Lighting Market Report: Northern California
A recent research report provides insights into market sectors, design firm activity, lighting agents and work-from-home impact in the Northern California lighting marketplace.
Emerging Trends in the Northern California Architectural Lighting Industry
Author: MJ Paul, VP Sales of Omega Pacific Lighting Supply, San Francisco, CA
Summary:
Six months into the pandemic, “wait-and-see” seems to be the prevailing strategy for the lighting industry in Northern California. The uncertainty of an economic and public health emergency that no living professional has experienced before has most companies choosing to keep their market positions as-is, retaining talent wherever possible, and tepidly preparing to target undetermined customers in an already saturated LED market. California lighting firms that traditionally served the commercial office TI market are now directing their efforts to more active and reliable verticals, such as affordable multi-family residential and mixed-use projects, biotechnology, education, government buildings, and transportation. Companies that already focused on these markets are now challenged to keep their share in a growing competitive landscape.
Work-from-home seems to be an experiment that has proven that in-person human interaction is necessary to drive innovation, maintain efficiency, improve productivity, and create positive team morale. While a hybrid working environment is expected once lockdown measures are relaxed, most essential personnel will return to the office. This will probably not result in the return to pre-Covid tenant improvement construction activity, especially in San Francisco, as vacancies and general rejection of high-density urban environments may persist beyond 2021.
Finally, most respondents to this study predicted that there would be a return-to-normal that only begins in Spring 2021. The upcoming election and a reliable vaccine seem to be the turning points to improvement, with the direction of each somewhat dependent on the political viewpoint of the interviewee. In addition, affordable housing will continue to be a pressing issue for the next few years as the pandemic has not changed the need nor demand for residential stock throughout Northern California, including in San Francisco.
Purpose and Methodology:
Omega Pacific Lighting Supply commissioned this study to better understand the current Northern California lighting market status and to determine where the company will direct its business efforts and resources through 2021. This study may also be used as a current snapshot of the state-of-the industry in our area, as well as a datapoint for other participating partners to decide on their own potential go-to-market strategy through this unprecedented economic environment.
Twenty scheduled interviews were conducted with industry leaders in California across a broad range of professional lighting disciplines, including designers, contractors, agency principals, sales managers, manufacturers, and public employees. Each interview took place sometime between September 8 and September 23, and was conducted in private, with one-on-one non-recorded open discussions that lasted on average thirty minutes each. All responses are anonymous in this report. Approximately 60% of the interviews were conducted via video conferencing or in-person sessions, while approximately 40% were conducted via telephone conference. All participants were asked for a description and valuation of their firm’s current business activity compared to January 2020, and all were asked for a description of their current project activity. The final segment of the interview focused on gut-feeling forecasts, emerging markets, and expected changes based on trends and inquiries they are experiencing in the field. An individual interview summary was prepared immediately after each session, and selective verbatim responses from respondents are noted in quotations throughout this report.
Bay Area Hot Spots:
In general, lighting business activity is “basically back to business as usual” for most areas of Northern California, except for the City of San Francisco. Almost all work in San Francisco is paused, however almost all other territories, particularly in the North Bay and Sacramento, have returned to normal pace. California’s Central Valley reports most recent lighting business activity in the industrial sectors, focused around food production, packing houses, and shipping warehouses. More industrial high bay and warehousing projects are expected as quick delivery of commercial and consumer goods means more square footage demand for local affordable storage. In the North Bay, hospital projects, medical office buildings, education (K-12 and universities), car dealerships, a federal laboratory, as well as wineries are all still moving at the same pace. Residential projects in the north remain very strong, particularly single-family lighting projects, primarily due to recent wildfires.
Current Activity:
Design Firms
Nationally, architectural billing is down 17%, and some lighting designers reported as much as 50% decline of activity if firm was focused on commercial offices or other impacted markets. There were few headcount changes at Bay Area design firms due to difficulty to secure talent, however the reduction in billable hours will make this situation unsustainable. Most firms reported a hiring freeze until at least 2021, and most are “holding fast” for now, but difficult decisions regarding salaries, headcount, and benefits are looming. Projects that a TI design firm would once reject are now fully considered. Alternatively, firms focused on transportation, education, biotechnology and healthcare have seen less work reduction, from sometimes approximately +150% overdrive capacity in January 2020 to essentially 100% of preferred normal today. Boutique firms will continue to focus on affordable housing, single-family projects, and controllability solutions for individual environments, such as desks, homes, and hotel rooms. Recently, there may be possible market improvement as new architects are now reaching out to some local design firms, not just legacy clients. Project activity is increasing, and capacity of regular subs is low, which may result in overflow work for others.
Agencies and Channel:
Most agencies were not hit as hard as they expected when the lockdown began, with few reductions in headcount reported. In general, 110% or more effort is now required to maintain approximately 60% of 2019 sales. Aggressive bidding activity is up, however overall hit rates are down. All levels of the channel are getting more competitive, including rep competitors, GCs, and subs. Before the pandemic, most top-tier contractors had their “pick of the projects” but are now “back in the trenches” to earn new business. A significant decrease in stock-and-flow lighting purchases were reported, which mainly rely on business-as-usual to maintain minimal profitability. Except for Sacramento based operations, most agency salespeople continue to work exclusively from home with very few in-person visits reported in the last few months. Reps will have to be more creative to expand their line cards beyond the saturated LED market, and even a few agencies are delving into personal safety equipment and UV germicidal equipment sales as supplements to their typical lighting efforts.
Manufacturing:
Several manufacturers that are traditionally focused on commercial TI and retail lighting products reported current sales at 2018 levels and lower, and approximately 60% lower sales as compared to 2019. Commercial TI projects that do reach quotations stages require much more value-engineering cost reductions and cross-over attempts to win jobs, which necessitates more legwork to ensure only profitable business is captured. Conversely, manufacturers that are focused on government, education, roadway, and residential lighting equipment report either no change or an increase in activity compared to 2019. However, there is a fear that most of the funding for current active projects is earmarked money from previous budgets, and we will see a significant lull in spending in the 2021-2022 fiscal year. A few manufacturers are also concerned about countering a new influx of disruptive offshore products that seem to have the same quality and performance as their domestic counterparts.
Work-From-Home (WFH) Impact:
Approximately 80% of respondents agree that full-time WFH is unsustainable, and almost all respondents believe a hybrid model will prevail but will lean toward more in-office time. For specifiers and designers, it is difficult to emphasize and sketch design changes remotely compared to a conference room setting, and many young employees need the structure of the office to stay on track, learn from veterans, and grow their skills. Additionally, design disciplines require much more in-person interaction to keep projects on schedule. Local private companies are already facing real WFH compensation conflicts, such as: “Should an employee who works remotely in, say, Mississippi get paid the same as an equivalent employee at the office in SF?”
Regarding public employees now working from home, a few respondents reported that these staffers were already inefficient, and now their worsened work productivity is slowing government-controlled projects even more. Public projects are no longer expedited compared to 2019. For Caltrans employees, California’s compulsory 10% pay reduction has resulted in lost income, poor morale, and disproportionate productivity for these transportation projects, in release, movement, and responsiveness.
Market Sectors:
Commercial Offices and TI
Without exception, all respondents reported that there is a significant decline in all large technology and office TI projects in San Francisco. There are no more “juicy big box” tech office projects that have driven the market for the past 8 years. There is currently more than 7 million square feet of vacant commercial office space in San Francisco, when about 1 million is the norm. When commercial office TI work does return, there will be more private rooms and less open office concepts, and spaces may also become more modular and flexible to easily convert small footprints for various uses. Even for projects that are inching forward, clients are “pausing and reflecting”, reassessing floor plans and social distancing rules, and square footage reductions are typically the result. Interestingly, commercial office TI work for biotech companies continues to flourish on the peninsula, and these projects are addressing social distancing realities by increasing office footprints and outdoor campus sizes.
Hospitality and Retail
Retail, hotel and restaurant projects are essentially all paused or cancelled, however wineries in the North Bay continue to thrive. “Pop-ups” for retail and restaurants will become more prevalent as a commitment to long leases will be less desirable for untested start-up businesses. One forecast predicts an uptick in retail, restaurant, and hotel demand in early 2021 as many of the recently vacated businesses will eventually be replaced with new tenants, which may result in a wave of small and medium TI projects. This may be especially prevalent within high value prime locations in San Francisco and many Bay Area main streets where current vacancies are mostly due to lockdown restrictions, not from low demand or reduced consumer confidence.
Education
Education and affordable housing are parallel segments that seem to be unaffected or even boosted by the current business and political climate. Most school projects are staying on schedule as funding was approved in previous budgets and indefinite closures provide unprecedented access during daytime hours. Retrofitting older schools to CA Title 24 standards may also be a sector with longer life. Like offices, the future of educational facilities may morph into a hybrid model with students spending less time in physical classrooms.
Housing
Housing throughout the Bay Area has not slowed down, especially affordable units, and this is most visible outside of SF where there is an apparent exodus of residents from the City. Where applicable, almost all respondents reported increases in multi-family starts: approximately 80% of activity focused on affordable units and 20% on market rate developments. On Sept. 28 the Governor signed several bills supporting housing construction, but the debate on affordable vs. market rate approval policies will probably be settled through several key SF Board of Supervisor elections in November. Housing demands and projects in Sacramento, Central Valley, and northward are quite active. Interestingly, 52% of all 18- to 29-year-old millennials in the USA are reportedly living with their parents, which is the highest rate since WWII. This is creating a rise in intergenerational and ADU (accessory dwelling unit) housing construction trends throughout the territory.
Public and Transportation
Outside of San Francisco, government spending with municipalities, utilities, and Caltrans has not been affected. There is an increase in state and federal government work, courthouses, Dept. of General Services projects, etc., especially in Sacramento, and Gov. Newsom’s recent approval of SB 288 means transportation projects may now be fast tracked throughout CA. Caltrans’ increased project activity is primarily due to the unique opportunity to work on roadway projects while traffic volumes are low. A normal mix of medium and small Caltrans projects are still progressing, as well as large projects that secured funding in previous years. In the future, transportation projects will be steered to be less car-focused due to new work-from-home trends. Most activity will continue to focus on small and medium sized projects, such as streetscapes, and provisions for alternative transportation modes, such as bike lanes, pedestrian infrastructure, trails, and public transit. Solar lighting’s improved form factors, higher wattages, and lowered prices are also making this technology more viable for these types of applications.
Concerningly, long-term future funding for major transportation projects is in doubt due to significant loss of gas-tax revenue, and continued work-from-home policies that will exacerbate the problem unless alternate funding is secured. Big state and city agencies are waiting for alternative or federal funding to pay for major municipal efforts, and a long-discussed infrastructure bill from Congress would get many of these projects up and running again. FEMA and DOT projects will have more activity in 2021, and “smart cities” and controls for public works projects will continue to gain traction.
Healthcare and UV Germicidal
Healthcare will continue to grow with more consideration of human-centric technologies that address circadian rhythms, WELL standards, glare control, sound absorption and more. Almost all new UV germicidal market activity is being driven by manufacturers rather than demand from the field. There were very few mentions of projects beyond healthcare that are even interested in the technology, and even then, the current demand is very low. While interest in ultraviolet disinfection is peaking due to Covid-19, there is still general distrust in UV-C and
UV-A effectiveness and reliability. Additionally, for permanent installations, the complex control needs for safety protocols to limit potential UVC exposure is also a technological and financial hurdle that has yet to be addressed.
Potential new markets for UV germicidal disinfection are classrooms, gyms, prisons, and other spaces that can be properly vacated during exposure, and for parking garages, open offices and retail “where a lot of touching may occur.” Some manufacturers are already releasing fluorescent UV solutions which are readily available, and others are developing UV-LED solutions to integrate into their product line. In the near future, rep line cards will feature solutions for air filters, downlights, disinfection cabinets, portable units, “walk-throughs”, and UV technology integrated with architectural lighting. While the effectiveness of long exposure UV-A is still undetermined, a few manufacturers believe this spectrum will prevail as it is reportedly safer.
Conclusion:
While “wait-and-see” may be the safest strategy for most firms at this stage of the crisis, there will be a point soon where each company will need to fully re-evaluate their current direction and its long-term viability given the effect of Covid-19 in essentially all aspects of our personal and professional lives. At these crossroads, a decision will need to be made to conserve and recapture 2019 business levels through a hopeful V-shaped recovery or adjust and adopt creative measures to serve expected growth in healthcare, housing, education, and public works in Northern California.
Copyright October 2020, Omega Pacific Lighting Supply. This non-scientific study and subsequent report are for general reference only and may not be distributed or reprinted without permission from the company.
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