family are involved in the business? What are their roles?

Mix is a concrete supply business founded back in 2010 by myself, and my brother Dean. My wife Dawn and I are active in the daily operation and administration of the company as President and CFO, along with our oldest daughter. Both Dean and his wife Belinda are critical to the operation as the aggregate supplier, financial support, and as board members.

A fleet of Northgate trucks lined up in parking lot

What were your most important projects?

Northgate Ready Mix is fortunate to have been involved in numerous bridge projects, wineries, breweries, subdivisions, and countless wildfire rebuild of single-family dwellings. But I think the most memorable projects are the ones that “took you to school.” You know, the ones that gave you sleepless nights wondering if you would be able to pull it off. As with any business, when you try something new, mistakes are bound to happen. But once we completed those projects and learned what we can and cannot do, the projects following run more smoothly, and you can take on more of the same types of projects.

What do you think are the key ingredients that have made Northgate Ready Mix so successful?

I believe that a big part of what makes Northgate Ready Mix successful is our community connection. As a proud member of this family, our name and reputation are very important. We service customers frequently that we’ve known for decades through school, church, or related business. In part, due to our community connection, I feel a sense of duty to uphold the highest standards in the industry.

Another important aspect of our success has been innovation. We have always sought to reuse and up-cycle at every opportunity. We have developed markets that allow us to reuse all our returned and leftover concrete by crushing it back to pieces less than 1 inch in size and shipping it to job sites in one form or another. We capture all our rinse water on-site and reuse it. We also have the capability to capture and store our rainwater for use in concrete production. We are always trying to innovate and make the most of the resources at our disposal.

What brings me the greatest satisfaction as a company owner is when a customer comments regarding the professionalism of a driver or the office staff, the first-class equipment we send out each day, the respect we have for providing excellent service, or the quality of the finished product. These represent our values. The central theme is to take pride in what you do and strive for excellence.

Northgate Ready Mix strives to provide the absolute highest level of customer service. The company makes it a point to cater to customers of all sizes and seeks to provide the highest level of customer service, taking pride in every job.

To learn more about Northgate Ready Mix, visit their website at northgatereadymix.com.

July 5, 2018

An Afternoon with Matina Kolokotronis

Executive-Forum-with-Matina-Kolokotronis_1500x480

River City Bank invited Sacramento Kings’ Matina Kolokotronis to speak at their recent Executive Forum. Kolokotronis is the Chief Operating Officer and the only woman in the NBA to hold the titles of both COO and President of Business Operations.

She acknowledged the importance of being a mentor, breaking barriers, and accepting the challenges that influence change. Addressing a roomful of Sacramento’s business leaders at the Sutter Club, Kolokotronis gave insight on the success of the Golden One Center and her 20-plus years with the Kings organization. She shared her story as a female executive in a predominantly male environment and the significance of blazing a path for the next generation.

She acknowledged mentors who inspired her to have work-life balance, where you can have a fulfilling career and raise a family. Kolokotronis also credited former NBA Commissioner, David J. Stern, on setting the tone at the highest level and for having the vision to be an inclusive organization.

Paul McClure of Runyon Saltzman and Iain Mickle of Boutin Jones

Sacramento Kings COO, Matina Kolokotronis, and SVP of Communications, Joelle Terry

Erika Avanova and Linda Bergaus of Life Assist with Janette Moynier of River City Bank, Carolyn Lewis of The Lewis Group Inc., and Valerie Park of Nathan Property Management.

Eric Johnson of GNT Solutions, Mike Newell of HP Hood LLC, and Yasmin Seyal of EvinceMed Corp.