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Construction Costs Are Stabilizing (And Lower)

The Bureau of Labor Statistics put out its monthly report on inflation last week and it had good news for the construction industry. The global demand freeze since March has neutralized most of the supply imbalances

Two years after nonresidential building inflation hovered at 8%, the producer price index (PPI) for nonresidential building jumped 0.2 percentage points to a mere 1.9% year-over-year. That PPI was flat from September to October. Material prices were less volatile across the spectrum, with most of the month-to-month variance between zero and one percent, up or down. The few outliers mostly related to the decline in oil prices or the shift in lumber markets. Moreover, all of the changes greater than one percent were price reductions.

This environment of falling material prices is supportive of the recovery in construction that should gain strength as multiple vaccines become more widely distributed throughout the first half of 2021. Unlike during the 2003-2004 recovery, when spikes in steel and oil prices derailed many projects (remember Children’s Hospital anyone?), the current environment should enable recovery rather than hinder it.

Bidding and proposal activity has picked up in recent weeks but remains slow. Because of the time of year, however, it’s tougher to judge whether or not this is picking up to a more normal pace (which would be slowing to the holidays). Architects and engineers are hiring and reporting more RFPs. Contracting volume in October topped $300 million for new work. That’s about normal for the season. Election results have provided cheer to investors, despite warnings from the right that a change in the White House would chill recovery. The COVID-19 outbreak now underway is going to bring disastrous public health results over the next 60 days, I fear, but the other side of the pandemic is in sight. That seems to be offering optimism about 2021. Extending the bridge to the rollout of vaccines would build a strong foundation under the recovery in 2021, perhaps even assuring that growth booms in the second half of the year. Congress seems unwilling to unite to build that bridge. Recovery doesn’t depend on it but the strength of the recovery in 2021 does.

Civically Inc. and Bridging the Gap LLC selected A. Martini & Co. as general contractor for the $6 million Hunter Building re-use in Wilkinsburg. Wexford Science + Technology reported that its new $100 million life science research building at 5051 Centre Avenue should start next spring. Turner Construction is the CM. Massaro Corp. is budgeting the $51 million Fifth & Dinwiddie project. Mele & Mele & Sons announced that it is building a new 38,000 square foot office and maintenance shop at the RIDC City Center of Duquesne. Goldfish Swim Club is taking bids from A. W. McCay, A. Martini & Co., & Rossman Hensley on its $2 million buildout of the former Community Supermarket space in Fox Chapel Plaza. Mortenson is taking trade package bids Dec. 8 on the $45 million Lasch Building expansion/renovation at Penn State.

Why the Fourth Quarter Matters

If you’ve watched enough college football over the past five years or so, you have noticed a number of teams gathering at the end of the third quarter and holding four fingers up as they prepare to start the fourth quarter. It’s a rallying cry to finish the game strong, a recognition that how the team finishes the fourth quarter matters. That visual works for the U.S. economy right now. Congress should be holding up four fingers, especially as it appears likely that a couple of vaccines could begin rolling out by the end of 2020. The literal end of 2020, December 31 is looming as an economic cliff that could set recovery back even as the COVID-19 virus is contained. In most years, the period from now until New Years Day is particularly unproductive for Congress. In lame duck years, that’s more so; and in lame duck presidential years (like 2020), the tendency is for next to nothing to happen. With Republicans trying to use the lame duck to ram through last-minute appointments, the attention of Congress should be diverted long enough to address the looming expiration of key safety net measures. If a vaccine to end the pandemic is truly looming for 2021, the nascent economic recovery should be given as much fuel to grow as possible.

The economic recovery has been judged to be durable because of the relatively strong rebound during the third quarter and the (apparently) short runway to a viable vaccine to end the pandemic. The timing of this assessment is particularly worrisome, however, as we are entering a period of heightened risk, even as the delivery of a vaccine seems likely to be sooner than expected. Setting aside the unknown impact of the surge in COVID-19 infections as winter looms, there are known risks that could sabotage the economy just ahead of a recovery. More than 12 million unemployed persons will lose compensation on December 31 without an extension or passage of further assistance. On that date the moratoria on foreclosures, student loan payments, and evictions expire. Household savings will have been tapped for an additional three months since the rosy third quarter estimates.

Most of the aid or stimulus programs passed in 2020 were meant to be bridges to the vaccine. When the CARES Act was passed, there was no realistic estimate of how long that bridge needed to be. That fact made it difficult to gain agreement on subsequent aid legislation. As the holidays approach we have a pretty clear idea of the length of the bridge. Failing to extend the safety net for tens of millions may not prove to damage the recovery but, with the duration of another round of aid being 90 days or so, providing that safety net assures that there will be demand for a recovery that will be sorely needed. We don’t need another extended weak recovery a la 2010-2015.

JLL’s chief economist, Ryan Severino, discusses the case for more stimulus in his weely email  today. Former U.S. Treasury Dept. economist Ernie Tedeschi talks a lot on the subject on Twitter @ernietedeschi. The upshot of the current situation is that the spike in COVID-19 hospitalizations and deaths is driving economic activity lower just ahead of a time when the unemployed are going to become vulnerable (along with a lot of low wage earners in the hositality industry). Personal savings has soared since the pandemic started. The current savings rate remains at 14% (It was 1% ahead of the Great Recession by comparison). There is $6.5 trillion in money market accounts looking for a place to deploy. That capital will fuel the supply. The demand will come from consumers, who provide 70% of GDP. They, and the economy, are vulnerable as the year ends. The chart below shows just how much people have altered their behavior and spending as the COVID-19 cases spike again. Extending the safety net another 90 days could make a world of difference to an economy in the midst of a vaccine rollout on April 1.

Data gathered from iPhones show that consumers have curtailed activities again to the levels seen during the spring shelter-at-home period.

One sector of the Pittsburgh construction market that has been surprisingly disrupted by the pandemic is multi-family. The economic disruptions caused by COVID-19 were expected to cause some pain for apartment owners but the case for apartment development should not have been dented. If anything, the economic case for renting instead of owning grows during recessions. It doesn’t appear that it has been the economic justification that has slowed multi-family construction, but rather the execution of plans to build. There is still a pipeline of several thousand units in development but roughly 1,200 to 1,500 units that were scheduled to start in 2020 aren’t going to get underway until next year. When Al. Neyer Construction starts site work on the 150-unit 5803 Centre Apartments in December, the project will bring the total for 2020 to about 950 units of new construction, about half what was forecasted. The good news is that the business case for the 1,200 or so units that were delayed has not eroded. Apartment construction in 2021 should return to the 2,000-plus unit pace again.

Neyer is currently taking bids on the 5803 Centre project. Elford Construction has been taking bids on the 370-unit Brewer’s Block Apartments in Bloomfield. Elford is bidding to partner with RDC Design + Build on that project. Massaro Corporation was selected as CM for Conemaugh Hospital’s $50 million Building D project.

The Fog Begins to Lift on 2021

The election is behind us. Confidence is growing in a spring delivery of an effective vaccine(s) to begin getting us past COVID-19. Along with better news for higher ed and healthcare since the fall, the recent developments are giving a clearer picture of the construction outlook for 2021. And it’s better than was expected 60 days ago. Escalating increases in hospitalizations for COVID-19 are likely to give the economy another punch to the gut over the next few months; however, assuming a vaccine is in circulation in early 2021, there is visibility on a recovery that should boost bidding and contracting next year.

The chart reflects Tall Timber Group’s forecast for the next two years, following a steep (perhaps 30%) decline in contracting in 2020. The amount of construction put in place may not decline nearly as much in 2020. That’s good news for contractors and suppliers. How the contracting unfolds in 2021 will determine how much better or worse next year is financially for the construction industry. Hospitals are thus far seeing their critical November/December elective surgery schedules hold up. College enrollments are in line with 2019. Anecdotes suggest that architects involved in healthcare and commercial real estate have ramped up already. That’s a good sign for spring bidding. Bear in mind that construction projects mostly won’t need to wait for immunization to start work. There just needs to be confidence that a corner will be turned by mid-year or thereabouts.

Owners will also want to see a corner turned on economic demand. The next few months will be critical to that as well. There are good signs that demand can roar back once the fear of infection subsides. U.S. households increased their savings deposits by $2 trillion from February to October. Capital has been amassing on the sidelines, whether in the form of the stock market or private equity. Unlike in 2010, there is dry powder to deploy. Recent data suggests that the economy still needs a bridge to get from here to a vaccine. Ideally, the lame duck Congress would pass further safety net measures. Failing that, it would be incumbent upon a new administration and Congress to act immediately to prop up those who will suffer from what is sure to be decreased economic activity this winter.

There is reason to be anxious about the timing of more aid from a demand point of view. Should an effective vaccine be delivered on a large scale during the first quarter of 2021, there would likely be a big jump in demand for economic activities that have been hard hit by the pandemic. That means travel, restaurants, entertainment (theaters, sports, concerts) would get a boost in revenues. The potential fly in the ointment is that demand would be dampened by lack of funds. The capital on the sidelines waiting to be deployed isn’t what will drive the consumer recovery. The $2 trillion in increased savings that consumers have built throughout 2020, even as many have lost jobs, represents 11% of GDP. That’s powerful fuel for a recovery. Propping up consumers for the last three months of the year becomes even more important when you consider that, and when you look closely at how the unemployment compensation picture changes on December 31.

Unemployment claims slowed again in the most recent week, but remain at 709,000 for first-time claims. Digging below the headline numbers, you can see a potentially damaging wave building. The greatest share of the 21.7 million out of work at the end of October are those receiving benefits tied to COVID-19. There are two categories of pandemic-created unemployment compensation, totaling 13.6 million people. Those receiving Pandemic Emergency Unemployment Compensation (PEUC), which was part of the CARES Act, have exhausted regular unemployment compensation, and make up 4.1 million claims. Another 9.5 million self-employed have been receiving Pandemic Unemployment Insurance because they aren’t eligible for regular unemployment compensation. The numbers are growing weekly for PEUC claims, as regular unemployment compensation from mid-year expires. Because of the timing of the pandemic, the majority of these still-growing groups will see benefits end by December 31. Without aid, 8% of the total workforce will be without income in January. From that point, the reserves begin to deplete, robbing the recovery of fuel. The prospects for 2021 look good, but we’re not out of the woods yet, with or without a vaccine.

The Builders Exchange reports that the new Plum Municipal Center is out to bid, due December 8. Massaro Corporation was selected as construction manager for the $6 million expansion of the Pittsburgh Glass Center and the $2 million Holy Family Institute project.

Some Insight on Downtowns During COVID-19

Don’t read any further if you are looking for insight into the office market or long-term migration trends in or out of cities. We don’t know yet. We won’t know until COVID-19 is no longer a public health threat. (If you’d like to read what some smart people think about the office market, read the feature article in the Fall DevelopingPittsburgh.)  After six months of data, however, it’s possible to begin to see the impact on commercial real estate located in downtowns. Wells Fargo Economics Group published research on the debilitating impact of the pandemic on central business district (CBD) businesses that is worth a read.

The upshot of the report is that occupancy in downtown workplaces is so much lower that the ripple effect is reaching wider than most of us think. It’s easy to understand that bars, restaurants, and hotels will be hard hit by the lost traffic due to work from home. Travel is picking up slightly but it does not appear that the uptick is being felt in CBD hotels. The impact on apartments is more derivative. Downtown apartments are popular for a variety of reasons but central to their appeal is the proximity to work. People who rent apartments are willing to pay a bit more for a downtown location. With work from home rendering the proximity attraction null and void, it appears people are choosing to move to the suburbs to save a few bucks or get more space for the buck. I don’t have any local data to see how that’s playing out or not in Pittsburgh, but the chart below show the sharp divergence in trend for suburban vs. urban apartment vacancy.

Pittsburgh’s downtown has been impacted like most major metropolitan areas. Commercial office brokers estimate that buildings are at about 20% of the normal occupancy. That means most workers aren’t coming into downtown (NOT that there is an 80% vacancy rate!).Until that changes there will be no recovery to normal for hospitality businesses. The lost traffic for restaurants and hotels translates into lost revenue for parking garages, and has a significant drag on revenues the city collects. Lost nights in the Cultural District magnify that ripple effect.

There is no silver lining if you are operating in one of those businesses being hard hit by the drop in demand. The only upside comes after a medical solution to the virus is widely-distributed. Notwithstanding idle speculation about some shift in where people will live/work/play, downtowns will be attractive for the reasons they have been attractive since the Middle Ages. It’s a question of when not if.

One of the winning sectors in this losing economic moment has been the industrial warehouse sector. Driven by spiking online shopping, the demand for distribution space has jumped by double digits in 2020. That’s showing up in permits around Pittsburgh. Last month Al. Neyer started work on a 400,000 square foot build-to-suit distribution center at Clinton Commerce Park in Findlay Township and a 150,000 square foot warehouse at the Hempfield Commerce Center in Westmoreland County. Also in Findlay Township, Buncher started work on Neighborhood 91, the advanced manufacturing campus being developed on behalf of Allegheny County and University of Pittsburgh. The first building is a 44,000 square foot multi-tenant facility that will be anchored by Wabtec. In other construction news, Rycon Construction has started work on the $6.5 million adaptive re-use of 2400 Smallman Street, which will be home to Pro Bike & Ride. MBM Contracting is doing the $3.1 million AGH pathology lab renovation. Omega Building Co. is renovating the space above Nakama Steak House into 23 residential units, a $4 million project. Sota Construction is general contractor for the $3.6 million renovation for the new office/studio for Headwaters Films in Bloomfield.

CORRECTION: The Oct 22 post (The Case for Getting the Stimulus Done) incorrectly listed DiMarco Construction as the contractor for Robinson Township’s new $3.8 million police station. The general contractor is Masco Construction.

Seeing a Runway to Recovery

The Commerce Department released its first estimate of gross domestic product growth for the third quarter. The good news: the 7.4% jump from quarter two was just as expected. The bad news: the 7.4% jump from quarter two was just as expected. In this rarest of times, there is a lot of economic news that is two things at the same time. To wit: the big rebound was inevitable and, at the same time, insufficient.

The 9% plunge in the second quarter set the table for a big rebound, even though the third quarter started with a second surge in virus infections happening. That surge seemed to cement mitigating behavior in the minds of most U.S. consumers. By wearing masks, maintaining safe distances, and doing things outside, more Americans were able to return to more normal behavior. That included shopping, dining, vacationing, and a host of activities that stopped from mid-March through May. Most economists saw data that predicted growth of more than 7% (that annualizes to 33%, although no quarterly growth remains the same for a year – also true when the second quarter fell 31% annualized). It was also apparent to observers that the stagnating hiring and increasing layoffs would cap the growth below 8%.

Reactions to the news ranged from relief to caution, except for Republican candidates for office. While there was almost no chance that GDP growth was going to be poor, it was still good to see expectations confirmed. At the same time, it’s obvious growth has slowed in September and October. It’s also true that the recovery in GDP is only two-thirds of the way back to where the U.S. economy was in the first quarter. At $18.5 trillion, GDP is almost exactly where it was in January 2018 and is 3.5% behind the third quarter of 2019. Moreover, the current level of GDP output is 7% behind where GDP would be if the 2.3% annual growth rate of the first quarter had continued. So there’s work to be done.

It’s important to have confirmed the expectations for a third quarter bounce back, if only to feel comfortable that there’s a foundation for 2021 recovery. With a vaccine seeming more likely to be first available in early 2021, more economists are forecasting improvement next year that will lead to full recovery in 2022. On Wednesday, Urban Land Institute released its ULI Real Estate Economic Forecast for 2021. The survey of 43 leading economists and analysts predicted above average GDP growth and job creation in 2021 and 2022. The summary paragraph is below:

The results of the survey, which is conducted semi-annually, expect GDP to decline 5% this year but increase again in 2021. Respondents forecast 3.6% GDP growth in 2021 and 3.2% GDP growth in 2022. The 2020 GDP loss is an improvement compared to the prior survey, which estimated a 6% fall in GDP this year. However, the previous survey was also more optimistic about GDP growth in 2021 and 2022, forecasting 3.9% and 3.6% respectively. Employment follows a similar trend. This year, the survey expects jobs loss to total 9 million, but—like GDP—job growth will begin in 2021 and 2022, growing by 3.5 million and 3 million jobs, according to the survey. By the end of 2022, unemployment could fall to 5.5%.

There are still a host of consumer activities that will remain depressed until the fear of COVID-19 recedes. And it’s important to remember that it’s the fear that is depressing the economy. It makes good political theater to blame lockdowns or rage on about not living in fear but, across the planet, at least a quarter of the people aren’t taking chances by going back to normal indoor socializing or gathering. Sweden is often pointed to as a model of allowing normal activity while protecting the vulnerable. That model produced one of the highest death rates per capita in the world, plus a decline in GDP of 8.3% during the second quarter. Sweden’s neighbors, Finland and Norway had shutdowns of public spaces (including businesses) and mandated masks. The death rate per capita was 10% of Sweden’s and their economies shrank by 4.5% and5.1% respectively. We’re seeing similar dynamics in places like Wisconsin and the Dakotas now, where surging infections are dampening commerce significantly.

That may sound depressingly like more bad economic news but, as we learn more about the pandemic and its outcomes (even if behaviors don’t change), the economic picture becomes clearer. That’s very important for the construction industry. Having some sense of predictability gives owners the confidence to build. If the expectation is that GDP will fall 5% or thereabouts in 2020 and recover by growing 3-4% in 2021, that’s a scenario that owners can plan to meet. Yesterday’s GDP numbers gave that forecast more validity. If behaviors change in the U.S. so that the spread of the infection slows or accelerates more slowly during regular flu season, then the forecast probably improves. Owners are like a pilot sitting at the end of a runway. COVID-19 has been a fog that obscured the runway. Pilots can adjust to the length of the runway if they can see it but few have seen where the runway begins or ends since mid-March. There’s little evidence that the economy will be soaring in 2021, even with a vaccine, but we can now see how it will get airborne again.

Little construction news but Mucci Construction was the low general contractor bidder on the $65 million Canonsburg Elementary School yesterday. The Digital Foundry in New Kensington held a virtual groundbreaking this week. Mosites Construction should start work on the $5 million, 15,000 square foot building in December. forge 39 Construction Management will be building the 100,000 square foot 250 Crown Court at Imperial Business Park in Findlay. Al. Neyer is building a 30,000 square foot addition to the Pella Showroom & Warehouse in Thorn Hill, Cranberry Township.

 

 

The Case for Getting the Stimulus Package Done

Congress and the White House seem to be ready to get a second major economic aid package done (or not). I have to admit that I don’t understand the politics of this latest round of stimulus talks. An unpopular sitting president, struggling in the polls, would normally be cheerleading a bill home that put thousands of dollars in the hands of voters in the last weeks before an election. But these aren’t normal times. This morning’s press conference by Speaker Nancy Pelosi characterized the negotiations as “just about there,” which gave Wall Street a boost after a brief plunge this morning. The S&P 500 fell 20 points by 10:00 but is now up 17 points from yesterday’s close. Reports from the Senate are less encouraging. Majority Leader McConnell is reported to be against passage of any aid ahead of the election, fearing it will limit Republican leverage in the event the Senate flips to a Democratic majority.

The best case for the stimulus came at 8:30 this morning, when the unemployment claims report for the week of Oct 17 was published. The good news: first time jobless claims fell under 800,000 for the first time in a while. The bad news: total unemployment insurance claimants have fallen by less than 8,000 since Oct. 3. The total number of people receiving unemployment claims was over 23 million.

Setting the politics aside (since politics will not feed the family or pay the rent), the need for more aid is clear as a third increase in infections and hospitalizations washes over the U.S. Doctors and researchers are still learning about COVID-19 but what is abundantly clear is that it will continue to drag down the economy until a vaccine is found. Because the opinions about how to deal with the outbreak have become politically polarized, a central economic reality has been glossed over. That is, that the steep decline in demand for services in major sectors of the economy is due to consumers avoiding those sectors to avoid the infection. Marker posted an excellent article about this demand shock. It’s not shutdowns that slowed the economy. Consumers have shown they will be wary, regardless of the government’s position. The best example of this is Sweden, where the official approach has been to allow the virus to move through the less vulnerable population to achieve herd immunity. Sweden’s GDP declined 8.9% in the second quarter without lockdowns. Its neighbors, Finland and Denmark, saw decline of less than 6%, even though they imposed short-term lockdowns and guidelines like mask-wearing and limited gatherings. A slower economy seems inevitable until a medical solution is found. Government aid for those impacted the most will help keep a floor under the economy until then. Absent such aid, evictions and foreclosures will begin to spike. What follows that is a double-dip recession. At this point, there aren’t any fiscal conservatives left in Congress. Moreover, there are some compelling cases made for the efficacy of borrowing money at near zero rates to stimulate growth above 3% again. Fiscal policy can tighten once the corner has been turned.

At the regional level, while unemployment in Pittsburgh is higher than most of its benchmark cities, the real estate market is recovering. Residential real estate has, in fact, seen growth across the board, with the exception of apartment construction. Sales of homes and home values have risen sharply. New construction of single-family homes is up over 29% year-over-year. New multi-family projects have fallen off last year’s pace. Through nine months, there were only 785 new apartments built in Pittsburgh, compared to 1,459 during the same period in 2019. Commercial real estate is beginning to reawaken as well, particularly in the industrial sector.

In construction news, Pittsburgh Glass Center took proposals from A. Martini & Co., Dick Building Co., A. M. Higley, and Massaro Crop. for its $6 million expansion. Burchick Construction is doing a $3 million build-out for Oculus on the 3rd floor of Schenley Place. Burns & Scalo Real Estate is building out a $12 million research space for Hillman Cancer Institute and a $4 million wet lab space for NeuBase at The Riviera. Al. Neyer was selected to build the second 60,617 square foot building for Elmhurst at the Heights of Thorn Hill. DiMarco Construction was awarded the general contract on the $3.8 million Robinson Township Police Station. Allegheny Construction Group is CM for the $4 million Jefferson Hospital chiller replacement. BJ’s Wholesale Club is taking bids on two 100,000 square foot-plus new stores in Ross and South Fayette. The $33 million New Kensington Wastewater Treatment Plant Upgrade is due Dec. 8.

 

Pittsburgh Office Market: Focus on Data – Not Speculation

Earlier this week, JLL issued its Skyline Report, which got a bit of media play, particularly in the doom-and-gloom Pittsburgh Business Times. JLL’s report highlighted concerns about the surge in sublease space and the media emphasized JLL’s opinions about the impact of tech work-from-home on future office demand and the uncertain future of office because of WFH. These concerns are legitimate. If WFH becomes another trend that leads to downsizing of office usage by even 10%, it will add five million-plus square feet to the vacant inventory. That stuff makes for good headlines and click bait. The problem is that we have no idea when we’re getting out of this pandemic, let alone what things will look like on the other side. The better course is to look at the data.

JLL’s headline data point, a vacancy rate near 20%, is not comforting either, but it’s only marginally higher than 90 days earlier. Newmark Knight Frank released its thrid quarter reports today, and the data is similar. According to NKF, the overall vacancy rate moved from 17.9% in July to 18.5% in October. The more troubling trend is the year-over-year decline of 2.2 points. New construction deliveries of a million square feet were the main reason for the jump, with lower occupancy having a small impact. Rents held steady, rising three cents to $24.10/square foot. Rent is a lagging indicator, however, and the likelihood is strong that rents will fall as leases renew during the next 12 months. One interesting view of the NKF data is the stability of the market overall. Occupancy is above 80% for almost all submarkets. The east market is an outlier to the downside, with vacancies at 26.5%, and Oakland/East End vacancy is the outlier to the upside, at 11.8%. These two are the smallest submarkets by far, at just over three million square feet each. The remaining suburban and urban markets are between 16% and 18% +/-.

Vacancy has been growing in Pittsburgh since mid-2019. Source: Newmark Knight Frank

Office occupancy is a function of employment. Until there’s a medical solution to the COVID-19 virus outbreak, employment will be significantly lower than in February 2020. At last week’s meeting of the Federal Reserve Bank, the governors looked forward to unemployment staying below eight percent at year’s end and a steady decline in unemployment that returned to the four percent range in late 2022 or 2023. It won’t take that long for office occupancy to tick back down in Pittsburgh, but it’s worth remembering that 1) Pittsburgh’s office market was much softer in February 2020 than in February 2017, and 2) the speculation about declining office demand because of COVID-19 response is not unfounded.

The Fed’s observations about the economy were made before the Trump administration walked away from negotiations over a third major economic safety net package. The House of Representatives hurriedly passed a $1.3 trillion bill last week that was set to provide direct aid to households, additional assistance to small businesses, and funds for state and local governments, which have seen their revenues decimated. Aid for local government is particularly critical to the economy, according to the Fed. The bill contained a number of non-economic provisions that the Senate was not likely to accept but there was the basis for negotiations to continue. Reactions to the president’s shutdown of negotiations have been strongly negative and the White House today hinted that discussions had re-started. That would be good news. Fed Chair Jerome Powell cautioned in the FOMC minutes that the risk from providing too little aid was much greater than overshooting government intervention, especially since inflation remains well below two percent. Absent more assistance, the economy is expected to remain in declining GDP growth through the winter.

Regional construction activity has begun to pick back up, with more bidding and RFP’s out. Carlow University is looking for developers to partner in its proposed 400,000 square foot research/mixed-use tower in Oakland. Cavcon Construction is starting work on a $4 million-plus Education and Tech Center in Indiana PA for Westmoreland Community College. New-Belle Construction was awarded the $4 million new manufacturing facility for Barchemy in Donora. Facility Support Services was awarded $2.7 million in contracts for renovations to the Dept. of Energy National Energy Technology Lab in South Park. PJ Dick is the contractor for $3 million in renovations to Aramark concession areas at PPG Paints Arena. A separate $1.5 million package of renovations for Rivers Casino at PPG Paints is out to bid to Mascaro, Massaro, and PJ Dick. Turner Construction is doing preconstruction on the $35 million AGH Neurology Center for Excellence.

The Two Sides of the Regional Unemployment Story

There was a good story in Pittsburgh Quartelry’s digital update this morning on the region’s unemployment rate. Check out Julia’s Fraser’s story. The top line was good news. The unemployment rate fell from 12.8% in July to 10.5% in August. But the data was less rosy. The actual number of people employed fell by 39,405 from July to August; and the year-over-year decline in total employment plunged to more than 175,000. That’s the worst year-over-year decline since April 2020, and the second worst decline since the recession began in February. In part, that’s because August 2019 marked a high point in regional employment, with 1,157,274 people employed. However, the year-over-year decline jumped because the economy in Pittsburgh has weakened further with the end of the Payroll Protection Program.

Source: Department of Labor

These two concepts may seem at odds. How can unemployment drop more than two points when employment drops by almost four points? Remember, the unemployment rate is just the math. It’s easy to forget that if the total number of people in the workforce decline, the unemployment rate will decline (assuming the number of jobs lost doesn’t outstrip the number of people leaving the workforce). That’s what happened in August. While unemployment rose by 74,800 compared to August 2019 (or 6.5 points), the workforce declined by 48,000 people. It’s the latter number that is a key metric that we don’t understand at the moment. Pittsburgh Quarterly quotes Pitt’s Chris Briehm on the subject and he notes quite correctly that we won’t know the full story until the public health crisis ends.

It’s worth digging into that a bit. Briehm’s point is that the varying motives of people leaving the workforce during a pandemic make it impossible to judge whether or not there is an accelerating trend towards a smaller workforce. Unemployment insurance allows some people who can’t work remotely to not work, rather than take the risk of infection. Others will take the choice of unemployment over illness, even if they don’t qualify for UI. Still others who must work – like in restaurants or bars – may have chosen to relocate to states where those establishments have reopened to a greater degree than in Pennsylvania. And some of the workers have quit looking for work for now or have chosen to retire. Until there is clarity about the safety of the workplace, we won’t know how many of the workers who left the workforce are coming back; and until there is organic job growth, meaning adding of new positions, we won’t know how much of the discouraged workforce will return.

The significance of a declining workforce is obscured in a severe jobs recession like we’ve seen since March. For now, at least, the decline has positive benefits. Fewer people are looking for work. Pittsburgh’s unemployment rate is lower, even though the number of employed is much lower. If the people who have declared themselves as out of the workforce in August remain out, that means unemployment is not artificially low. That’s a good thing. But, if that’s true, then Pittsburgh faces a much bigger uphill battle once economic growth returns. Employers will struggle to find workers with the skills they need. Growing companies can’t tolerate that, so they will look elsewhere for talent. That means some will close shop in Pittsburgh and move elsewhere, or expand elsewhere instead of Pittsburgh. The region’s future is predicated on the innovation economy driving job growth in Pittsburgh. That can’t happen if innovators can’t find employees in Western PA. Our vaunted university research does Pittsburgh no good if the businesses that spin out of them move to Palo Alto or Austin or Nashville. Let’s hope that the cure for the public health crisis results in a cure for our workforce decline as well.

Green Shoots of Recovery for Higher Education

Throughout the U.S. colleges and universities have become hot spots for new COVID-19 infections, often with numbers that are astronomical for the small towns in which the schools are located. After one month, however, returning to school has been less of a problem for the economy than was feared. This doesn’t mean we’re out of the woods, of course, but the outbreaks have so far been mostly confined to the campuses, rather than setting off big spikes in the college towns. Obviously, stay in touch with this issue as flu season begins.

This morning brought a report from the National Student Clearinghouse that was more good news for the higher ed market. The National Student Clearinghouse Research Center released a preliminary report on fall enrollment across the U.S. today and its results were better than expected. Colleges and universities have seen undergraduate enrollment decline 2.5% in fall compared to last year. Public 4-year schools were nearly even with 2019, and private non-profit schools were off 3.8%. One downside surprise was that community colleges saw a 7.5% decline. Community colleges were expected to get a bump because of the economic impact of the pandemic. Another troubling trend was the decline in foreign students. The pandemic, and its related travel restrictions, accelerated the declining foreign student enrollment to 11% in fall 2020. Only 22% of the colleges and universities reported in time for this update, so it is possible that these trends will see revisions by the time of the final report in late fall.

Source: National Student Clearinghouse

Pennsylvania institutions fared much worse than the nation as a whole, probably because of the predominance of private 4-year schools, with enrollments shrinking 9.2%. One national trend that is likely to hit Pittsburgh universities harder than most is the 11% drop in foreign students enrolled in U.S. colleges. Locally, Duquesne University was off very slightly, as an increase in graduate students virtually offset the drop in undergrad enrollment. The same trend boosted enrollment slightly higher at Slippery Rock and California University of PA. Local private colleges Point Park University and Grove City College both report that enrollment was lower but in line with 2019. Robert Morris University saw a decline of just under 10% but attributed that to an unusually large graduating class in 2019 and a significant drop in international students. Data on Pitt and CMU enrollments wasn’t available but, assuming enrollment declines were milder than expected there also, news is good for the many planned construction projects in Oakland.

In project news, JMC Holdings selected the PJ Dick/Dick Building Co. team as construction manager for the 1501 Penn Avenue office building, which is expected to advance in spite of rejection by the Pittsburgh Planning Commission. Another large redevelopment will be before the Zoning Board of Adjustment in October. Echo Realty’s Shady Hill mixed-use project, a demolition and redevelopment of the Shakespeare Street Giant Eagle in Shadyside, involves a new 36,000 square foot Giant Eagle and 38,000 square feet of retail, to be built by Continental Building Co., and a $10 million, 432-car garage that has been awarded to Carl Walker Construction. Shady Hill also includes a $37 million, 252-unit apartment being developed by Echo’s partner Greystar. Massaro Corp. is the contractor for the apartments.

Mele & Mele was low on the $25.7 million Canonsburg-Houston WWTP. Yarborough was low bidder on the $1.9 million Port Authority Manchester Garage engine test facility. Masco Construction was low on the $3.6 million Robinson Township Police Station. Sentinel Construction is about to start on an $8.7 million renovation of Seven Oaks Country Club in Beaver. Johnson Development has awarded a contract to Franjo Construction for the new $6 million, 105,000 square foot Cube Smart Self-Storage on the North Side. Franjo is also the contractor for a $3.2 million upgrade to Zamagias’ Shaler Plaza.The $67 million Canon McMillan Middle School is out to bid due Oct. 15. 

Pittsburgh Planning Should Approve This Project

On September 15, the Pittsburgh Planning Commission will again hear from JMC Holdings about its plans for a $200 million mid-rise office building proposed for the for Wholey refrigerated warehouse site. The project , 1501 Penn Avenue, is a 525,000 square foot office building, with 12 floors of offices atop a podium that includes parking and retail. JMC has worked with Turner Construction on preconstruction, although the project is expected to eventually bid to Turner, Mascaro, Rycon, and a PJ Dick/Dick Building Co. joint venture.

Rendering by Brandon Haw Architecture

When the geometric 21-story structure was first revealed to the public earlier this year, Mayor Peduto panned the design and the Planning Commission was lukewarm about the project. One of the principal concerns is the building’s height, which will be roughly twice that of the next tallest building, the Penn-Rose Building one block east. The 1501 Penn project presents the city with the perfect opportunity to transition what is Pittsburgh’s second-hottest office market (and the one with actual land on which to build) towards Downtown. Real estate professionals have considered the Strip District to be the fringe of the Central Business District for a while now. The Pittsburgh Downtown Partnership includes it in its description of the Greater Downtown. If the vision of developers matches the demand from Pittsburgh’s emerging technologies, the Strip could ultimately look like what Fifth and Forbes are becoming in Oakland – blocks of 10-15 story tech “towers” that put thousands of well-paid people in proximity to the city’s center. The image above shows the glass tower rendered in the context of the 1500 block of Penn Avenue, with Downtown beyond. Its location does not threaten the character of the Strip’s iconic retail blocks to the east and provides a reasonable first step towards denser, taller construction between the 16th Street and Downtown.

Wholey’s warehouse

For those concerned about the cold, symmetrical architecture, let’s remember what building will be replaced by 1501 Penn (see above).

If your argument is that the project is overly ambitious for the times or the market, I understand. That’s the call the developers and their investors get to make, however. The same argument was reasonably made about Bakery Square in 2009. That turned out rather well. Like 1501 Penn Avenue, Bakery Square was the latest in a series of attempts to redevelop a legacy building that was unworkable in the 21st century. Bakery Square was also started during the depths of the Great Recession. The Wholey’s warehouse has been proposed as a telecomm center, apartments, condos, and offices over at least two decades. The structure is poured concrete. The concrete is meant to act as one of the insulating materials so the walls are extremely thick. It simply won’t be re-purposed within the bounds of economic sense. If JMC and its investors see a diamond in the rough, I hope the City of Pittsburgh allows them to polish it. The city may no longer need to offer enticements to attract developers like JMC Holdings from New York, but Pittsburgh isn’t Seattle. Planning Commission would do well to remember that we’re still the pursuer, not the pursued. JMC isn’t proposing a chemical plant, just a place where 1,500 or so people will work. After the obstacles that were put in front of McCaffery Interests for five years to make development of 1600 Smallman and the Terminal Building possible, it might be a good idea to put 1,500 customers one block away. How do you think McCaffery feels about the vision rendered below? Seems like the occupants of 1501 Penn Avenue might like having those lovely lifestyle amenities close by.

Rendering by Studio 97.

1501 Penn Avenue can be another linkage between Downtown and the burgeoning Strip District. The Downtown market has gotten softer in recent years. Allowing the Strip Dictrict to become more like Downtown will make for better connections and better rationale for renting Downtown. Planning Commission should let the rising tide continue.

Another interesting project on the agenda for September 15 is the Uptown Tech Flex development proposed by Westrise. The former commercial laundry on Jumonville Street will be converted by Omega Building Co. into a 63,000 square foot office/lab/shop for emerging tech companies. The property type is suddenly a hot item and the Uptown Tech Flex project is located about midway between Oakland and Downtown, just a block from the route of the Bus Rapid Transit (BRT). You can view Desmone Architects’ design at the Planning Commission’s website. The Westrise development is one more private investment that is slowly bringing Oakland and Downtown together, with Uptown and the Hill District standing to benefit. You can only imagine what might occur in this neighborhood if the BRT was running.