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A Flurry of Jobs Reports With Good News/Bad News

Make no mistake. When 4.8 million Americans go back to work in one month it’s good news. Today’s Employment Situation Summary from the Census Bureau showed that about 30% of the workers laid off during the March-April COVID-19 mitigation have been re-hired. Unemployment fell to 11.1%. That report comes on the heels of private payroll report for June from processor ADP, which showed 2.4 million jobs being recovered in the private sector last month. The Census Bureau rolling chart is one that is unlike any other in my lifetime.

So, what’s the bad news? First, the report on first-time unemployment claims for the week of June 20 was released this morning and it showed that claims increased last week. Another 1.428 million people filed for unemployment and the number of people continuing to claim unemployment comp jumped to 19.2 million. Last week marked 15 consecutive weeks with first-time claims in excess of one million. The ADP data was essentially a mirror image of its adjusted May numbers, meaning the growth merely backfilled the additional reductions in May.

Let’s re-emphasize: adding almost five million jobs is good for the economy, especially when the hiring coincides with an increase in the number of people in the workforce, which is what happened in June. What has economists concerned is the fact that the June hiring was mostly unaffected by the rapidly rising number of new infections in the U.S. The most acutely affected areas in the South and Southwest are now seeing pullbacks on business openings and on customers willing to risk “normal” activities. Don’t be persuaded by the images in the media of crowded bars and parties. As the hospitalizations are increasing, citizens in the areas affected are reducing their exposure. That means there will be pressures to reduce costs for businesses in those areas soon. And, in the final analysis, the economy doesn’t really re-start until the schools do. That prospect is looking grimmer now.

The problem continues to be a public health problem first and an economic problem second. Leaders cannot re-start the economy by imposing their will. This isn’t a partisan phenomenon. Yes, the first states to see new surges were red states with governors who have had to walk back their bluster. California is also seeing record spikes, and they were the first state to shelter at home, and California’s Gov. Newsome is a deep blue Democrat. You only need to look at Allegheny County to see that taking your eye off the ball for a couple of weekends was enough to fire community spread again.

There is a potential upside to this new spike in infections. It may drive people to finally act as though a highly contagious virus is sweeping the U.S. That might push enough people to capitulate to preventative measures, like wearing masks outside their homes, to impede the spread. In stock market terms, capitulation is when the last of the bulls finally sell off. Every stock market crash eventually has a capitulation point, after which recovery begins. Let’s hope the June flare-up, which will set the economy back for a spell, is that capitulation point for COVID-19. Until there is a vaccine, what stops the virus in its tracks is not having hosts. Following the simplest of preventative measures deprives COVID-19 of its oxygen to spread.

It’s giong to be a tough time to own a bar, or a theater, or a football team for that matter, until a vaccine is delivered. But stamping out the spread gets us a long way back to economic growth.

On the bidding front, Canonsburg-Houston Joint Authority put the $28 million 2nd phase of its wastewater treatment plant modernization out to bid, due Aug. 17 according to the Builders Exchange. Massaro CM Services is managing the bidding of the $7 million PSU West Campus Chilled Water Plant in State College. TBI Contracting was the low bidder on the $2.7 million spec Alta Vista Lot 10A industrial building in Washington County. Carl Walker Construction is about to start work on the 376-car parking garage at the Vision on Fifteenth office building in the Strip District.

Good News and Bad, A Month Into Re-Opening

It’s going to be Labor Day until we have a (somewhat) reliable read on just how much the economy is re-opening. There has to be back-to-school before there is back-to-work. Colleges have to see what kind of decline in enrollment the pandemic has created. This will vary. The significant chunk of businesses that make their livelihood during the summers will know how that went. What all of this will depend upon is the consumer returning from sheltering at home to spending. There’s some good new there. The savings rate for U.S. consumers is at an all-time high. The $1,200/person checks and shutdown of most businesses kept a lot of cash in the pockets of consumers. Readings on consumer sentiment suggests that people are itching to use that dry powder. That would be good for business.

There are a variety of good news reports since the late May/early June opening of most states. The housing market is probably the best news. Housing starts bounced back 5.4% in May and permits were up 14.4%, a good sign for June and July. The NAHB Market Index jumped to 58 in June. Consumer spending jumped 18% in May, basically reversing a similar decline in April. Thursday morning’s report on new unemployment claims showed 767,000 fewer people on continuing unemployment, dropping the number to 19.5 million.

That unemployment claims report also had bad news, of which there is still plenty. During the week ending June 13, an additional 1.48 million people filed for unemployment for the first time. That’s down slightly from the week before and a continuation of an 8-week trend since the peak of job losses in April, but 1.48 million new claims is about 7 times the filings in February. The more concerning news is the increasing number of hospitalizations and infections across 26 states, including several of the largest hot-weather states. Sadly, this has become a political issue as much as a public health issue, but the long and short of the problem is that COVID-19 cases are rising sharply instead of falling as hoped. Should this surge go on, there will be economic damage in the South, Southwest, and West. The big increases are in Florida, Texas, Arizona, Georgia, California, Oregon, and the Carolinas. Those are red, blue, and purple states. COVID-19 has proven to be color blind. If conditions worsen, even reluctant elected officials will have to consider mitigation. Arizona stopped elective surgery again, meaning hospitals will face steep revenue declines. Even without mitigation or shelter at home, private citizens and businesses have shown they will pull back. Disney delayed opening its California parks until after July 4, for example. The places experiencing a spike are also among the most popular travel destinations or business hubs in the U.S., which means there will be spreading into other regions from these hot spots. We won’t have to wait for Labor Day to see how this plays out. By mid-July the efforts to tamp down the flare ups will be measurable.

This is not a great trend. Source: Johns Hopkins University Medicine

Regional construction bidding slowed considerably in June. Bidding is picking up a bit into July, which is typically a slower month for bidding activity. The $55 million Evans City Elementary School bids July 14. ALCOSAN’s next project, a $22 million upgrade of its Return Activate Sludge facilities is due July 8. PJ Dick is starting work on the $15 million Ihmsen Hall at Mt. Aloysius College. Rycon Construction is doing a new $2.2 million branch for Chase Bank in Bridgeville. A report on the region’s largest construction project: about 25% of the workforce has returned to work at Shell’s Monaca project. The virus safety measures are expected to reduce the peak labor force from 6,000 pre-pandemic to 4,000, which will add six months or so to the original completion schedule.

Based upon activity through May, our estimate for construction starts in metro Pittsburgh for the first half of 2020 is $1.71 billion. Given the overall economic picture, there is going to be less activity during the last six months of the year. Activity for 2020 will not reach $4 billion, and could be off as much as 30% from the $4.8 billion forecast at the beginning of 2020. Activity in the technology sector is encouraging, especially to the degree that the research at Pitt and CMU are still supporting dynamic, high-demand technology solutions to problems like the coronavirus and cybersecurity. A medical solution by early 2021 could unleash enough pent-up demand to recoup the construction that wasn’t executed in 2020. Pittsburgh’s construction industry, in the meantime, is left waiting for such a solution.

Where We Stand as We Move to Green

Southwestern PA went to green today and I’m getting a haircut. Seems like a good time to look at where the market is.

This morning the Bureau of Labor Statistics released its monthly Employment Situation Summary, which had some of the first good economic news since January. Employers re-hired enough laid-off workers to add a net 2.5 million jobs in May, bringing the unemployment rate down to 13.3%. That’s pretty consistent with the decrease of four million receiing unemployment insurance during the week ending May 23. The report followed on the heels of Thursday’s news that first-time unemployment claims “fell” to 1.88 million last week. Earlier this week payroll firm ADP reported that private employment declined 2.76 million in May, a significant improvement over April. The most significant information in this morning’s BLS report was the analysis of the unemployed from the past few months. The relevant paragraph from the summary is quoted below:

In May, the number of unemployed persons who were jobless less than 5 weeks decreased
by 10.4 million to 3.9 million. These individuals made up 18.5 percent of the
unemployed. The number of unemployed persons who were jobless 5 to 14 weeks rose by
7.8 million to 14.8 million, accounting for about 70.8 percent of the unemployed. The
number of long-term unemployed (those jobless for 27 weeks or more), at 1.2 million,
increased by 225,000 over the month and represented 5.6 percent of the unemployed.

The data shows the potential for strong recovery, providing that the news on the medical front remains positive. If economic activity were to return to 95% of GDP levels pre-COVID (a mark that would equal the output at the bottom of the financial crisis recession), unemployment should decline to 7-8%. That’s not a great economy but it is a vast improvement. Absent a medical solution to the virus, this outcome seems unlikely but the May data shows a possible path to a quick recovery. (That’s a scenario that seemed highly unlikely a month ago.) The risk in viewing this report as the start of a “V” shaped recovery is real, however. In the breakdown of industry-level hiring, the biggest gain was in hospitality (1,239,000), which remains mired in a deep slump from lack of demand. It’s likely that the bulk of the hiring in hospitality was the result of Payroll Protection, since we also know that demand for restaurants, hotels, and travel is off by 50-75%. The gains in construction and manufacturing (464,000 and 225,000 respectively) are more durable. Much of the economic activity that was lost since mid-March will be lost for 2020; however, the opportunity for a quicker-than-expected recovery exists if consumers and businesses did build reserves that can carry them into the late summer.

Yesterday’s extension of Payroll Protection Program benefits will help businesses stay afloat through the summer months and retain employees, which in turn provides income for rent, mortgage payments, and consumption. The INVEST Act, which was passed by the House of Representative Wednesday, also provides hope for the construction industry. INVEST authorizes infrastructure spending for the fiscal years 2021-2025. The $500 billion represents a 64% increase over the $305 billion authorized in the 2015 FAST Act. The authorization still has to pass the Senate.

Because of the lag in reporting, the data we have on the regional economy is not as sunny. The Department of Labor reported that unemployment jumped to 16.3% in metropolitan Pittsburgh during April. That tracks very closely with the expectations based upon U.S. data for April. It will take until mid-late July to see whether regional hiring picked back up in May to the same extent as the rest of the U.S. Construction data for the first five months in Pittsburgh suggests that nonresidential/commercial construction will fall below $2 billion for the first six months of 2020, a trend that indicates total construction in 2020 of less than $3.5 billion. That would be a decline of more than $1 billion from forecasts at the beginning of the year.

On June 1, Census Bureau reported on total U.S. construction spending. Because of its methodology, the spending looks much more optimistic than what is likely to be reality. AGC’s Ken Simonson points out that Census imputes a lot of modeling into its calculations in the absence of first-hand reporting from contractors, many of which did not report in April. He believes the actual totals will be much lower when revised in coming months.

Source: U.S. Census Bureau

Last week Pittsburgh’s Urban redevelopment Authority approved the Buccini Pollin plan for developing the 28-acre former Civic Arena site last week. The move cleared the path for the $200 million FNB Tower, which will be built by the PJ Dick/Mascaro/Massaro team. It was but one of several significant projects to move forward in the Hill. McAllister Equities is presenting its plans to the city for a $10 million, 51-unit apartment at 1717 Fifth Avenue. Franjo Construction is scheduled to start construction around August 1. The URA is publicizing the June 12 pre-bid meeting for the $10 million Granada Square redevelopment, a conversion of the Granada Theater in the Hill District into a 40-unit apartment built by Mistick Construction. Subcontractor/supplier bids are scheduled to be taken July 6. With the $450 million UPMC Mercy Vision & Rehabilitation Hospital underway, the Hill District is set to lead construction out of the recession caused by the coronavirus mitigation.

In other construction news, Mistick is also taking bids on the $16.5 millioin, 44-unit Jeremiah Village in Zelienople. PS Construction started work on $7.5 million build-out for medical marijuana facilities for CannTech in RIDC Thorn Hill. Sentinel Construction is working on a $1.4 million tenant improvement for Seneca Resources at 2000 Westinghouse Drive in Cranberry Township. Shannon Construction started work on an $800,000 TI for Matthews Marking Systems at Cranberry Business Park. A. Martini & Co. was successful on the new Chase Bank branch announced for Fox Chapel Road next to Fox Chapel Plaza. Charter Homes & Neighborhoods started work on the 26,000 square foot retail building at the Meeder Farm development in Cranberry Township that will include the Recon Brewery.

 

 

The Workplace Workers Say They Want (Take 113)

There’s a continuing argument about the future of office space that has accompanied work from home (WFH) during the pandemic. Lots of opinions, almost no data. You have to be careful about whose opinions you’re reading, as commercial real estate professionals have a vested interest in promoting higher occupancy. Professional opinion givers (including yours truly) have a vested interest in attracting readers and will profit from attracting views to outrageous opinions. Here are the two main arguments that seem to best describe the future of office use:

  • Everyone (or more people than in February) will want to work from home in the future; therefore, we’ll need less space.
  • People will still want to have an office and we’ll need more distance between workers; therefore, we’ll need more space.

These are not particularly scholarly positions and are mutually exclusive. The likelihood is that more people will work remotely going forward and most people will still want an office. That’s the conclusion of an interesting survey done by Cushman & Wakefield since the shelter-at-home orders blanketed the country in April. The survey had 40,000 respondents, a robust sampling with 1.7 million data points. The net conclusion is that the demand for WFH and the need for separation will result in a net zero impact on space demand, even though office design will be very different. Cushman & Wakefield is in the real estate service business, so skepticism about their objectivity is warranted. The breadth of the survey responses, and objectivity of the questions, should allay those concerns. Here are the key findings:

1. Productivity can occur anywhere, not just at the office:

Pre-COVID-19, remote workers were more engaged and had a better workplace experience than office workers
During the pandemic, effective team collaboration has reached new heights, through better leverage of remote collaborative technology, and the ability to focus was upheld

2. Flexibility and choice to work from anywhere is accelerating

73% of the workforce believes companies should embrace some level of working from home
Human connection and social bonding are suffering, impacting connection to corporate culture and learning
Younger generations are reporting more challenges working from home

3. The new normal will be a Total Workplace Ecosystem:

The workplace will no longer be a single location but an ecosystem of a variety of locations and experiences to support convenience, functionality and wellbeing
The purpose of the office will be to provide inspiring destinations that strengthens cultural connection, learning, bonding with customers and colleagues, and supports innovation
Current footprint sizes will remain steady, balancing social distancing’s relaxing of space density with less office space headcount demand in the new total workplace strategy.

Employees felt they were as productive at home, often more so because of the better focus. (My belief is that this assertion will need the test of time. The bar for productivity is unnaturally low at the moment.) Collaboration is enhanced, workers said. Employers believe they are getting more time and effort from employees. All sides reported a higher sense of trust. The report also highlighted the challenges that workers and employers were experiencing. Of interest was the fact that younger employees, who were quicker to adopt alternatives to traditional workplaces, also expressed a higher sense of lost human connectivity with peers. Employers were concerned that remote working leaves younger workers without the mentoring and assistance they would get in an office with experienced co-workers.

The conclusion drawn by the report is that workers are going to expect an “ecosystem” of work locations, including traditional offices. This sounds very much like the outcome you might expect from getting the input from all workers. How an ecosystem of locations providing a variety of work experiences will square with the CFO and the employer’s profit expectations is likely to be the final arbiter about the office of the future. Juggling talent atraction and real estate costs probably got more difficult.

You can download the full survey and report here.

 

A Tale of Two Overlooked Trends

With two full months of pandemic mitigation under our belts, we are finally beginning to understand the secondary effects of the health crisis. Here are a couple of derivative financial impacts to consider. Unlike previous recessions, the peculiarities and uncertainty of the COVID-19 pandemic are creating unusual stresses on primary care medicine and bankruptcy. As the divergence grows between the health of the stock market and the health of the underlying economy, the shutdown is impacting each of these in an exceptional way.

The fact that there are likely to be a dramatic increase in bankruptcy filings is not unusual for the coronavirus-induced recession. Recessions create different winners and losers. Sometimes it’s just bad luck or timing for a firm that was doing well prior to a downturn. Regardless of the reasons, the steep reduction in business and disruption of credit that accompany recessions results in businesses having to declare bankruptcy. For many of those firms, the bankruptcy allows for reorganization and forbearance that leads to recovery, and ultimately to creditors being repaid. In many cases, the act of filing bankruptcy motivates creditors to reassess their positions and the bankruptcy is avoided altogether. Of course, a significant share of the bankruptcies filed during a recession is Chapter 7 filings, which result in liquidation.

This recession is causing a shakeup in the bankruptcy landscape and the pattern of financial distress is different from any post-World War II recession. One factor that leads to bankruptcy is corporate debt that can’t be paid. Coming into 2020, the levels of corporate debt held in speculative BBB or junk bonds were high, and the stress since then has elevated worries of default. As defaults increase, bonds will be further downgraded, meaning it will be harder for U.S. corporations to raise debt and more costly when they do.

One measure of this problem is the rise in distressed credits, or junk bonds with spreads that are ten points higher than the corresponding U.S. Treasury bonds. In other words, a distressed two-year corporate bond would yield 10.13% on May 20. Standard & Poors estimates that distressed credits as a share of junk bonds rose from 25% to 30% from March 16 to April 10. During that same period the default rate for junk bonds rose in the U.S. from 3.5% to 3.9%. Two-thirds of global defaults in April were by U.S. corporations. This is strong indicator of coming bankruptcies. Moody’s predicts that the global default rate for junk bonds will be twice the 10% rate that marked the financial crisis.

Should this trend play out to bring a steep rise in bankruptcy filings, another issue looms: inadequate bankruptcy court capacity. Courts are already stretched thin and the looming wave of bankruptcies threatens to overwhelm them. That would leave corporations and creditors floundering without resolution while the courts try to catch up.

These dynamics suggest that there will be an increase in pre-packaged bankruptcy agreements and other alternatives to dissolution. Unlike in 2009, liquidity is not a problem in capital markets. There has been dramatic growth in private equity rescue funds. Viable companies should be able to access credit to survive the business disruption or to negotiate satisfactory payments and refinance debt with creditors. But the peculiar nature of this recession makes it almost impossible to determine corporate value. That makes it tough to assign share prices for investors in exchange for equity, or to determine credit worthiness when there are limited revenues, cash flow and view to the future of the market.

Solutions to these challenges for bankruptcy and debt refinancing could keep businesses from closing their doors in the coming months.

The plight of hospitals during the pandemic has been well-documented. What has received less attention is the financial stress of the healthcare system’s foundational element, the personal care physician (PCP).

Mitigation measures in all states included avoidance of doctors’ offices for anything other than emergency or necessary visits. That has resulted in a massive loss in revenues for PCP practices across the U.S. Physicians switched gears fairly adroitly as the virus spread, moving quickly to telemedicine as a way to treat many patients; however, fees for telemedicine appointments are lower, as are reimbursements. Compounding the revenue problem are the delays in getting reimbursements from insurers during the shutdown and the delays in billing from the more limited staffing in PCP offices.

Losing PCP practices, either to closing doors or mergers with large practices, will be bad for healthcare consumers. If there are fewer PCPs competition is reduced, raising prices. In areas that are already underserved by PCPs, consolidation will just broaden these healthcare deserts. Losing more density of healthcare providers will reduce the number of referrals to specialists. More people will put off treating nagging ailments and chronic conditions if the PCP office is inconvenient. That will result in higher hospital admissions and escalating costs of treatment for serious conditions that could have been treated cheaper at an earlier stage.

The problems facing primary care and bankruptcy are downstream from the obvious healthcare and economic crisis. But they represent systemic weaknesses that will present challenges that are mostly unforeseen now.

Innovation Research Tower at Fifth & Halket. Image courtesy Walnut Capital.

Some construction news: PBX is reporting that the $55 million Evans City Elementary School is out to bid due June 19. Continental Building Co. is taking bids for the $12 million North Shore Lot 10 445-car parking garage on May 27. Rycon Construction was selected as CM for the $25 million redevelopment of the former Sears Outlet on 51st Street. Construction will resume on the $80 million, 280,000 square foot Innovation Research Center in Oakland being developed by Walnut Capital and built by PJ Dick Inc.

An Update on Construction Financing (And a Correction)

First the correction: The construction manager for the heating cooling plant at AHN Forbes Regional has not been awarded. PJ Dick was reported in error.

Most of Western PA began the transition from shelter at home to resumption of business today. A number of states across the country have mostly normalized over the past week or two. After two months of business being shutdown, a severe recession has begun. As if to emphasize that point the Commerce Department reported this morning that retail sales slipped 16.4% in April. It’s hoped that the resumption of business will begin the recovery from that recession. What’s unknown about the coming months is the degree to which consumers and businesses will “normalize” without a medical treatment or vaccine for the coronavirus. Photos from Wisconsin bars earlier this week suggest that drinkers will flock back, but evidence from other states that reopened suggest people aren’t yet ready. What’s somewhat encouraging is that, despite the staggering loss of jobs, there is dry powder to deploy.

Since the shelter at home orders began in most states, there has been a dramatic rise in bank deposits. According to the Federal Reserve Bank of St. Louis, more than $15 trillion was on deposit in commercial banks across the U.S. on April 30. The bank data does not tell how those deposits are distributed among depositors, but that’s a pile of cash to support pent-up demand. It will also serve as a reserve for those who will be without incomes for some time.

Source: Federal Reserve Bank of St. Louis

That pile of deposits is also a great foundation for the nation’s finance system and is one of several key differences between the conditions right now and those that prevailed in 2009. The drunken overextension of credit in the mid-2000s led to a financial crisis that dragged the world into the Great Recession. This recession came on the heels of a strong economy, which was reflected in a strong commercial finance system. That system has begun responding to the recession, getting more conservative in its practices. That will be a headwind to recovery, especially for commercial construction, but it will also allow lenders to respond freely when a recovery is perceived. A lot of water still has to go over the dam but here are a few of the observations about financing at the moment:

  • Lenders are responding to the market, not a crisis of their own making.
  • Loan-to-value ratios have been pulled back to 60%, even to 50% for some risk-averse lenders.
  • Life insurance companies are cherry-picking projects for the most part, seeking conditions like the banks want.
  • CMBS, which cratered in 2009, is finding demand for its bonds, selling deals at low risk premiums.
  • Banks are pretty much the only game in town for construction financing.
  • Banks want to do construction loans with low leverage, strong income prospects, and a clear exit to permanent financing.
  • Private equity is still plentiful and opportunistic, looking for sweetheart deals.

This is not to suggest that it will be easy to get a construction loan (or permanent financing for that matter). There are still regulatory reins on lending that will curb the most aggressive lenders. And lenders have wasted little time getting more conservative. But because liquidity and portfolios are solid, commercial lending can respond to demand. That wasn’t the case in 2010 or the years that followed. There is also still time for delinquency and defaults to grow to levels that will impede lending. Lenders who are able are building reserves so that they can respond to opportunities and avoid being hamstrung by regulatory limits on what is set aside to cover bad loans. PNC’s sale of Black Rock is a good example of that.

The regional bidding market has responded quickly to the reduction in volume. Two major projects bid this week and the results were well below the budgets. The Builders Exchange reported on the low bidders for CCAC’s Workforce Training Center and ALCOSAN’s North End Plant. Rycon Construction was low on the CCAC general contract and the $23 million total was more than 20% lower than the $30 million budget. ALCOSAN had budgeted $120 million for its project. The low bids came in at $100.3 million, with Mascaro Construction low on the general package at $94 million.

The low bids were something of a surprise, given that construction costs are going to be increased somewhat by the heightened jobsite safety measures put in place to counter the pandemic. The bids do reflect a shift to a significantly more competitive bidding environment.

The Confusing Future of Office Space

Imagine you’re the owner or developer of office buildings. For the past two months most, if not all, of your properties have been nearly empty. A pandemic has forced the adoption of new work habits for tens of millions of people, now working from home and thinking differently about what their workplace should be. Some tenants may not survive the disruption. Those that do are going to have new needs. Think of the questions running through your mind as the landlord:

• When will my tenants come back to the building?
• What do they want from me that is different from what they wanted in January?
• How many of them will work from home now?
• Will they expect me to clean more often? How often?
• What do I do with that million-dollar amenity space I just renovated in the lobby?
• Will they need less space?
• Will they need more space?

This is hardly a parlor game for landlords. As two weeks of social distancing has turned into two months (or more) of shelter-at-home, experts have begun regularly speculating about what the post-pandemic office will look like. Since I’m on record opposing any kind of post-crisis predictions made while the crisis is ongoing, I’ll refrain from commenting upon the many predictions being offered, except to say that I agree the workplace will be different. Bear in mind, however, that there is rarely a time when it is untrue that the workplace of the future will be different. There were already a number of workplace-altering trends in place in 2020. The pandemic has accelerated, eliminated or exaggerated most of them.

First among the trends being accelerated is the move away from the open office plan. Hundreds of articles had been published about the fatigue that was setting in about open office plans. Whatever benefits came from that office design trend are currently being weighed against the fear of easier infection transmission. Likewise, the need to maintain a safe distance from co-workers is inspiring fresh looks at collaboration spaces and shared amenities, which were among the “must haves” for occupiers looking to use their real estate to attract talent.

Developer Jim Scalo is among those looking to understand what changes will be required of the post-COVID-19 workplace. He’s an advocate for the idea of attracting talent through better real estate. He also believes that on balance the pandemic will create demand for more space and he’s not alone. Former Google CEO Eric Schmidt recently made the same prediction on Meet the Press.

The rationale behind this theory is the need to make space less densely populated in order to reduce the risk of infection. Fewer people per square foot mean more space. This flies in the face of one of the primary motives driving the more dense open office plan: lower rent. Open plans may have been trendy for any number of reasons, but the most compelling (and mostly unspoken) was the decrease in space needed. CFOs became very trendy people once they realized the bottom line benefit of density was a smaller rent payment.

Countering the argument for more space is the change in perception about work from home (WFH). Forced to work from home for two months, the American office worker has adjusted very well. The same is true for employers. Most of them look at their next lease renewal with the new perspective on WFH and see the potential for a smaller office footprint. One big North Shore tenant was looking forward to expanding space to keep up with a growing workforce. A month into shelter-at-home, he wondered if he could get smaller space for the same number of people.

You can start to understand why office building owners and occupants are searching for answers. There isn’t much data on the subject and what exists adds to the dilemma. Continental Office did a survey of 424 people, ranging from admins to CEOs, during April and published the results today. Here are some highlights:

• 95% expect the office to be disinfected before returning to work and 96% expect the office to be cleaned and disinfected more often.

• 76% of people think shared seating should be eliminated. 71% think adding partitions to workstations is important.

• 58% of CEOs say they are re-thinking the amount of space they use.

• 74% of people aged 25-34 say they want a WFH option. 72% of all people said they were as productive or more productive working from home as from the office.

• 94% still want to have a physical workspace, regardless of how often they work from home.

• 72% said they missed the social interaction of an office.

Now try reconciling the last two bullet points with the three above them. Work from home can reduce the physical footprint of a business, but not if the company still needs to maintain a workplace for 94% of the workers! That’s probably the reason that Perkin Eastman’s Jeff Young guesses that some form of shared address seating will be part of the future office plan.

Young was one of just a few architects who said that clients had requested that they look at actual space requirements as a result of the pandemic. For their part, architects are being proactive and have generated some interesting guidelines for post-COVID offices, like The Post Quarentine Workplace from Dan Delisio at NEXT Architecture, or We are Here to Help from Perkins Eastman, or WELL Building Cleaning Protocol from Chip Desmone.

At the end of the day, it will be the occupants of the offices that drive whatever the office of the future looks like. Thus far, occupants are just as confused. Two veteran tenant reps, Kim Ford from COEO and Dan Adamski from JLL, were clear that it was too early to draw any conclusions. In fact, they both indicated a lack of specific requirements from tenants. Searches for space are on hold, except for those who absolutely must move.

It’s tough to count your blessings in the midst of a pandemic and business shutdown. You can, at least, thank your lucky stars that you don’t own an office building right now.

What We Know So Far (And What We Don’t)

This morning’s April jobs report was both stunning and completely expected. The headline – that 20.5 million fewer persons were employed in April – is unprecedented in documented U.S. history. At the same time, the Bureau of Labor Statistics’ report was in line with the trend from the weekly unemployment claims filed during the past eight weeks. The unemployment rate of 14.7% was slightly lower than what was forecasted by economists.

The data confirms that the U.S. economy has a mountain to climb before recovering. Anyone who gives you a forecast of how that recovery will go is a fool. There is no playbook for this kind of recession. Virtually none of the lessons from 9/11, the financial crisis, or the Great Depression for that matter, can be applied directly to the current situation. Government action has been swift but more time is required to judge if the quick action was an effective backstop or a Band-Aid on a bullet wound. There are some big trends beginning to appear, however. None can provide certainty about the near-term future but any clarity is welcome.

1) Government action will not restart the economy. Reopening business (more accurately, removing shelter at home restrictions) is different from restarting the economy. Evidence from China, Italy, Texas, Denmark, and Sweden points to a consumer who won’t return to consuming just because stores are open. Sweden has been held up as a model of remaining “normal” while the pandemic raged. Swedish consumers did not spend normally, reducing personal consumption by roughly 80% since March. It’s going to take a medical solution to make consumers comfortable that there is little or no risk in returning to normal activity.

2) China’s role in the world will change. As the U.S. relinquishes its leadership role in many global organizations, China has stepped in to increase its investment. Chinese companies, backed by its government, are poised to swoop in to buy struggling European auto makers and international airlines at pennies on the dollar. At the same time, China’s role in the global supply chain has made thousands of manufacturers vulnerable. Re-shoring the supply chain will happen. If it happens to a large degree, much of China’s manufacturing and its burgeoning middle class will be decimated. Negative sentiment about China’s lack of information and disinformation about the COVID-19 outbreak in Wuhan is fueling a backlash that will impact its trade. Whatever trajectory China was on in the global scene will be altered going forward.

3) The pandemic will accelerate the trend that was rewarding scale. Bigger companies will get bigger. There will be an acceleration of mergers and acquisitions once financing becomes more certain. Some big corporations will fail and their customers will make big competitors bigger.

For the Pittsburgh economy, some of these emerging macroeconomic trends could have some pretty specific impacts. As a center of medical research, Pittsburgh could get a boost if a treatment or vaccine originates here or can be replicated here. Will the disruption of China’s global role dim the flow of students and researchers to CMU and Pitt? Will the pandemic limit the number of foreign students overall to the economic drivers of our region. Does a tech giant buy struggling auto companies or consumer appliance makers and alter the arc of autonomous vehicle or artificial intelligence research in Pittsburgh?

On March 30 I posted that you shouldn’t trust articles that were heavy on “could,” “might,” or “may.” The word “could” only appears twice in this post but I’d still caution you from putting much stock in predictions at this point, especially those I make.

Construction returned to work this week in PA and the reports are that it went fairly smoothly. The Shell cracker project is a notable exception to the restart of work, although more workers are expected on site next week. There is no word from Shell or Great Arrow as to when a return for the 5,000-plus workers will occur.

PurePenn expansion at RIDC McKeesport. Photo by Emily Sipes.

In construction news, Arco Murray is underway on the $20 million PurePenn expansion at RIDC McKeesport. Momentum Inc. has started work on the new $2.8 million Armco Federal Credit Union Hub Branch in Mars. Haemonetics selected Al. Neyer to build-out its new $24 million lab in Findlay Township. AIMS Construction was awarded the $1.9 million UPMC St. Margaret’s Hospital roof and air handler replacement. MBM Contracting is working on $4 million-plus renovations at Jefferson Medical Arts Building and South Hills Medical Building in Jefferson Hills.

First Glimpses of the Construction Economy Post-Reopening

Construction resumes on Friday. There will be a number of conditions placed upon construction activities that will be restrictive. Over the next couple of months contractors and owners will test the limits of their collaborative natures as workers incorporate cleaning, distancing, and additional safety clothing into their daily productivity. There will be challenges to the productivity assumptions of all parties to a construction project. Questions remain unanswered about how willing the skilled worker will be to return to work, and how willing the construction owner is going to be to reopen its job site with so many unknown factors.

One of the unknowns about restarting construction is how much demand will return for construction services. Here in Pittsburgh, there were a handful of mega-projects in some form of construction or development that will create immediate demand for many workers, assuming the work resumes. It appears the Shell Franklin project will continue to its finish in 2021. Likewise, the $1.1 billion airport Terminal Modernization Program is expected to resume its early contract bidding this spring. Less certain are the $1.2 billion US Steel Mon Valley Works modernization, the $8 billion PTT cracker, and the timing of the UPMC Transplant and Heart Hospital at Presbyterian Hospital in Oakland. More uncertain, of course, is the demand from the bread-and-butter construction economy.

As states reopen for business gradually, the U.S. economy will begin shaking off the effects of around six weeks of shutdown. One effect of the timing of the sheltering at home is the lack of data measuring its impact. With more than 26 million first-time claims for unemployment filed during the period, it’s not hard to assume that consumers will have spent much less than normal. Consumer spending declines varied depending upon the type of expense. Clothing sales fell 50%. Hotel and airline receipts plummeted by more than 90%. Grocery sales jumped by 15%. All of these comparisons are March-to-February. We can be certain that a full month of sheltering in April will depress numbers again in April. Manufacturing also declined. Capacity utilization dropped over 7 points to 72.7% currently. Six weeks into the recession conditions, some data is emerging to give a view to the recovery that will follow.

Tuesday morning, CBRE’s senior economic advisor, Spencer Levy, addressed an audience of Pittsburgh real estate executives about the commercial real estate market recovery. In the presentation, called “Reassessing Pittsburgh’s Real Estate and Economic Outlook,” Levy expressed optimism about the macro economy and Pittsburgh’s economy. Levy pointed to the recovery in Hong Kong and China (to an extent) as indicators that demand for goods and services will return. His belief in a “V-shaped” recovery may be overly optimistic for the U.S. economy, but he made a case for Pittsburgh’s resilience to the downturn. Levy pointed out that cities with strong technology sectors, like San Francisco, Boston and Austin, saw stronger economic performance after the financial crisis and the 9/11 Dotcom bubble recessions. He expressed caution about the depressed oil/gas sector and the potential decline in international students, which have helped drive the strong universities in Pittsburgh.

More globally, Levy predicted that the “next 45 days are the most important for commercial real estate in U.S. history.” The slowdown in leasing and acquisitions reflects the great uncertainty about future occupancy and rents. Levy noted that CBRE-managed properties had fared better than expected thus far. Its multi-family and office rent collections were running at 90% of normal, while industrial properties were at 70%. Retail and hotels rents were between 20% and 40%. In his opinion, the next six weeks would help U.S. commercial real estate find a bottom and pricing certainty. From that point Levy predicted that multi-family and industrial properties would recover in 2021; office buildings would recover in 2022; and retail and hotels would lag into a third year of recovery.

Another global indicator of future construction, the AIA’s Architectural Billings Index (ABI), reflected the sudden shock to the economy that came in mid-March, with the billings index falling further than at any time in its history to 33.3%. The ABI is a binary index that reflects whether a firm’s billings increased or decreased from the previous month. The reading in March indicates that 2/3 of all firms saw declines in billings. That matches the responses at the depths of the Great Recession in Jan-Feb 2009.

Some of the major commercial real estate projects in Pittsburgh are continuing to advance, perhaps validating Levy’s point about the tech and biomedical sectors. Wexford Science & Technology took proposals from Turner and Mascaro on its 180,000 square foot research building on Forbes Avenue. A few blocks west, PJ Dick is bidding packages on Walnut Capital’s $100 million Innovation Research Tower. Spear Street Capital took proposals on the $50 million conversion of the former Sears Outlet at 51st Street. Aurora took proposals on tenant improvements for 140,000 square feet at 1600 Smallman Street.

Clarification: The April 23 post incorrectly listed AIMS Construction as the low bidder on a $4.5 million renovation to Pitt’s Cathedral of Learning ground floor, which was put on hold. AIMS was low on one alternative for the $1.5 million Architectural Film Studies Lab at the Cathedral of Learning. Dick Building Co. was the low bidder on the other alternative proposal.

Construction Readying to Re-Start May 1

The construction industry in PA received its second re-start news in the past week last night when Gov. Wolf announced his plan for reopening the PA economy. In Wednesday evening’s announcement was the news that construction could begin again on a limited basis on May 1. The announcement from last Thursday put the re-start of construction at May 8. Read the governor’s 3-step process to reopening.

Wolf’s most recent announcement was lacking updated instructions on what “limited” meant. If that assumes the same standards as were indicated last Friday, it means contractors can return with protective gear and follow the CDC’s guidelines for safe work. That would include washing/sanitizing tools and equipment, maintaining six-foot distancing between workers, heightened job site cleaning, and restrictions on workers congregating together. There were limits on the number of workers discussed after the April 16 announcement, which will need to be confirmed prior to returning to work. Those limits allowed four workers for projects up to 2,000 square feet, with one worker per 500 square feet after that. These limits could present a problem for small complicated projects like hospitals or labs, where multiple trades need to work in small spaces like MRI units or operating rooms. For medium-to-large spaces, however, the limits are manageable. For example, a 30,000 square foot project would accommodate 60 workers at a time.

Diamond Ridge. Rendering by NEXT Architecture

With the industry on the verge of re-opening, some construction news is in order. This morning, Burns & Scalo Real Estate announced it was developing Diamond Ridge, a 500,000 square foot, $130 million office complex of three buildings in Moon Township. The firm does its own construction and work is expected to start one the first building at the end of the year. Volpatt Construction was awarded the $3 million Langley Hall renovation at Pitt. DiMarco Construction was successful on the $2.75 million Butler County Community College South Campus maintenance building. DiMarco was also the low general on the $13 million South Hills Village PAT Station and garage renovation. MBM Contracting is doing the $3 million amenity space at One Gateway Center. United Contractors was awarded the general package on the $6.6 million Moniteau School District renovations in Butler County. Rycon Construction will be converting two buildings into Chase Bank branches in Oakland and on McKnight Road in Ross Township.

This morning’s announcement of first-time unemployment claims reported 4.4 million new unemployed in the week ending April 21. That brings the total of the four weeks since the national emergency was declared to more than 26 million claims. Beginning May 1, we will begin to get some hard economic data on activity since the shutdown of business. Expect that construction spending totals will not be as bad a number as many other indicators, since only three states stopped construction. The drop in demand for construction should reduce the total to near $1 trillion. That’s about a $300 billion decline since February.