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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. 

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech might not be a deeply ingrained industry standard, but every indication is that it is here to stay. Short for property technology, PropTech is essential for commercial real estate professionals and average people alike. The name PropTech suggests some sort of trendy new thing, but it represents more of a shift in real estate thinking than any one technological advancement. PropTech allows the real estate industry to act intelligently, anticipate future trends, and even improve customer experience

With all of this in mind, today we will aim to define PropTech, identify how PropTech is being used today, and how PropTech has and will continue to impact the commercial real estate landscape.

What is PropTech

What is PropTech? (Property Technology)

According to techtarget.com: “PropTech (property technology) is the use of information technology (IT) to help individuals and companies research, buy, sell and manage real estate…PropTech uses digital innovation to address the needs of the property industry.” In other words, PropTech can be thought of as any software or data analysis application that can be utilized within the real estate sector. 

It can be tempting to assume that PropTech must utilize some cutting edge technology like advanced algorithms, artificial intelligence, or advanced cloud computing. Those technologies certainly can be used, but the everyday realities of PropTech are more about the utilization of any technology for real estate purposes than the nature of the underlying technology itself. 

Going back to the introduction, commercial real estate is an industry that relies on industry wisdom like the one percent rule, the 50 percent rules, vacancy rates, cash flow rules, and much more. This creates a situation where real estate firms and professionals willing to embrace PropTech have a unique leg up on the competition. 

How PropTech is Used for Real Estate Today

How PropTech is Used for Real Estate Today

How can PropTech be used in the real world? Here are some ways in which PropTech is already being used for commercial, residential, and industrial real estate today.

  • Handling big data in the real estate sector: before diving into specifics, one of the main benefits of integrating PropTech into real estate is the need for real estate investors and other industry professionals to leverage the big data available today. When information is cheap, utilizing this information in a profitable manner is essential.

  • Real estate rental and/or buying sites: there are dozens of legitimate real estate search sites out there where users can rent or buy properties. Most people think of these as being for individuals searching for residential real estate, but plenty of PropTech apps/sites exist for commercial real estate including Digsy and LoopNet.

  • Virtual tour applications: for premium real estate listings, virtual tours have become the expectation. Full 360-degree tours available in VR and through standard screens are certainly examples of PropTech. This application has become extremely valuable as social distancing and more severe isolation measures taken to mitigate the COVID-19 pandemic limit physical property tours.

  • Real estate investment technology: for the investor, there are plenty of CRE investment apps from which to choose. These apps might run the numbers on property valuations, give comparables, set realistic rent goals, and much more.

  • Blockchain technology: the technology which allows many cryptocurrencies to operate without government backing is also getting a stronger foothold into the world of real estate every day. For more on blockchain technology and commercial real estate, read on here.

  • Consumer technology that connects them to the world of real estate: just about anything can be PropTech if it is used for the purposes of real estate. This could include your smart device, a digital assistant, a web browser and more. 

Commercial Real Estate PropTech Today and Tomorrow

Commercial Real Estate PropTech Today and Tomorrow

Many of the aforementioned applications of PropTech tie in closely with commercial real estate. The integration between technology and commercial real estate investment and construction gets deeper by the day. One aspect that we have not yet mentioned is how the commercial real estate industry is investing in PropTech itself. In 2016, over $2.5 billion was invested in real estate tech organizations. 

It is next to impossible to predict the future of technology. What is more reliably true is that PropTech will continue to influence commercial real estate construction and investment. A notable downstream impact of PropTech that we did not yet mention is how technology tends to equalize the “have’s” and the “have not’s” in deeply seeded industries. Where commercial real estate information used to be very difficult to find and analyze, many PropTech solutions offer anybody with an internet connection a fairly comprehensive look at industry information. This might also encourage more commercial real estate investment through REITs, crowdfunding, and other modern options. 

Going Forward

Major commercial real estate firms are not only trying to develop their own PropTech, but they are also trying to locate and utilize the best PropTech solutions from startups and third-party companies. The world of commercial real estate is always looking out for the next big industry disruptors such as finding new talent, changing consumer behaviors, and the future of the economy. The emergence and evolution of PropTech is right there with the most significant disruptors to the future landscape of CRE.

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

The stagnation or flat out devaluation of retail real estate values has been well documented in recent years. Dead malls and empty storefronts aren’t just headlines in the news, they are apparent for most of us in our daily lives. Yet it isn’t all doom and gloom. Brick & mortar retail is bouncing back in many regions and within many business sectors. Perhaps more importantly, commercial real estate owners are finding new and different methods to make retail spaces profitable again. In the case of Bed Bath & Beyond, their recent sale and leaseback arrangement could set a precedent for other struggling retailers to get an influx of liquid cash while also planning for the future. 

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Bed Bath & Beyond sold a large portion of its owned commercial real estate in January for a grand total of $250 million. The sale included a wide range of properties including multiple retails stores, office space, and a distribution center, totaling 2.1 million square feet. The commercial real estate portfolio was purchased by Oak Street Real Estate Capital, a privately owned real estate firm operating out of Chicago. It is estimated that the 2.1 million square foot sale accounts for approximately 50% of the real estate owned by Bed Bath & Beyond.

As part of the sales agreement, Bed Bath & Beyond has agreed to lease these properties back from Oak Street Real Estate Capital for an undisclosed period of time. According to Bed Bath & Beyond CEO Mark Tritton: “This marks the first step toward unlocking valuable capital in our business that can be put to work to amplify our plans to build a stronger, more efficient foundation to support revenue growth, financial stability and enhance shareholder value.”

Why This Move is Being Viewed as a Positive for Shareholders

Why This Move is Being Viewed as a Positive for Shareholders

Bed Bath & Beyond, like many struggling retailers, has a debt problem. According to their own public financial reports, the retail giant had accumulated approximately $1.5 billion in total debts as of early 2019. This had investors concerned in previous years. The decision to dump about half of its real estate interests was viewed as a smart move by many in the investment industry based on the fact that Bed Bath & Beyond desperately needed liquid capital to reinvest in their business.

New CEO Mark Tritton prioritized the sale of this property to free up the value of the company’s portfolio. Of course, renting vs. owning creates its own set of headaches. Now Bed Bath & Beyond is on the hook to wisely use this influx of cash to turn a profit or risk wasting their previously owned real estate assets. 

Some Pros and Cons of “Sale-Leaseback” Deals

Some Pros and Cons of “Sale-Leaseback” Deals

Sale-leaseback agreements are relatively uncommon, but they can certainly be mutually beneficial under the right circumstances. With deals like the one struck between Bed Bath & Beyond and Oak Street Real Estate Capital, there are some key benefits and risks that come with the territory, including:

  • Pro: the new lessee frees up capital. As we have already reviewed, perhaps the most obvious and important benefit from the perspective of the seller is the injection of cash they receive from the sale of their real estate. This one in the hand is worth two in the bush only works if organizations reinvest their cash wisely.
  • Pro: sale-leaseback agreements are alternatives to loans. When companies need cash fast, they generally seek loans or equity financing. Sale-leaseback deals allow companies to raise their own capital using owned assets and save money in the long run.
  • Con: tax implications. $250 million in cash sounds like a great deal, but Bed Bath & Beyond may be responsible for paying property sales tax on their new cash injection. There are deductions and reinvestment options to save on taxes, but taxes will be part of the picture regardless.
  • Con: lost long term value. Owning property might not be as sexy as making a huge sale, but the value of real estate cannot be overstated in the long haul. Selling massive real estate interests can be detrimental overall.

Impact of the Deal on Commercial Real Estate Going Forward

Sale-leaseback deals are nothing new. The impact of Bed Bath & Beyond’s recent real estate dump might come down to how the move impacts the company’s financial standing in the next few years. Complicating matters further, the recent Coronavirus fueled bear market has muddied the public’s ability to track Bed Bath & Beyond’s financial health in March and beyond. Projections still suggest that the move will benefit Bed Bath & Beyond in the long term. This may prompt other cash strapped retailers to make similar decisions with their commercial real estate portfolios. 

It will also be telling to see whether the company continues to sell its remaining CRE assets. Other major retailers like Macy’s and Sears have also employed this in the past with mixed results. Whether the latest major sale-leaseback is a revitalization or a last gasp, it will likely inform the future decisions of other companies in similar situations moving forward.

CMU Converting to Wind Power Could Set a Precedent in the Area

CMU Converting to Wind Power Could Set a Precedent in the Area

CMU Converting to Wind Power Could Set a Precedent in the Area

In September of 2019, Carnegie Mellon University announced a deal with Engie Resources for wind power from a 306 megawatt wind farm in Illinois. The deal is to last through 2024, and would power its Pittsburgh campus. This was a bold move towards sustainability and viability of variable renewable energy (VRE), and sets a precedent for other businesses and universities in the area. The move could potentially signal a paradigm shift towards institutional use of environmentally conscious infrastructure for new construction and renovations alike.

With all of this in mind, today we will discuss wind power 101, how other regions and countries have successfully implemented wind power, and ultimately how the recent CMU wind power deal could impact the local CRE landscape.

Wind Power: the Basics

Wind power is a type of variable renewable energy (VRE). The National Renewable Energy Laboratory (NREL) does not identify technical barriers to a grid running solely on VRE, but instead, many of the challenges come from capacity factors. A capacity factor is based on how much power a plant produces in comparison to its overall potential, and it is often based on how often a plan is running or generating power. A conservative estimate for the capacity factor for VREs, namely wind and solar, is around 50 percent.

When there is wind, there is power. On the other hand, nuclear power plants usually have over 90 percent capacity factor. In the long term, however, the resources being utilized will dwindle, which is why many businesses, cities, and states are moving towards either a mix of “clean” energy or, in the case of Carnegie Mellon University, 100 percent wind power.

Examples of Wind Power Around the World

Examples of Wind Power Around the World

As of March 2020, 60 percent of Germany’s energy came from renewable sources, the majority of which came from wind turbines. China and the US lead all countries with total wind power usage, clocking in at 221 GW and 96.4 GW respectively. Interestingly, Germany (the third highest wind power producer in the world) sets a far more productive example of using wind power the right way. Meanwhile, China’s ambitious wind farms have been reported to go largely unused.

This concept of wasted alternative energy hits home in the US. While many Americans support alternative energy over traditional fossil fuels, recent polls have also shown that Americans also fear alternative fuels are less efficient and costlier than the current energy infrastructure. Germany is also a great parallel for Western PA as a region in that Germany has traditionally depended on coal economically and for their energy needs.

German infrastructure has been updated over the past 10 years to adopt more alternative energy sources including wind power that made energy production more efficient, cost effective, and beneficial to the economy overall. Other countries including India, Spain, and the UK have all adopted wind power with mostly positive results.

Implications of CMU Using Wind Power in Pittsburgh

Implications of CMU Using Wind Power in Pittsburgh

That background information leads us to the simple question: will CMU’s converting to wind power have a material impact on commercial real estate in the Pittsburgh area? Unfortunately, as with many issues concerning alternative fuels and climate change the answer is less than clear. Here are a few factors and considerations that will likely come into play when it comes to wind power adoption in Pittsburgh.

  1. Will there be sufficient alternative fuel infrastructure? Businesses and other organizations with the intention of switching to an alternative fuel such as wind power is one thing. Having the available resources and/or infrastructure to make that change is another. The US might produce the second most wind power on earth, but it is primarily located in the Great Plains states.
  2. Governmental and public support. Again, converting to wind power is a very significant choice that requires available supply and infrastructure. The US currently gets slightly more than 7% of its energy needs from wind power. While this number is expected to rise, the future remains murky.
  3. Cost viability of wind power in Pittsburgh. The success of the wind power program at CMU may influence public opinion but investment in wind power in the near future will still depend upon return on investment. As CMU’s contract will run through 2024, we expect to see more detailed numbers over the next 4 or so years.

Implications of CMU Using Wind Power in Pittsburgh

Going Forward

Alternative energy sources become less “alternative” by the day. Some countries, including Sweden and Iceland, have committed to cutting fossil fuels from their energy creation entirely. Such a transition is harder to sell in places, like Western PA, where natural gas and coal are still significant economic drivers. There are ideological and political shifts which will determine the future of alternative power sources including wind energy. American institutions like CMU committing to 100% alternative power generation will certainly have an impact on public perception of such programs.

Working Through the Fear and Some Construction News

On March 20 I posted about how difficult the coming weeks were going to be. As expected, the past week brought much worse news than the previous week.

News about the spread of COVID-19 has followed the same pattern as the news that has come from the rest of the world. As states have responded to the outbreak with shelter-in-place orders, the economy has slowed. The huge jump in first-time unemployment claims filed – some 3.28 million new claims – shocked the public but was also not a surprise to economists tracking the pandemic.

The next few week’s news will be bad too. That’s how the fear stage of a crisis works out. It is likely that the news won’t improve much for a while. That doesn’t mean we won’t work through the fear stage. We’ll accept the gravity of the situation, or get used to the bad news, and then work our way through the crisis. Business owners I know started doing that very thing this week and it was a tough week for that reason. Working through this means layoffs and pay cuts. Small business owners hate taking those steps but they are the first steps in recovering. You have to survive to recover. And there will also be good news too. Last week Congress passed a package of measures that will help with some of the economic damage from the outbreak. Federal guidance on isolation were extended and showed the government was taking the outbreak seriously as a public health threat. Even the stock market showed signs that the selloff may have stopped.

One thing that helps with the fear stage is being informed. That has its own set of challenges. You have to work hard at deciphering information from opinion but here’s a tip: avoid any article that has the words “could,” “might,” or “may” in the title. These are attempts at predicting how this crisis will play out. They are most certainly going to be wrong. The forecasts will be both too gloomy and too optimistic, but almost certainly wrong. It’s not that the articles won’t be well-researched or the forecasts unfounded; it’s that the most important variables are so far from being understood that you can’t reliably predict an outcome.

As an example, some very smart people earlier this week predicted that unemployment “could” reach 30 percent as a result of the shutdown. That was the Federal Reserve Bank of St. Louis. That’s 47 million people, or six times the number of people thrown out of work in 2008-2009. Several industry categories would have to go to zero employment for that to come true. More importantly, that kind of forecast leaned on variables about infectious rates and quarantining that aren’t even known in countries that faced the virus a month before the U.S.

Why does this matter? In the fear stage, our minds gravitate towards the negative emotions. We envision the worst that could happen as our likeliest future. Christy Uffelman from Align Leadership shared this Harvard Business Review article on the emotions of fear last week. It’s OK for leaders to embrace the grief that this kind of crisis brings; it’s not OK for leaders to embrace opinions and feelings as facts. Better we should stick with what we know, rather than search for what experts think might happen. Reflecting again on the financial crisis, many of the experts who were forecasting the end of the world in September 2008 were telling us that the panic was overblown in July 2008.

The course of events over the next few months is unclear. Uncertainty helps feed fear too. But some things that are uncertain will have positive outcomes too. There will be resources thrown at developing a vaccine as quickly as possible. It won’t take as long as we fear. Prior to World War II, it took three years to build an Essex class air craft carrier. By 1943, shipbuilders were launching one every 3 ½ months.

We simply don’t know what we don’t know about this pandemic. Stick with resources that inform you, rather than those trying to tell you what will happen or how to feel. Here are a couple of suggestions:

Allegheny County established a rumor control website for public health concerns.

Newmark Knight Frank issued a clear-eyed and objective report on how the pandemic is impacting commercial real estate and construction.

U.S. Senate Committee on Small Business and Entrepreneurship posted a useful guide to the benefits in the $2 trillion CARES Act for businesses.

There is construction news, even in a shutdown. First, the shutdown of construction may be short-lived. Speaker of the PA House, Mike Turzai, is introducing HB2400 next week to allow all construction projects to move forward with mitigation efforts in place. Industry associations have been working to draft mitigation plans this week to make job sites safe for workers. It is not known if Gov. Wolf will support such a bill. The General Contractors Association of PA – working closely with the MBA – developed a COVDID-19 exposure mitigation plan that will inform PA policy.

In project news, Mascaro Construction is coming out of the ground on the $12 million Steelers Pro Shop addition to Heinz Field. Carl Walker Construction has started work on the $11 million renovation of the UPMC parking garage at 3500 Terrace Street. Omega Building Co. is underway on the $7.9 million kitchen and restroom renovations at the Cork Factory. M*Modal is taking 53,000 square feet in the $20 million expansion/renovation of 7514 Penn Avenue that Franjo Construction is doing. Lone Pine Construction was awarded the Westmoreland County Municipal Authority’s $5.5 million office and garage in New Stanton.

Shutting Down Construction and Thinking About What’s Next

The order to shut down all PA businesses except those that are life sustaining is a splash of cold water on the construction industry. While the order has caused dismay in parts of the industry, it has removed uncertainty about how construction companies should react to the pandemic. This week I’ve talked to a lot of old friends/customers and talked more than a few off the ledge. There is some comfort in not having to make the tough choice between keeping people working and keeping people safe from infection.

This week definitely had the feel of the first week of the financial crisis in mid- September 2008. There was bad news every day and the whole thing is evolving rapidly. We’re in the fear phase of the crisis. We don’t know what’s about to happen and we don’t know what will solve the crisis. Judging from the data from other countries where the outbreak happened first, we’re going to get worse news next week and maybe worse the week afterwards. And that’s only if we get the ability to start testing widely. At the same time, the bad news about how the infection is spreading should not be a surprise. COVID-19 will behave much the same way in the U.S. as in other countries. After a few weeks, we will begin to accept the news and the fear of the unknown (at least) should recede.

There was an interesting graphic I saw this AM, maybe on Twitter? It showed the rapid increase in research on COVID-19, which looked very much like all the graphs on the rapid spread of the virus itself. There is a cottage industry of sorts blossoming in coronavirus articles. It reminds me of the flood of research and articles during the financial crisis, many of which had the same feel as those today that predict how this virus will develop. All of those articles – about the huge toxic asset balance, the trillions in CDOs, or the tidal wave of refinancing that would break the market in 2012 and 2013 – were based in reality in 2008. All were also ultimately wrong. Why? Things changed.

Setting aside articles written from one bias or the other, many well-meaning nand bright people are going to write predictions about how another wave of infections is coming, or how the virus will mutate and return in 2021, or how it will all blow over in 45 days. We don’t know enough about COVID-19 to make predictions. We also don’t know what will change with a little more time. Really smart people are trying to develop treatment or vaccines. Applying the same assumptions to this effort as if people were trying to develop an acne medicine is foolish. Maybe COVID-19 can’t be treated but the evidence suggests that a vaccine is possible. I’m betting that the trial period won’t be too long. Don’t put too much stock in predictions when we know things are going to change.

One article I do suggest you read is this article by a bunch of engineers and doctors that are trying to draw conclusions from what little data we have. The goal: buying more time.

Speaking of buying time, while you are waiting for the March/April BreakingGround to appear at your office, you can get a peak at it online at the Tall Timber Group website. We take a whack at trying to update you on the economy in a rapidly-changing environment.

Second Phase of Major AHN Construction Project Nearly Complete

Second Phase of Major AHN Construction Projects Nearly Complete
Second Phase of Major AHN Construction Projects Nearly Complete

Allegheny Health Network, much like their latest business partners UPMC, have kept busy in recent years with commercial real estate purchases and developments. One of these development projects is a new emergency department in the Jefferson Hospital in Jefferson HIlls, PA. This project is just one of multiple renovations and new construction projects currently underway under the Allegheny Health Network Banner. Today, we will review the details of the AHN Jefferson Hospital project, discuss some other recent AHN commercial real estate deals, and end with how these projects might impact CRE in our local Pittsburgh region.

Details on the Jefferson Hospital Expansion Project

Details on the Jefferson Hospital Expansion Project

According to Commercial Property Executive: “Highmark Health and Allegheny Health Network have completed Phase I of the new emergency department of AHN Jefferson Hospital in Jefferson Hills, Pa. The project cost $21 million and expanded the existing facility by 34,000 square feet. During the renovations, the hospital’s helipad was also relocated to the roof of the structure. Phase II, which is expected to complete in May 2020, will consist of modernizing the current emergency department space.”

The AHN Jefferson Hospital is home to nearly 400 doctors covering over 40 areas of practice. The new emergency department will consist of:

  • 44 private treatment and observation rooms
  • 7 central nursing pods
  • A more modern and spacious triage area focused on privacy
  • Advance CT and x-ray capabilities
  • Trauma rooms
  • Rooms specially designed for behavior health assessments and treatments

The AHN Jefferson hospital currently cares for over 50,000 patients in the Lower Mon Valley and South Hills areas. This latest round of renovations comes on the heels of a $17.5 million investment into a new surgical suite.

Recent Allegheny Health Network CRE Investments

Recent Allegheny Health Network CRE Investments

While the AHN Jefferson Hospital upgrades are ongoing, they are certainly part of a larger effort being put forth by AHN to modernize and invest in their medical facilities. Here are some other recent examples.

AHN Constructing Harmar Hospital

AHN broke ground on a new Harmer Hospital location on October 5, 2018. The site is still under construction, but is expected to open this fall. Construction on the site was delayed for six months, but kicked back into full gear in July of 2019. The new Harmar Hospital will be located at the intersection of Freeport Road and Guys Run Road, near Zone 28 (formerly Fun Fest). The site will operate as an emergency hospital with additional services including imaging, inpatient care, and a multitude of lab tests.

AHN Construction on New Wexford Hospital

As of October 24, 2019, the final beam was put into place for the brand new AHN Wexford Hospital. The 160-bed hospital is expected to open in 2021. According to Cynthia Hundorfean, AHN CEO and President, “When Wexford Hospital opens its doors, it will be the most technologically advanced and patient-centric acute care hospital in western Pennsylvania.” The hospital is being built in response to the rapid growth in Pine Township and the surrounding areas.

AHN Waterworks Outpatient Center

On a smaller scale, Allegheny Health Network has also committed time and resources into developing outpatient centers for local residents. The most recent of these investments went into the AHN Waterworks Outpatient Center. The center employees ~35 workers, and includes:

  • Gynecologist/obstetrician appointments with full ultrasound capabilities
  • Orthopedic care provided by Allegheny Orthopedic Associates
  • Primary care for adults and children
  • Cardiology care including echograms
  • Diagnostics services including blood tests, MRI, CT scans, 3-D mammography, and more
  • Express care service for non-emergency healthcare with no appointment necessary

How Medical Construction Impacts Western PA Commercial Real Estate

How Medical Construction Impacts Western PA Commercial Real Estate

Allegheny Health Network has been investing heavily into the local community, but how does that impact the local Pittsburgh commercial real estate market? While the full breadth of these major CRE investments is far reaching, here are a few primary takeaways:

Investment in local healthcare drives the local economy. It is well documented that greater healthcare investments lead to greater economic health. This has been shown to be true on both large and small scales. As AHN and UPMC continue to invest and improve our local healthcare resources, the population gets healthier, jobs are created, and the overall quality of life improves. This creates a stronger economy which in turn has a positive impact on commercial real estate in the area.

Greater healthcare services serve our aging population. Pennsylvania, like much of the US, has an aging population. As a greater percentage of our local population is 65 plus, the need for healthcare services increases. AHN investing in hospitals and outpatient centers allows the aging population to remain in their current areas. This increases the demand for housing, retail locations, and commercial real estate overall.

AHN is choosing to renovate defunct retail locations. On a more specific note, AHN and other local healthcare providers have been more willing to renovate/repurpose spaces in dead malls and other retail locations. This could be great news for CRE investors sitting on vacant retail spaces. At the end of the day, any CRE investments from our regional healthcare networks should be a shot in the arm to the commercial real estate market overall.

Pittsburgh’s Tech Boom is Driving the Local Real Estate Market

Pittsburgh’s real estate landscape has changed significantly since the slowdown of the manufacturing and steel industry decades ago. The influx of technology giants such as Uber and Google has brought a rise in the demand for both commercial and residential real estate. The low cost of property relative to cities like New York and San Francisco has been attracting companies such as Duolingo, a language learning app that moved its headquarters to Pittsburgh and subsequently put up billboards in San Francisco in 2018 advertising, “Own a Home. Work in Tech. Move to Pittsburgh.” Although plenty of attention has been paid to the effects of the tech industry on residential real estate, not as much as has been placed on commercial real estate.

Today, we will try to connect the dots between the influx of high profile tech companies, trends in local employee behaviors, and how this new Pittsburgh business atmosphere is having a major impact on the local commercial real estate market.

The Current State of Pittsburgh’s Tech Boom

Most of us in Western PA have noticed the recent boost in high tech presence in our local regions. Splitting from our historical business ventures like steel and coal, Pittsburgh is becoming an affordable alternative for tech companies who are no longer willing or able to pay for spaces in Silicon Valley, San Francisco, and other bloated commercial real estate markets.

Much of this tech boom is reliant on the rich talent pool being churned out by local universities. In particular, computer science, robotics, and other high tech programs at Carnegie Mellon University are routinely ranked amongst the best in the world. In recent years, companies like Google and Uber have been working hard to keep these young tech professionals in the local Pittsburgh area after graduation. Those efforts are starting to pay dividends.

Today, there are significantly more jobs (approximately 41%) in research and development than there are in iron and steel mills. Pittsburgh is also experiencing attention from investors. “SoftBank Group Corp (9984.T) last year led a $93 million investment in Pittsburgh-based AI company Petuum. Innovation Works recently hosted 30 Chinese investors interested in robotics and health care start-ups.”

Office Spaces for Google, Uber, Duolingo, and More

While there are many players in the technological revitalization of Pittsburgh, there are a few key players who are leading the way.

Google has long made massive investments in Pittsburgh, particularly with their Bakery Square office spaces. The refurbished Nabisco factory is a fitting transition from the old to the new. Much like Duolingo, Google has actively pursued bringing tech talent to the Pittsburgh area to live and work in the East End.

Uber employs thousands of workers in the Pittsburgh area, which of course does not include the drivers themselves. Perhaps more importantly, Uber has selected Pittsburgh as a research center for self-driving cars. This move ties the ridesharing tech giant to our region for years to come.

Duolingo was founded and is currently headquartered in Pittsburgh. In December, Duolingo became Pittsburgh’s first tech “unicorn” when a fundraising round pushed the company’s value above $1 billion. Rather than going the route of other tech giants and selecting our region as an affordable alternative, Duolingo has always been committed to revitalizing the Pittsburgh area. Duolingo employs 200 workers in local offices.

The Impact of Tech Companies on Commercial Real Estate in Pittsburgh

Beyond the obvious connection of tech companies’ presence being an injection to the local economy, here are some concrete ways in which tech companies have impacted the local commercial real estate industry:

  • Office jobs are on the rise: commercial real estate value for office spaces have been increasing as tech companies continue to occupy more and more space. Thousands of jobs were added in the summer of 2019 as a continuing trend of higher occupancy rates for local office space.
  • Tech companies are investing in properties: not all CRE impacts are directly related to office spaces. For example, Uber recently purchased 600 acres of commercial real estate in Findlay County, PA. This space is going to be used for a self-driving test track for their latest vehicles.
  • Tech workers are driving occupancy in apartment complexes: large multi-family CRE complexes have been going up around the Pittsburgh area, particularly in areas like East Liberty, Lawrenceville, and South of downtown. These complexes are being built in part to accommodate a rising number of tech employees in our area.
  • More tech investment = more local wealth: last but not least, it is undeniable that tech dollars drive local economies. A strong local economy often means a strong commercial real estate market.

Going Forward

There are no signs that the trend of high tech companies choosing Pittsburgh will slow any time soon. An industry-wide trend of shifting away from California and other west coast markets towards traditionally affordable markets is driving the tech industry overall. Other cities experiencing similar growth include Nashville, TN and Austin, TX. The Pittsburgh commercial real estate market has responded in turn, focusing more on offering high scale amenities at premium prices.

What remains to be seen is whether any other large companies like Amazon will set up additional headquarters in our area. Regardless, the effort to keep local talent and recruit local talent to our area will certainly continue to have a major impact on our economy and real estate markets.

Understanding Triple Net Lease (NNN) Agreements

Understanding the intricacies of different commercial real estate lease agreements allows investors, property managers, and lessees to come to an arrangement that is mutually beneficial. One common “special” type of lease arrangement for commercial real estate is known as a triple net lease or a NNN lease. These types of lease arrangements are typically utilized in situations where a single tenant rents out an entire space. While NNN leases are almost always for commercial real estate agreements, they apply to other real estate ventures as well.

With all of this in mind, today we will define triple net leases in detail, explain how they differ from standard leases, single net leases, and double net leases, and finally discuss why NNN leases can benefit both investors and tenants for medium to long term commercial real estate agreements.

What is a Triple Net Lease (NNN) Agreement?

As mentioned in the introduction, a triple net lease may also be called a NNN lease or a net-net-net lease. In a triple net lease agreement, “tenant(s) agree to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.” In other words, the landowner will not be responsible for many, if any, maintenance expenses on the property during the term of the lease.

For a multitude of reasons, NNN leases are less common for short term leases. It is more common for triple net leases to range from 10 to 15 years with stipulations for rate increases over the term of the loan as appropriate. As we will discuss in greater detail below, the primary benefits of NNN leases are lower risk for investors/property owners and lower rates for lessees.

Single vs. Double vs. Triple Net Lease Agreements

Net leases are not necessarily an all or nothing proposition. Instead, there are also single and double net leases that are sometimes used to balance risk vs. cash flow. Here are the similarities and differences between single net leases, double net leases, and triple net leases:

Single net leases are less common than triple net leases, particularly for commercial real estate. According to investopedia.com, single net leases are when: “the landlord transfers a minimal amount of risk to the tenant, who pays the property taxes. This means any other expense—such as insurance, maintenance and repairs, and utilities—are the landlord’s responsibility. The landlord is also responsible for any maintenance and/or repairs that must be done during the course of the lease within the property.”

Double net leases are much more common for commercial real estate agreements. In double net leases, tenants are responsible for insurance premiums and property tax on top of their rent owed. Maintenance costs remain with the landowner.

Triple net leases put the biggest responsibility on the tenants, essentially making the tenants responsible for any ongoing fees and costs related to the property. These include all three of the costs discussed above: insurance premiums, property tax, and maintenance costs.

Gross vs. Net Leases for Commercial Real Estate

Of course, not all commercial real estate agreements are considered “net”. There are also gross leases in CRE in which the property owner maintains fully financial liability for the property during the course of the lease. All commercial real estate leases are considered either gross or net, with single, double, and triple net lease agreements being the differentiator for the degree of responsibility that will reside with the tenant(s).

Benefits of NNN Agreements for Commercial Real Estate Properties

This leads us to our last question: why are NNN leases preferable to other commercial real estate leases? The answer is that they aren’t preferable in all situations. All types of leases from gross to triple net lease arrangements have their share of benefits and risks. Here is a high-level checklist of the benefits of triple net leases:

  • NNN leases carry the lowest risk for investors. The primary benefit of a triple net lease from the perspective of the investor/property owner is the low risk. If insurance premiums go up or if a major repair is required, with a NNN lease, that onus falls on the tenant.
  • Triple net leases are more affordable for tenants. On the flip side, the selling point for NNN leases to tenants is their affordability. Lessened risk for the commercial real estate investor also means lower rental rates.
  • Triple net cap rates are easier to calculate. While this is all relative, calculating NNN cap rates is more reliable than calculating gross cap rates. This is tied into the concept of risk and a more reliable return on investment.

In Summary

Double and triple net leases are likely to remain an appealing option for commercial real estate investors and tenants for many years to come. In the right circumstances, NNN leases are mutually beneficial with their ability to reduce risk for investors and reduce total costs for tenants. Yet they are not appropriate for all CRE lease agreements. As with many decision-making processes, understanding all options available before entering into a commercial real estate lease agreement is a great way to make the best possible choice.