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.

The Great Disruption – One Month In

We are apparently expected to name our economic events. The title above is one I’m seeing increasingly as the reference to the recession we are now experiencing. This past week marked the first month of sheltering at home in PA, and for most of the U.S. Today, the Labor Department reported that 5.2 million more Americans filed for unemployment last week. That brings the total for the four weeks to more than 22 million people laid off. It’s likely that number will be added to significantly next week but many economists believe that the terrible total from the first four weeks will have brought the U.S. economy very close to the bottom of the cycle. Allowing for the few companies that were hiring during April, the next jobs report on May 1 should show unemployment above 17%.

It’s way too soon to have a clear idea of what the recovery from this looks like. First, we’d have to have a clear end to the pandemic. In the U.S., there are insufficient means to test and trace those who are infected, meaning that the methods used to return to normal in other countries that have beaten back COVID-19 can’t be applied here yet. Assuming that business does begin to re-boot sometime in May, here are a couple of thoughts about what to expect from various economists and researchers:

Source: Wells Fargo Economics Group, U.S. Dept. of Commerce

1: Reopening the economy in the manner suggested by the advisors to the White House would lead to about one-third of the unemployed to rejoin the workforce by July. That brings unemployment back to 13% or so.
2: The abrupt nature of the disruption probably dipped GDP into negative territory for the first quarter. The deep decline since late March should compress most of the technical recession into the second quarter. That dip will be catastrophic, likely above 20%.
3: GDP growth should return in the third quarter. Some very smart economists predict that GDP will bounce back 7-10% this summer. I’m not sure I buy that but I understand upon what those experts base their forecast.
4: Without adequate testing and tracing, COVID-19 infections will flare up in the fall (maybe even sooner in places that have ignored the advice to practice social distancing). Controlling those flare-ups of community spread will allow the recovery to continue.
5: “Normal” will not return again until there is a widely available, affordable, treatment for COVID-19. That can either be a therapy or a vaccine.

The discussions/shouting match about reopening the economy is political, not economic. Neither the president, nor Congress, nor governor, nor mayor can get people back into restaurants, shopping centers, and offices if they don’t trust the environment will be safe for them. It’s why the success of finding a therapy or vaccine is not just a medical necessity but also an economic necessity. If we can take an antibiotic, or gargle with Listerine, or get a shot, and be confident that it won’t kill us, we’ll begin to return to our old habits of consumption. That’s when the economy will grow fast enough to bring everyone back to work.

One surprising finding from talking to local contractors this past week: bidding didn’t really slow down over the past month. Most of the public bidding did; however, owners as varied as PNC, Hitchiker Brewing, Chase Bank, Walnut Capital, Dancing Gnome, and Pitt have taken bids and awarded contracts while we have been sheltering. These haven’t turned into construction starts yet but it suggests that some number of the owners are ready to renew their business when it is safe to do so.

In construction news, the $40 million CCAC Workforce Development Center is out to bid. Likewise, bids are being taken for the $20 million Arnold Palmer Airport Runway Expansion and the $15 million Montgomery Dam repairs near Monaca. Pittsburgh’s URA approved financing for several projects this week. Mistick Construction will be renovating 327 North Negley into apartments, a $10.7 million project. URA approved funding for the $27 million Flats on Forward in Squirrel Hill, which PJ Dick will build. Buccini/Pollin and the Penguins unveiled its plans to the URA for purchasing the site for the $200 million FNB Tower in the Lower Hill. That project will be built by a venture involving PJ Dick, Mascaro and Massaro.

Iconic Wholey’s Building to be Converted into Office Tower

Iconic Wholey’s Building to be Converted into Office Tower

Iconic Wholey’s Building to be Converted into Office Tower

Most Pittsburghers are very familiar with the “Wholey Fish”, a longtime part of the strip district’s personality. Of course, this is nothing to speak of the Robert Wholey Company which stakes its claim as the most well-known seafood grocer in Western PA. While the company isn’t going anywhere, the iconic smiling fish is slated to make way to a brand new office tower. Ultimately, this change in the Pittsburgh skyline is a sign of a healthy commercial real estate market seizing an opportunity to turn a previously all-but-vacant property into a viable working space right next to downtown. 

Today, we will review the details of the new construction plans by reviewing the demolition plans, the new office tower which is expected to go up in the place of the Wholey Building, and by discussing a very brief history of the Robert Wholey Company and its tight-knit relationship with the city of Pittsburgh. 

Plans to Demolish the Wholey’s Cold Storage Facility

Plans to Demolish the Wholey’s Cold Storage Facility

Most folks simply know the large concrete building at the edge of the strip district as the Wholey Building. The proper name of the structure is, in fact, the Federal Cold Storage Building, address 1501 Penn Avenue. The property was purchased in October of 2018 by JMC Holdings, a New York City-based “entrepreneurial real estate company.” Locals might know JMC Holdings from their $15 million project redeveloping The Pennsylvanian. 

The commercial real estate property investors have recently announced plans to demolish the Federal Cold Storage Building. This demolition/construction effort will not have an impact on the Wholey Fish Market business which currently operates on Penn Avenue. Wholey’s has been quick to assure customers that while the iconic Wholey Fish might be gone in the near future, the company has barely utilized the cold storage center at 1501 Penn in recent years. 

For those of you wondering about the neon fish sign itself, it is not known whether it will make the move to a different building or be retired as part of the demolition. 

New 21-Story Office Space to Replace Wholey’s Building

New 21-Story Office Space to Replace Wholey’s Building

When JMC Holdings purchased 1501 Penn Avenue in 2018, their goal was always to replace the structure with a modern office building filled with top-of-the-line amenities. As the ball has begun to roll with this development effort, we have some additional details on what the building might look like:

  • 21 Stories and 950,000 square feet: The new office building is expected to be significantly larger in overall size than the previous Federal Cold Storage Building.

  • 13 floors and 520,000 square feet dedicated to office space: Initial plans include using the lion’s share of the floors and the overall square footage for office space.

  • 900 car parking capacity and a “footprint” of 17,000 square feet: Transportation amenities will also include a bike shop, convenient bike parking, and a cycling maintenance area.

  • Amenities including a fitness center, outdoor terrace, large conference rooms, and more: JMC Holdings has openly expressed its desire to take full advantage of the unique zoning in the strip district by offering a wide range of amenities. 

JMC Holdings engaged Turner Construction to do preconstruction during the early phase of planning when the project was proposed as an office of less than 300,000 square feet. Before the past holiday season JMC sought new proposals from Turner and PJ Dick/Dick Building Co. No selection has been made for the next preconstruction phase.

Going Forward

The Strip District has been a hotbed for commercial real estate expansion in the past few years. This newest move by JMC Holdings to erect an office building may have an interesting ripple effect across the immediate area and the downtown work environment overall. JMC has just begun the process of getting the site entitled and seeking the zoning variances necessary to build the project. Some officials have expressed skepticism about the project, it’s worth noting that Mayor Peduto’s displeasure with the aesthetics has no planning or zoning authority. There are no official dates for demolition, construction, or completion at this time.