Category: Regional construction

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.

Second Phase of Major AHN Construction Project Nearly Complete

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

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

Details on the Jefferson Hospital Expansion Project

Details on the Jefferson Hospital Expansion Project

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

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

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

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

Recent Allegheny Health Network CRE Investments

Recent Allegheny Health Network CRE Investments

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

AHN Constructing Harmar Hospital

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

AHN Construction on New Wexford Hospital

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

AHN Waterworks Outpatient Center

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

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

How Medical Construction Impacts Western PA Commercial Real Estate

How Medical Construction Impacts Western PA Commercial Real Estate

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

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

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

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

Construction Underway at Beaver Valley Mall

Recently, we discussed what commercial real estate investors were doing to solve the problem of America’s dead malls. As part of that article, one of the solutions which have effectively brought life back to struggling retail real estate is to invest in renovations or other related construction projects. The Beaver Valley Mall in Beaver County, PA has recently broken ground on a new construction effort. If successful, this revitalization could be a blueprint for other dying malls in the Western PA region.

Today, we will review some highlights of the Beaver Valley Mall, discuss the details of the newest construction project, and how this project might impact the local commercial real estate landscape.

CBRE Heads New Strip Mall Construction at the Beaver Valley Mall

Funded by commercial real estate giant CBRE, plans to redevelop a now-defunct Macy’s location are underway at the Beaver Valley Mall. The former site of a Macy’s megastore will be turned into a mini strip mall. This is part of a plan to redevelop large retail locations that were struggling in the region. This new mini strip mall is to be named The Shops at Beaver Valley Mall. JJO Construction started work on the first building in the fall of 2019.

As reported by timesonline.com: “The Shops at Beaver Valley Mall, which will include about 50,000 square feet of retail, office and service space with mall access available in various sizes. According to a CBRE press release, there will be nearly 27,000 square feet of retail space facing Brodhead Road. The Shops at Beaver Valley Mall will join other anchor tenants, such as JCPenney, Dick’s Sporting Goods, U-Haul, Rural King, Planet Fitness and Boscov’s.”

This is not the first renovation and/or construction effort that has recently taken place at the Beaver Valley Mall. Recent construction updates for restaurants and entertainment venues including escape rooms have been part of the shift away from large retail locations and towards smaller, more profitable business partners.

Beaver Valley Mall History and Current Climate

Beaver Valley Mall is located less than an hour north of downtown Pittsburgh. The location first opened in 1970 and boasts over 100 individual stores, a gym, restaurants, and is getting more involved in the entertainment space. Beaver Valley Mall is also dedicated to offering free programs and events for local community members and their families.

As with many American malls, Beaver Valley Mall enjoyed financial success through partnership with anchor tenants including JCPenney, Gimbels, The Joseph Horne Company, and Sears. The location of this latest construction, a now-empty Macy’s, is just one example of these retail giants struggling in the 21st century. Sears and Macy’s locations closed in 2016 and 2017 respectively.

Despite all of the hyperbole surrounding the detail of traditional retail, many malls remain successful. Recent history has shown that successful malls have been willing to make updates to both their facilities and their business model. With the recent backing of CBRE, Beaver Valley Mall is looking towards the future.

Following the Beaver Valley Mall Template

As a continuation of this point, Beaver Valley Mall is by no means in a unique situation. Other large, local malls such as Ross Park Mall, Monroeville Mall, and The Pittsburgh Mills, are all in relatively similar situations. In particular, the Galleria at the Pittsburgh Mills has an uncertain future. Despite promises by Mason Asset Management that renovations were high on the priority list, no action has yet been taken.

The four most recent tenants of the Pittsburgh Mills: Allegheny Health Network Citizens’ School of Nursing, Focus on the Arts, Chicken Connection, and Himalayan Salts Co, tell the story of a shift away from large retailers and towards alternative mall tenants. Many Western PA malls are considering what these new tenants might require from an infrastructure perspective.

Beaver Valley Mall is amongst the local commercial real estate leaders investing significant capital into their retail facilities. With backing from a well-financed organization such as CBRE and a commitment to investing in the space, local commercial real estate professionals and residents will be watching how this new construction effort pays dividends.

Going Forward

As all commercial real estate professionals know, there is not much room for waiting in this industry. As the retail space continues to evolve, so too will commercial real estate investors’ mindsets about malls and other large spaces. The process of revitalizing America’s dead malls is already well underway. In the local Western PA area, it remains to be seen which malls will be able to successfully adapt to a changing retail reality. The truth likely lies somewhere in between exaggerated reports of the demise of traditional retail and the rosy reports of modern retail evolutions.

The mall industry will need to adapt to changing consumer behaviors. Beaver Valley Mall is using a now-defunct mega-retail location as an opportunity to develop a location for multiple, smaller, more profitable tenants. Whether this investment will pay dividends remains to be seen. In either case, the success or failure of mall renovation projects will inform future decisions in our area.

Renovations have Brought the US Steel Tower Back to Prominence in Pittsburgh

The US Steel Tower, also referred to as the Steel Building and the USX Tower, has been a trademark of the Pittsburgh skyline since its construction was completed in 1970. The building is now also known as the UPMC building, and has a long history of importance to the Pittsburgh people, identity, and economy. Recent renovations have breathed new life into the now 50-year-old building. Office spaces in Pittsburgh have become more decentralized in recent years with tech companies like Google and Uber electing to headquarter outside downtown offices.

With all of this in mind, today we will review the recent work being done on the US Steel building and what impact this might have on the building itself and downtown as a whole.

Details of Steel Tower Renovations

Although there is no onset of renovations, the US Steel Tower has undergone some major facelifts in the past months and years which will be noticeable to regulars in the area. Here are some of the highlights:

The US Steel Tower is now the second-largest LEED Silver Certified office building in the world

LEED stands for Leadership in Energy and Environmental Design. While the US Steel Building may be thought of as a 50-year-old dinosaur, it is likely the most economically and technologically advanced building in downtown Pittsburgh. This is thanks to recent renovations aimed at efficiency and eco-friendliness.

The US Steel Tower renovations modernized the infrastructure

As a continuation of the above, the US Steel Tower has implemented a number of modern changes that improve cost and environmental inefficiencies. Modern renovations/improvements include retrofitting water supplies, sustainable energy practices, offering alternative transportation services, installing eco-friendly LED lights, installing eco-friendly HVAC products, and much more.

US Steel Building has renovated office spaces

As part of UPMC moving in, several large renovations took place to the office amenities of the US Steel Building. These renovations included:

  • Renovation of seven (7) full floors of office space to be used for UPMC headquarters
  • Changing cubicle like layouts to more modern designs including high-end, high-tech offices and support areas
  • Updates to the 60th floor “Center for Connected Medicine (CCM)”
  • Overall renovations to existing workspaces and offices

These renovations covered a total of 185,000 square feet over 11 months and were all part of the LEED silver certification process.

Pittsburgh Steel Building Facts

To understand why renovations of the US Steel Building are so significant to the local Pittsburgh economy and atmosphere, let’s look at some quick facts on the building itself.

  • The US Steel Building stands at approximately 841 feet tall, making it the 66th tallest building in the United States.
  • Those 841 feet are spread across 64 floors, which are mostly comprised of office space.
  • The single floor area equals 41,163 square feet, which is only ~2,000 square feet shy of a full acre.
  • The facilities include a 2,900,000 square foot grass area which is used as a local park for the public.
  • The US Steel Tower underbelly holds a three-level parking garage which can accommodate 700 cars.
  • The building holds 11,000 windows, 54 elevators, and boasts a massive lobby area with full amenities

List of Recent US Steel Tower Updates

In a five year period, over $60 million was invested into the US Steel Building in total renovations with no end date in sight. These changes include:

  • Lobby updates including renovations to many interior businesses
  • The addition of two (2) garage elevators
  • Newly installed brick and granite in the plaza area
  • A new fire alarm and security system
  • A new tenant and building sprinkler system
  • Renovated restroom facilities
  • Energy-efficient upgrades (as mentioned above) including closed water loops, HVAC upgrades, energy-efficient light installations, and more
  • Improved facilities to comply and exceed the American with Disabilities Act (ADA) requirements
  • New infrastructure including improved electric distribution panels and “base building mechanical improvements”

Going Forward

For those of us native to Pittsburgh, the US Steel Tower is probably the building we think of when we think of the downtown area. While the name and ownership may have changed hands, the importance of this structure remains. Recent renovations have improved both the work lives of the office tenants within and the amenities for the public passing through the building for a bite to eat or just to take in the sights. With major backers including CBRE and Jamestown L.P., it is likely that we will continue to see investments being made into the tallest and most historic Pittsburgh skyscraper.

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.

Insurance Costs Will Jump in 2020 – For Construction Industry Too

First the good news: improvements in workplace safety have helped push losses and Workers Compensation claims lower, which is expected to keep the insurance bill at the same rates or lower in 2020. Insurance for environmental contractors is also expected to be slightly less expensive in 2020. For the rest of the insured market, not so much.

Natural disasters and unlimited liability exposure have pushed the property/casualty sector of the insurance industry into unprofitable territory. Insurance companies have done well with investments and at attracting capital in recent years. Some $800 billion in excess capital exists in the insurance industry, but the additional capital is not expected to translate into more capacity for property/casualty lines. This is in direct opposition to what is going on in the construction surety market, which has seen steady low loss ratios for a decade and plenty of capacity for higher bonding limits. Insurance industry experts see the industry conservatively deploying and investing its capital, rather than expanding the capacity for property/casualty insurance. In fact, several of the industry’s biggest insurers are debating an exit from property/casualty insurance.

The biggest culprit is catastrophic losses on natural disasters. Regardless of your politics and beliefs about the impact of climate change, the frequency and severity of catastrophic natural disasters has increased. Floods, tornadoes, hail storms, and wildfires have all caused much greater damage than in previous decades. Houston, for example, has seen two 500-year flood occurrences in the past three years.

Likewise, the frequency and severity of liability claims have increased, with insurers seeing little hope of tort reforms or limitations in the offing. Casualty claims and losses, even for companies with risk-mitigation strategies in place, have increased.

Insurers, not surprisingly, are responding to these unfavorable trends by employing more conservative underwriting standards and raising premiums. It’s easy to shake a fist at the insurance company but it’s important to realize that the premium charged an insured is a calculation of the relative risk of the activity as a whole, in addition to the judgment of the insured’s risk. In other words, if the activity – such as driving a car – has become more expensive to insure or has an increased risk in general, the insurer needs to collect more money to respond to claims. Those actuarial calculations are the foundation of the insurance business. Companies can shave insurance costs by being safer but when insurance conditions become more expensive, everyone pays.

According to USI’s Commercial Property and Casualty Outlook for 2020, insurers expect to raise premiums on most property policies between 10% and 20% for most non-catastrophic property coverage, and as much as 60% for insurance with catastrophic coverage. Auto liability insurance is forecast to increase by 10% to 25%. Excess liability will go up 10% to 25%, as will errors and omissions. The cost of public company officers and directors coverage is set to increase 25% to 50%.

Regional construction news: ALCOSAN’s $130 million North Plant Expansion will be advertised for bid at the end of January. Duquesne University selected Jendoco Construction for its $18 million St. Martin Hall renovation. Fluor has issued the second phase package of US Steel’s $900 million Edgar Thompson Works modernization. The package includes a 50,000 square foot building. Mascaro, Songer and Stevens are expected to bid. Mascaro was awarded the $12 million first phase of the work. The $10 million, 376-car parking garage for District 15 should be bid by Carl Walker Construction after January 27.

WeWork and Pittsburgh’s Construction Economy

The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.

The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.

There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)

What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.

The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.

That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.

(Left-right) Rich Yohe, Bernie Kobosky and Scott Poillock at the MBA’s golf outing.

In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.

RACP Grants Help Fill Pittsburgh’s Construction Pipeline

Let’s start with some project news first: There was a groundbreaking held last week for Light of Life’s $5 million new facility on the North Side. Sota Construction is the contractor. Sota is also the CM for the $3 million UPMC Graham Field project in Wilkinsburg. H H & H started construction on the new $3.7 million Sheetz at Bursca Retail in South Fayette. Massaro Corp. is starting construction on $5 million Best of the Batch facility and $7 million bathroom renovation program at Pitt-Johnstown. A. Martini & Co. was awarded the $2.8 million Ernst & Young renovation. Rycon Construction started work on the new 19,000 square foot office TI for Microsoft and a $2.2 million pharmacy renovationat AHN Wexford Wellness Pavilion. Developers EPC Real Estate Group announced the 251-unit, $50 million Waterfront Apartments. EPC has been working with Continental Building Co. on the project. Continental is also building a 23,000 square foot retail center in Uniontown, called Beesontown Shops, which Herky Pollock and partners are developing.

Pennsylvania’s DCED recently announced the projects which received grants under the Redevelopment Assistance Capital Program (RACP). RACP grants are given to help bridge the gap in funding a difficult project or help an owner that will struggle with funding of a major capital need that serves the public good. Often these are commercial real estate deals or even industrial projects where the justification is the job creation that follows. Some are just public benefit projects, like the awarding of $1 million to the URA to do traffic improvements at the Highmark Riverhounds Stadium at Station Square, part of an $8 million expansion the Riverhounds want to undertake. Some of the projects that received awards that might be of interest:

 

 

The awards included millions for projects that are already underway or received other grants in previous years. These include the Terminal Building in the Strip and Hazelwood Green, aomong others.  You can view the lists of submissions and awards.

State Government Influencing Construction

As a buyer, the Commonwealth has been a minor force in the construction market for a decade. Over the past week, our state government has made a much bigger impact in other ways.

The legislature passed a 2019-2020 budget that has no relief for construction, but within the negotiations there was a break of sorts in the K-12 logjam. The results of a PlanCon task force report were accepted as the framework for a new PlanCon process. Sadly, this new framework did not coincide with a lifting of the moratorium on projects entering the PlanCon system (nor did it accompany funding for more projects). Getting agreement on what PlanCon will look like is a head start on the next wave of projects, which is building behind a decade of underinvestment.

Legislative action also occurred on PA’s Separations Act, although the action is likely to be moot. A full repeal of the Separations Act was passed in committee by a straight party 15-10 vote. Since Republicans control both houses, the repeal may pass; however, most legislators are aware that the full repeal will be vetoed by the governor and many understand that a full repeal was not the intent of the coalition lobbying for amending the Separations Act for years. A last-minute maneuver changed the proposed legislation from one that offers school districts choices of delivery methods to the full repeal. The last-minute measure was backed by AIA Pennsylvania, which had previously signaled alignment with the choice option. The full repeal legislation is probably dead on arrival, which means PA will remain the only state in the Union requiring separate prime contracts. Keep those claim forms handy!

Finally, PA’s attorney general, Josh Shapiro, may have catalyzed Pittsburgh’s two healthcare giants into an agreement that keeps the status quo for access. UPMC and Highmark announced last week that another 10-year agreement was reached. The upshot for construction seems to be limited. UPMC’s major capital plan is mostly aimed at replacing outdated facilities and supporting innovative new medicine (see Vision & Rehabilitation Hospital at UPMC Mercy). Its South Hills hospital is on hold, so the agreements with Jefferson and St. Clair probably make that permanent. Highmark/AHN has been investing significantly in facilities that were meant to capture the patients that would be without access to UPMC centers, so the construction is underway or completed on many of those. According to AHN officials, plans for further investment – like the $100 million Allegheny General Hospital Cancer Institute expansion and the Route 28 site – are being explored actively. It’s unlikely that the 10-year truce won’t have an impact on capital spending, but it doesn’t appear to be imminent.

Some project news updates:

The last two major K-12 projects of the bidding season were awarded. Franklin Regional re-bid its Sloan Elementary and new Grades 3-5 schools mid-June and awarded R. A. Glancy the general construction for the $14.6 million Sloan Elementary, and Walter Mucci Construction the general for the $26 million new 3-5 school. Mosites Construction won the $104 million Tuscarora Tunnel renovation on the PA Turnpike.

Volpatt Construction has started construction on the $4.5 million 6th floor Nursing Unit at Butler Hospital. Guardian Construction Management is underway on the $4 million renovation and addition to Grace Community Church in Cranberry Township. Turner Construction has been awarded the CM contract for the $8 million cooling tower upgrade at UPMC Shadyside Hospital, the enabling package prior to construction of a $50 million new central plant in mid-2020. PJ Dick is CM for a new Combined Cooling Heat and Power Plant for AHN in Wexford. Rycon Construction is renovating Ally Financial’s offices in Cranberry Township, a $2.5 million tenant improvement in Westinghouse Building 2000.