Category: National Economy

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.

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.

Interest Rate Cut Boosts Housing Market, Other Pittsburgh Construction Market News

Right off the bat, let me offer a disclaimer about the Fed’s rate cut. It’s going to help certain (very limited) parts of the US economy but will do nothing to help with whatever economic headaches result from the coronavirus. You can read more of this rant in the Publisher’s Note of the March/April BreakingGround in a couple weeks. The economy doesn’t need stimulus. What will be needed is a safety net for those who get thrown out of work. That will probably be cheaper for us taxpayers and way more effective than measures that will mainly please big donors to political parties. The oil and gas industry is getting clobbered further because the Russians and Saudis have started an oil price war. If the coronavirus was cured tomorrow that wouldn’t change. Likewise, giving people payroll tax relief helps those who are on someone’s payroll, not those who are laid off. That’s the disclaimer. I didn’t say it would be short.

Cutting rates is bad overall for banking because it reduces bank interest income from lending. Rate cuts are good for banks and lenders, however, when the cuts stimulate mortgage loans. Boy, has last week’s cut worked in that regard. The Mortgage Bankers Association reported this morning that there was a 79% jump in refinancing activity since last week. SINCE. LAST. WEEK. Refinancing activity is up 479% compared to last year. Refinancing is a zero sum game, which in the long run reduces the interest income for lenders overall. But, in the meantime, a 479% increase in refinancing will mean a significant increase in fees associated with the new loans. And, for the consumer, the refinancing means a big improvement in the household balance sheet. Cost of home ownership is lower. There’s more discretionary income. Mortgage indebtedness is cut to 15 years or less for millions.

Source: Federal Reserve Bank of St. Louis

The Mortgage Bankers also reported that there had been a 6% increase in home purchase mortgage applications, which was a 12% increase year-over-year. That pales in comparison to refinancing applications but there isn’t a Realtor in America who wouldn’t take a 12% jump in home sales. Likely that increase would be greater if there was a normal inventory of homes for sale.

On to Pittsburgh construction contracts. The Builder’s Exchange is reporting that Mistick Construction is taking bids on its $13 million 49-unit Clairton Inn mixed-use project. PBX also reported that Watson Institute is taking bids from A. Martini & Co., PJ Dick and TEDCO. Turner Construction was awarded the $12 million Price Waterhouse TI at One Oxford Centre. PJ Dick will be the contractor for the $10 million conversion of the Roundhouse at Hazelwood Green. Volpatt Construction was awarded the $4 million Carnegie Library Downtown Branch renovation. Stevens and Chapman Corp are building the new 250,000 sq. ft. plant for AmeriPrecision Metals in Canonsburg. Landau is the CM for Grove City College’s $8 million library renovation. And in non-Pittsburgh construction news, Mascaro Construction is the CM for the $90 million Carolina Panthers headquarters and training center just south of Charlotte in Rock Hill, SC.

Will Cannabis Legalization Present CRE Investment Opportunities?

Will Cannabis Legalization Present CRE Investment Opportunities?

No matter what your personal views on the matter, the cannabis legalization discussion is here to stay. As of the writing of this article, marijuana is fully legal in 11 states and legal for medical use in over half the states in the US. Those numbers are not expected to diminish, with additional states considering full or partial cannabis legalization. What has followed has been a growth in a previously non-existent industry that has affected both micro and macro economics in the US. The question we now ask is: will cannabis legalization change the commercial real estate market?

To answer this question, today we will explore the current state of marijuana legislature as well as future projections, the likelihood that cannabis will become fully legalized in the state of Pennsylvania, and discuss how federal and state legislation on cannabis has and will continue to impact the CRE industry.

The Latest on Cannabis Legalization

First and foremost, the federal government considers marijuana a class 1 controlled substance. This puts marijuana at the same tier as LSD, heroin, ecstasy, peyote, and methaqualone.

There is nothing clear about the current state of cannabis legalization. So let’s stick with the facts. First and foremost, the federal government considers marijuana a class 1 controlled substance. This puts marijuana at the same tier as LSD, heroin, ecstasy, peyote, and methaqualone. While legislation has been proposed, the nationwide legalization of marijuana is likely very far off.

11 states have fully decriminalized marijuana

It should be noted that although we consider these states part of a group, their individual laws on cannabis regulation vary dramatically. What remains constant is that users must be over the age of 21, and distribution is still highly regulated. The states that have legalized marijuana include Washington, California, Maine, Michigan, Alaska, Nevada, Colorado, Oregon, Illinois, Massachusetts, and Vermont.

33 states currently allow the legal use of marijuana for medical purposes

33 states plus the District of Columbia allow residents to own and use marijuana when it is prescribed by a physician. Pennsylvania is one of these states. These laws become even cloudier than the “fully legal” 11 states listed above, as the medical red tape can be quite complex.

33 states plus the District of Columbia allow residents to own and use marijuana when it is prescribed by a physician. Pennsylvania is one of these states.

Fully illegal vs. decriminalized and beyond

For the 39 states that have not legalized marijuana, there are varying degrees of criminality associated with possession and distribution charges. Some states including Delaware, Connecticut, Maine, and New York, have reduced cannabis charges, meaning previous punishments have been diminished for those.

Will Cannabis be Legalized in Pennsylvania?

Pennsylvania’s laws on cannabis allow for medical use only. Unlike some other states, Pennsylvania has not enacted laws to decriminalize marijuana possession or distribution charges. As we discuss the possibility of the marijuana business impacting commercial real estate in our region, the next logical question becomes: how likely is it that cannabis will become legal in Pennsylvania?

The answer is as complex as you might imagine. Politicians including Governor Tom Wolf and Lieutenant Governor John Fetterman have both gone on record stating that they would consider the legalization of marijuana in the future. In the case of Fetterman, he is openly in favor of full legalization on the state and federal level.

Pennsylvania’s laws on cannabis allow for medical use only. Unlike some other states, Pennsylvania has not enacted laws to decriminalize marijuana possession or distribution charges.

Recent polls suggest that 59 percent of Pennsylvanians support the recreational use of marijuana. This is in stark contrast to a similar poll in 2006, in which only 22 percent of registered voters were in favor of recreational marijuana use becoming legal. The biggest considerations continue to be:

  1. Pennsylvania’s mix of conservative and liberal ideals clashing at the state levels and
  2. Money. If other states see a windfall from marijuana legalization (including commercial real estate), the likelihood of full legalization grows.

How Cannabis Legalization Has Impacted the Commercial Real Estate Market

The legal marijuana industry has already eclipsed $10 billion in the US. The cannabis market is potentially the fastest growing industry in the nation. Commercial real estate investment is a huge part of that growth. Here are a few ways in which marijuana impacts local CRE markets:

  • The demand exists for large facilities. Cannabis production facilities are quite large, and often include both farming and processing capabilities.
  • Regulations are a blessing and a curse. CRE investors would be wise to understand state and local laws before entering the cannabis arena. Cannabis producers must jump through hoops at the state level to gain site approval before beginning any type of production.
  • Cannabis retail is big business. Of course, production is only one side of the equation. Marijuana has a strong retail presence which has injected life into a stagnant retail market.
  • Local and state economies have been boosted by legal marijuana. Even if you want nothing to do with the cannabis industry, there is now sufficient evidence to make the claim the legalizing pot boosts the economy at the micro and macro level. As we know, stronger economies often create stronger CRE markets.

Going Forward

At the moment, legalized marijuana in Pennsylvania is all a hypothetical. The benefits of legalized marijuana for business and for commercial real estate are well documented. If and when our state (or the fed) chooses to adopt cannabis, there will certainly be an opportunity to pounce. The question going forward will become when that happens and what regulations will come along for the ride.

Uber Purchases 600 Acres in Findlay Township, PA

Uber Purchases 600 Acres in Findlay Township, PA

Uber is a now well-known ride sharing service which has 100’s of millions of active users. Uber has been a major disrupter of the taxi and car service industries by offering a unique (at the time) business model of matching passengers to drivers with independently owned vehicles. Today, those 100’s of millions of active users have adopted ride sharing into their daily lives for commuting, when traveling, or even just getting home responsibly from a night on the town. In the Pittsburgh area, Uber is also known as a pioneer in autonomous vehicles and has established a technological headquarters where they are testing their new self-driving cars and trucks.

 

As part of this testing process, Uber recently made another large commercial real estate purchase west of Pittsburgh. Today we will review the details of that purchase, give some background on Uber, and explore how Uber’s presence in Pittsburgh might impact the local CRE industry.

 

Details on Uber’s Recent CRE Purchase near Pittsburgh

Details on Uber’s Recent CRE Purchase near Pittsburgh

Uber’s autonomous car shop in the Strip District is expanding its reach. Uber had been looking for additional facilities to test its self-driving vehicles. In late 2019, it found a new home by purchasing a nearly 600 acre lot in Findlay Township, PA. The land was sold for approximately $9.5 million by Imperial Land Corporation. The new facility will replace the old Uber testing ground at Hazelwood Green along the Monongahela River. Uber’s current lease at the Hazelwood Green expires in 2023. However, the pace at which the Findlay facility is advancing makes it likely that some portion will open as soon as 2021.

 

As part of the deal, Uber will be testing its autonomous vehicles in a newly constructed facility. The land was vacant at the time of purchase. Uber has not yet publicly announced the details of their plans for the location, but they have announced that their autonomous car facility in the Strip District will remain operational. 

 

Uber’s Pittsburgh Presence has Grown in Recent Years

Uber’s Pittsburgh Presence has Grown in Recent Years

By now, most Pittsburgh locals have seen the Uber self-driving cars patrolling the streets from their strip district research facility. Yet the testing of these experimental vehicles is only a small part of their Pittsburgh footprint. Uber has made it no secret that they intend to grow their Pittsburgh presence around their autonomous testing facilities. The latest land purchase is part of Uber’s plan to add more facilities, employees, and testing to the area. Uber is based in San Francisco, and has found Pittsburgh to be a desirable mix of affordability and access to highly skilled and educated employees.

 

According to Mobility21.cmu.edu: “The [Findlay Township] facility is expected to employ as many as 200 people and come with an observation (sic) tower and other developments to create a 24-hour simulated environment in which to test Uber’s autonomous vehicle technology that brought it to Pittsburgh in 2015.” The decision to purchase land and build a test track rather than leasing one is significant.

 

From a commercial real estate perspective, Uber’s expanded investment in the local economy will likely lead to related projects. As for the Findlay Township facility, much more than a test track is planned. While Uber has made no announcements, plans are being reviewed for entitlement and permit purposes. The first phase includes a 140,000 square foot testing facility with entrance doors that are tall enough to accomodate trucks. The site plan shows more buildings in the future, in excess of one million square feet under roof. 

 

Uber by the Numbers

Uber by the Numbers

To understand how Uber might impact Pittsburgh in the near and distant future, it can be helpful to understand a bit more about Uber’s story and their impact by the numbers. Here are some highlights which give recent events some context:

 

  • Uber was founded in 2009, and has since become the most highly valued private startup company in the world.
  • Recent estimates place the valuation of Uber at around $90 billion.
  • Uber is currently operating in 700 cities and 63 countries across the globe.
  • While Uber’s employee numbers range from 19,000 to 27,000 thousand, the total number of Uber drivers likely exceeds 4 million
  • Uber generates approximately $12 billion in gross bookings per quarter.
  • Uber has completed over 5 billion trips since its inception.
  • While these numbers are declining as the market matures, Uber has enjoyed a 70-75% market share of ride sharing services for several years.

 

These numbers illustrate the impact of Uber as a market disruptor and an economic force. Uber’s corporate decision to invest in the Pittsburgh area has already had a material impact on local economy and CRE landscape. While a 600 acre construction project might not be the biggest in the city this year, the real question becomes what will come next for the ride sharing service.

 

Going Forward

Uber’s preeminence in autonomous vehicles was short-lived. Shortly after establishing Pittsburgh as its global AV headquarters, Uber was joined in the region by Argo AI, Aurora, and Aptiv, along with the testing that Carnegie Mellon does on its own. As an employer and consumer of commercial real estate space, Uber has grown by leaps and bounds. Its competitors have expanded their presence as well. Autonomous vehicles appear to be an inevitability, maybe even morphing into fling vehicles or some other form of mobility we can’t as yet imagine. The beachhead that Uber has established by building a major testing facility makes it that much more likely that whatever the future of AV brings, Pittsburgh will be at the heart of it.

Real Estate Investment Trusts (REITs) Continue to be a Great Choice for Small Investors

Real Estate Investment Trusts (REITs) Continue to be a Great Choice for Small Investors

Perhaps the biggest problem being a modern real estate investor, or any type of modern investor for that matter, is an overabundance of choices. Stocks, bonds, mutual funds, options, annuities, direct real estate purchases, REITs, retirement accounts — the list seems to have no end. This leads to a situation where investors might miss out on potentially great opportunities in a sea of options. One such option is a real estate investment trust, frequently shortened to REIT. 

 

Today, we will explore REITs, how they differ from direct real estate investment, and review why REITs remain a perfect choice for individuals in 2020 and beyond.

 

What are Real Estate Investment Trusts (REITs)?

What are Real Estate Investment Trusts (REITs)

According to reit.com: “REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.”

 

Let’s break that down. REITs are a unique way of investing in commercial, industrial, and/or residential real estate that is available to investors of all wealth levels. REITs are generally hands off, meaning that investors may have a vote, but will not directly control the buying and purchasing of real estate assets held within their REIT. 

 

Real estate investment trusts are generally used as investment opportunities to grow the investor’s wealth. Most REITs focus on a particular subset of properties such as commercial apartment building, medical properties, data centers, hotels, and so forth. In this way, investors can choose the area of real estate they believe will make the best investment.

 

REITs vs. Traditional Commercial Real Estate Investment

REITs vs. Traditional Commercial Real Estate Investment

So how exactly do real estate investment trusts compare to direct real estate investment? There are several ways we can compare and contrast the two:

 

REITs are the mutual funds/ETFs of the real estate world

As we described above, REITs give investors access to a multitude of properties through a trust. This means that REITs are more stable than direct real estate investment as one-off losses or gains will be balanced out by a larger portfolio. This also means that the potential for extreme gains with an REIT is generally lower than direct real estate investment. 

 

Direct commercial real estate investment gives investors all the power

If you own a piece of real estate, you are in full control of that asset. You are free to buy, rent, renovate, or whatever else you might choose assuming you don’t have a contractual or legal obligation preventing such an action. REIT investors do not share this level of control or power. Instead, they buy into REITs which are managed by industry experts. A loss of control might be a non-starter for some investors, but the ability to diversify real estate holdings with REIT gives investors a much safer bet in the long term.

 

Direct real estate investment generally comes with a larger buy-in

REITs are extremely affordable. Much like stocks, bonds, or mutual funds, investors need only to be able to afford shares rather than making massive investments to purchase a real estate property. In this way, individuals and organizations of all levels of wealth can invest in the real estate market. This is a primary reason why REITs are perfect for individuals and small investors (more on this below).

 

REITs have guaranteed dividends

REITs have guaranteed dividends

Another huge advantage of REITs is that a minimum of 90% of all payouts must come by way of dividends. This is a legal obligation based on federal REIT law. It is important to note that according to investor.gov: “The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends.”

 

REITs Remain a Solid Investment Opportunity

REITs are not meant to replace a solid investment portfolio by way of a retirement account and/or traditional investment account. Instead, they should be thought of as a perfect supplement to those investment opportunities which allows individuals of all levels of available capital to invest in the real estate market. A few reasons why REITs will remain a great investment opportunity include:

 

  • Guaranteed dividends
  • Real estate investment without the need for industry expertise
  • REITs are completely hands off/passive (unlike direct real estate investment)
  • REITs are liquid just like stocks or other traditional investments. Again, this differs dramatically from typical real estate investments
  • A traditionally strong performance compared to other investments

 

Going Forward

REITs were first introduced in the early 1960’s, and they don’t show any signs of going away any time soon. In fact, the total monies invested in REITs around the world has exploded from $300 billion in 2003 to a massive $1.7 trillion in 2017. Real estate investment is not just for the wealthy or the connected thanks to REITs. Anyone looking to build equity or expand their investment portfolio should consider a real estate investment trust.