Category: Construction news

Construction Costs Are Cooling

The sharp slowdown in construction globally drove declines in many materials and building products in the second quarter. And competitive reactions to slower future markets pushed contractor prices lower. These were the observations of Turner Construction Vice President Attilio Rivetti, who compiled the Turner Building Construction Index (BCI) for the period. The BCI for the second quarter slipped lower to 1177. The decline was the first since 2010. Rivetti remarked that the third quarter should “more clearly define the fluctuation of escalation of cost in the construction industry.” You can download the report here.

Turner’s Building Construction Index fell by 1% during the 2nd quarter.

One week ago, the Bureau of Labor Statistics released its report on May’s inflation, including producer price indexes (PPI) for construction. The report showed costs for construction put in place were still up year-over-year, but that PPI inflation for all types of construction was roughly half what it was in January and February. For the first time in memory, inputs to construction across all types and trades were negative compared to May 2019. Across the board construction input deflation did not even occur during the Great Recession’s trough. You can read the tables prepared by the Associated General Contractors here.

Some random takes on the unemployment picture over the past week: Since the details on the Payroll Protection Program were revealed we’ve learned that firms employing a total of 51 million people received PPP loans. Since it’s estimated that roughly one-third of the people laid off during the April/May shutdown of the economy have returned to work, the number of people recalled by employers seeking to avoid repayment of the loans could be a drag on employment gains after PPP expires. If workers recalled by firms with PPP loans can’t be supported by revenues after the program expires, it’s likely more will fall back into unemployment. Wells Fargo Economics is forecasting that unemployment will stay above 8% in 2020 and remain above 6% through 2021.

One interesting economic data point to bear in mind during the debate over returning to schools is the fact that 23% of workers are the parent of a child under the age of 13.

Franjo Cosntruction has started work on the $7 million new Bowser Hyundai dealership in Chippewa Township, Beaver Co. Franjo is also the contractor for the new $10 million, 51-unit condo being developed by Solara Ventures at 26th & Penn. TEDCO Construction was awarded the general construction contract from DGS for the $3 million Ground Floor Renovation at the Cathedral of Learning. Mele & Mele & Sons was awarded the general contract for the Breakneck Creek Wastewater Treatment Plant Expansion in Adams Township, Butler County. Ferri Contracting was awarded the $6.3 million Kiski Pump Stations replacement in Leechburg. Derek Engineering was the successful contractor on the new Taco Bell in Chippewa Township.

A Flurry of Jobs Reports With Good News/Bad News

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

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

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

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

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

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

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

Good News and Bad, A Month Into Re-Opening

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

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

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

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

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

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

Where We Stand as We Move to Green

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

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

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

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

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

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

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

Source: U.S. Census Bureau

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

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

 

 

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.

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.

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.