Category: Regional Economy

The Fog Begins to Lift on 2021

The election is behind us. Confidence is growing in a spring delivery of an effective vaccine(s) to begin getting us past COVID-19. Along with better news for higher ed and healthcare since the fall, the recent developments are giving a clearer picture of the construction outlook for 2021. And it’s better than was expected 60 days ago. Escalating increases in hospitalizations for COVID-19 are likely to give the economy another punch to the gut over the next few months; however, assuming a vaccine is in circulation in early 2021, there is visibility on a recovery that should boost bidding and contracting next year.

The chart reflects Tall Timber Group’s forecast for the next two years, following a steep (perhaps 30%) decline in contracting in 2020. The amount of construction put in place may not decline nearly as much in 2020. That’s good news for contractors and suppliers. How the contracting unfolds in 2021 will determine how much better or worse next year is financially for the construction industry. Hospitals are thus far seeing their critical November/December elective surgery schedules hold up. College enrollments are in line with 2019. Anecdotes suggest that architects involved in healthcare and commercial real estate have ramped up already. That’s a good sign for spring bidding. Bear in mind that construction projects mostly won’t need to wait for immunization to start work. There just needs to be confidence that a corner will be turned by mid-year or thereabouts.

Owners will also want to see a corner turned on economic demand. The next few months will be critical to that as well. There are good signs that demand can roar back once the fear of infection subsides. U.S. households increased their savings deposits by $2 trillion from February to October. Capital has been amassing on the sidelines, whether in the form of the stock market or private equity. Unlike in 2010, there is dry powder to deploy. Recent data suggests that the economy still needs a bridge to get from here to a vaccine. Ideally, the lame duck Congress would pass further safety net measures. Failing that, it would be incumbent upon a new administration and Congress to act immediately to prop up those who will suffer from what is sure to be decreased economic activity this winter.

There is reason to be anxious about the timing of more aid from a demand point of view. Should an effective vaccine be delivered on a large scale during the first quarter of 2021, there would likely be a big jump in demand for economic activities that have been hard hit by the pandemic. That means travel, restaurants, entertainment (theaters, sports, concerts) would get a boost in revenues. The potential fly in the ointment is that demand would be dampened by lack of funds. The capital on the sidelines waiting to be deployed isn’t what will drive the consumer recovery. The $2 trillion in increased savings that consumers have built throughout 2020, even as many have lost jobs, represents 11% of GDP. That’s powerful fuel for a recovery. Propping up consumers for the last three months of the year becomes even more important when you consider that, and when you look closely at how the unemployment compensation picture changes on December 31.

Unemployment claims slowed again in the most recent week, but remain at 709,000 for first-time claims. Digging below the headline numbers, you can see a potentially damaging wave building. The greatest share of the 21.7 million out of work at the end of October are those receiving benefits tied to COVID-19. There are two categories of pandemic-created unemployment compensation, totaling 13.6 million people. Those receiving Pandemic Emergency Unemployment Compensation (PEUC), which was part of the CARES Act, have exhausted regular unemployment compensation, and make up 4.1 million claims. Another 9.5 million self-employed have been receiving Pandemic Unemployment Insurance because they aren’t eligible for regular unemployment compensation. The numbers are growing weekly for PEUC claims, as regular unemployment compensation from mid-year expires. Because of the timing of the pandemic, the majority of these still-growing groups will see benefits end by December 31. Without aid, 8% of the total workforce will be without income in January. From that point, the reserves begin to deplete, robbing the recovery of fuel. The prospects for 2021 look good, but we’re not out of the woods yet, with or without a vaccine.

The Builders Exchange reports that the new Plum Municipal Center is out to bid, due December 8. Massaro Corporation was selected as construction manager for the $6 million expansion of the Pittsburgh Glass Center and the $2 million Holy Family Institute project.

Pittsburgh Office Market: Focus on Data – Not Speculation

Earlier this week, JLL issued its Skyline Report, which got a bit of media play, particularly in the doom-and-gloom Pittsburgh Business Times. JLL’s report highlighted concerns about the surge in sublease space and the media emphasized JLL’s opinions about the impact of tech work-from-home on future office demand and the uncertain future of office because of WFH. These concerns are legitimate. If WFH becomes another trend that leads to downsizing of office usage by even 10%, it will add five million-plus square feet to the vacant inventory. That stuff makes for good headlines and click bait. The problem is that we have no idea when we’re getting out of this pandemic, let alone what things will look like on the other side. The better course is to look at the data.

JLL’s headline data point, a vacancy rate near 20%, is not comforting either, but it’s only marginally higher than 90 days earlier. Newmark Knight Frank released its thrid quarter reports today, and the data is similar. According to NKF, the overall vacancy rate moved from 17.9% in July to 18.5% in October. The more troubling trend is the year-over-year decline of 2.2 points. New construction deliveries of a million square feet were the main reason for the jump, with lower occupancy having a small impact. Rents held steady, rising three cents to $24.10/square foot. Rent is a lagging indicator, however, and the likelihood is strong that rents will fall as leases renew during the next 12 months. One interesting view of the NKF data is the stability of the market overall. Occupancy is above 80% for almost all submarkets. The east market is an outlier to the downside, with vacancies at 26.5%, and Oakland/East End vacancy is the outlier to the upside, at 11.8%. These two are the smallest submarkets by far, at just over three million square feet each. The remaining suburban and urban markets are between 16% and 18% +/-.

Vacancy has been growing in Pittsburgh since mid-2019. Source: Newmark Knight Frank

Office occupancy is a function of employment. Until there’s a medical solution to the COVID-19 virus outbreak, employment will be significantly lower than in February 2020. At last week’s meeting of the Federal Reserve Bank, the governors looked forward to unemployment staying below eight percent at year’s end and a steady decline in unemployment that returned to the four percent range in late 2022 or 2023. It won’t take that long for office occupancy to tick back down in Pittsburgh, but it’s worth remembering that 1) Pittsburgh’s office market was much softer in February 2020 than in February 2017, and 2) the speculation about declining office demand because of COVID-19 response is not unfounded.

The Fed’s observations about the economy were made before the Trump administration walked away from negotiations over a third major economic safety net package. The House of Representatives hurriedly passed a $1.3 trillion bill last week that was set to provide direct aid to households, additional assistance to small businesses, and funds for state and local governments, which have seen their revenues decimated. Aid for local government is particularly critical to the economy, according to the Fed. The bill contained a number of non-economic provisions that the Senate was not likely to accept but there was the basis for negotiations to continue. Reactions to the president’s shutdown of negotiations have been strongly negative and the White House today hinted that discussions had re-started. That would be good news. Fed Chair Jerome Powell cautioned in the FOMC minutes that the risk from providing too little aid was much greater than overshooting government intervention, especially since inflation remains well below two percent. Absent more assistance, the economy is expected to remain in declining GDP growth through the winter.

Regional construction activity has begun to pick back up, with more bidding and RFP’s out. Carlow University is looking for developers to partner in its proposed 400,000 square foot research/mixed-use tower in Oakland. Cavcon Construction is starting work on a $4 million-plus Education and Tech Center in Indiana PA for Westmoreland Community College. New-Belle Construction was awarded the $4 million new manufacturing facility for Barchemy in Donora. Facility Support Services was awarded $2.7 million in contracts for renovations to the Dept. of Energy National Energy Technology Lab in South Park. PJ Dick is the contractor for $3 million in renovations to Aramark concession areas at PPG Paints Arena. A separate $1.5 million package of renovations for Rivers Casino at PPG Paints is out to bid to Mascaro, Massaro, and PJ Dick. Turner Construction is doing preconstruction on the $35 million AGH Neurology Center for Excellence.

The Two Sides of the Regional Unemployment Story

There was a good story in Pittsburgh Quartelry’s digital update this morning on the region’s unemployment rate. Check out Julia’s Fraser’s story. The top line was good news. The unemployment rate fell from 12.8% in July to 10.5% in August. But the data was less rosy. The actual number of people employed fell by 39,405 from July to August; and the year-over-year decline in total employment plunged to more than 175,000. That’s the worst year-over-year decline since April 2020, and the second worst decline since the recession began in February. In part, that’s because August 2019 marked a high point in regional employment, with 1,157,274 people employed. However, the year-over-year decline jumped because the economy in Pittsburgh has weakened further with the end of the Payroll Protection Program.

Source: Department of Labor

These two concepts may seem at odds. How can unemployment drop more than two points when employment drops by almost four points? Remember, the unemployment rate is just the math. It’s easy to forget that if the total number of people in the workforce decline, the unemployment rate will decline (assuming the number of jobs lost doesn’t outstrip the number of people leaving the workforce). That’s what happened in August. While unemployment rose by 74,800 compared to August 2019 (or 6.5 points), the workforce declined by 48,000 people. It’s the latter number that is a key metric that we don’t understand at the moment. Pittsburgh Quarterly quotes Pitt’s Chris Briehm on the subject and he notes quite correctly that we won’t know the full story until the public health crisis ends.

It’s worth digging into that a bit. Briehm’s point is that the varying motives of people leaving the workforce during a pandemic make it impossible to judge whether or not there is an accelerating trend towards a smaller workforce. Unemployment insurance allows some people who can’t work remotely to not work, rather than take the risk of infection. Others will take the choice of unemployment over illness, even if they don’t qualify for UI. Still others who must work – like in restaurants or bars – may have chosen to relocate to states where those establishments have reopened to a greater degree than in Pennsylvania. And some of the workers have quit looking for work for now or have chosen to retire. Until there is clarity about the safety of the workplace, we won’t know how many of the workers who left the workforce are coming back; and until there is organic job growth, meaning adding of new positions, we won’t know how much of the discouraged workforce will return.

The significance of a declining workforce is obscured in a severe jobs recession like we’ve seen since March. For now, at least, the decline has positive benefits. Fewer people are looking for work. Pittsburgh’s unemployment rate is lower, even though the number of employed is much lower. If the people who have declared themselves as out of the workforce in August remain out, that means unemployment is not artificially low. That’s a good thing. But, if that’s true, then Pittsburgh faces a much bigger uphill battle once economic growth returns. Employers will struggle to find workers with the skills they need. Growing companies can’t tolerate that, so they will look elsewhere for talent. That means some will close shop in Pittsburgh and move elsewhere, or expand elsewhere instead of Pittsburgh. The region’s future is predicated on the innovation economy driving job growth in Pittsburgh. That can’t happen if innovators can’t find employees in Western PA. Our vaunted university research does Pittsburgh no good if the businesses that spin out of them move to Palo Alto or Austin or Nashville. Let’s hope that the cure for the public health crisis results in a cure for our workforce decline as well.

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.

 

 

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

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

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

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

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

Wind Power: the Basics

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

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

Examples of Wind Power Around the World

Examples of Wind Power Around the World

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

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

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

Implications of CMU Using Wind Power in Pittsburgh

Implications of CMU Using Wind Power in Pittsburgh

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

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

Implications of CMU Using Wind Power in Pittsburgh

Going Forward

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

Second Phase of Major AHN Construction Project Nearly Complete

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

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

Details on the Jefferson Hospital Expansion Project

Details on the Jefferson Hospital Expansion Project

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

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

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

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

Recent Allegheny Health Network CRE Investments

Recent Allegheny Health Network CRE Investments

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

AHN Constructing Harmar Hospital

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

AHN Construction on New Wexford Hospital

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

AHN Waterworks Outpatient Center

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

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

How Medical Construction Impacts Western PA Commercial Real Estate

How Medical Construction Impacts Western PA Commercial Real Estate

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

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

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

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

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

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

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

The Current State of Pittsburgh’s Tech Boom

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

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

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

Office Spaces for Google, Uber, Duolingo, and More

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

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

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

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

The Impact of Tech Companies on Commercial Real Estate in Pittsburgh

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

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

Going Forward

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

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

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.

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.