Category: Regional Economy

Good News on the Economy

The first week of the month is an eventful one for economic data. Last week was no exception. First the Commerce Department announced that total construction spending had declined year-over-year, but was still near all-time record high levels at $1.282 trillion dollars annually. The news that followed was rosier.

The Commerce Department released its first estimate of GDP growth for the January-March 2019 quarter. The 3.2% annualized jump was higher than expected. The above average growth was a turnabout from the talk of recession from earlier this year. There were two notes of caution in the report, however. First, GDP was inflated by an unusual buildup in inventories, which generally means that a following quarter will have lower growth from inventory depletion, There was also a temporary decline in imports, likely resulting from tariffs, which boosted consumption of U.S. goods. The second caution was the 1.3% increase in the sales of domestic goods to consumers and businesses. This suggests that underlying demand is lower than the headline GDP growth.

On May 3, the Bureau of Labor Statistics released its monthly Employment Situation Summary, which found 263,000 jobs had been created in April. Unemployment fell to 3.6%, with the number of unemployed persons falling to 5.8 million. That’s more than one million fewer people than there are jobs open, which underscores the seriousness of the problems that businesses are having with finding workers. In reality, this trend of roughly one million more jobs than workers has existed for a year or so, and it should have slowed the economy by now. Obviously, that hasn’t happened.

Light regional construction news. Research of April’s building permits in Pittsburgh revealed that Cavcon was selected to build Vollmer America’s new $4.8 million building in Findlay Township. PJ Dick has started work on the new $26 million multi-modal garage behind Bakery Square on Dahlem Place. A. Martini & Co. started demolition on the $6.5 million Wabtec TI at 30 Isabella Street on the North Shore.

Pittsburgh Jobs Bump

Department of Labor data this week showed Pittsburgh’s seven-county unemployment rate dipped to 3.6%, which is lower than the national rate of 3.8%. That’s the lowest since February 1970. Even more encouraging in the data was the estimate that Pittsburgh’s workforce grew by 8,000 in February, the second straight month of increased workforce. The Pittsburgh economy has been creating more new jobs each month than the net growth numbers, but the rapid retirement rate was consistently dragging the numbers down. Attracting population – and thereby workers – has been a major stumbling block for the region’s business attraction efforts. Let’s hope two months becomes a trend.

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One of the job creators in Pittsburgh, Facebook, is taking bids on the buildout of its 105,000 square foot VR space in District 15 in the Strip. Proposals are due from Burchick Construction, RDC Design + Build and Turner on April 5. RDC is also out to bid for subcontractors on its next building, the 260,000 square foot + 387-car garage District 15 Beta.

ConstructConnect is reporting that Carl Walker Construction was the low bidder on the Washington County Courthouse Square Parking Garage and Plaza renovations, at $8.5 million or $13.4 million depending on options selected. DiMarco Construction was the low general on the $6 million Gill Hall Elementary School addition. Volpatt Construction was selected for the $1.2 million West Penn Hospital ERCP project.

Big Win for Indiana County

Thursday morning, URBN announced they were building an 863,000 square foot fulfillment center for Urban Outfitters at the Windy Ridge Business & Technology Park in Indiana, PA. The project is one of the few mass fulfillment centers located west of the I-81 corridor and is a tremendous return on the investment made by the Indiana County Center for Economic Operations (CEO).

Indiana County CEO executive director, Byron Stauffer, says that $20 million had been invested in the Windy Ridge project over a period of more than ten years. Stauffer was effusive in his praise for the governor, Senator Don White and Rep. Dave Reed for their support of the project, which attracted a variety of grants and loans. URBN said that the fact that Indiana County had a prepared site, available workforce (the facility will employ more than 200), access to Route 422 and the IUP supply chain management program, tipped the decision in favor of the Windy Ridge site.

“The lesson learned here is if you think small, you get small,” Stauffer concluded.

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Blue Rock Construction from Allentown is the construction manager for the $60 million-plus facility, which will have 45-foot precast concrete panels on the exterior. Construction is scheduled to be completed by late summer 2019.

Inflation Hits Salk Hall Bids

The bids taken Sept. 11 on Pitt’s $41 million Salk Hall Renovation Phase 2 had the hallmarks of growing inflation and a market that is busy. The $50,862,000 total for base bid #1 was about 25% over budget and the project will likely re-bid after scope changes, since there were few alternates to reduce the cost. Burchick was the low general contractor. The general bids are below:

salk results

I don’t have enough information to deduce how much inflation impacted the project but the U.S. index for inputs to construction rose 9.6%, 8.1% and 8.1% year-over-year in May-July. There are also some indications that the current market conditions played a factor. There were only 3 bids on the general and electrical packages. HVAC received 4 bids and plumbing received 5. That’s a dramatic difference from what a Pitt-delegated project would have received even one year ago. Moreover, the gap between bids was big. Burchick’s low bid was 6.8% below the second low bid, and 10.2% below the third. That was the tightest spread by far. The spread between the low and second bids on the other 3 contracts was at least 9.5% and as much as 12.5%.

One of the strong economic signs has been the upswing in owner-occupied industrial/manufacturing projects. Yesterday, Uwharrie Builders from NC broke ground on an 80,000 sq. ft. expansion for Technimark in Latrobe. On August 20, New-Belle Construction pulled a permit for a 68,000 sq. ft. new facility for Zilka & Company in Mason Park, an industrial park near New Stanton. Westmoreland County IDC has been preparing new pads in several locations in anticipation of opportunities like these.  Zilka is in the bakery products business and Technimark does rigid plastic injection molding for healthcare applications. While emerging technologies and gas-related energy should drive growth in manufacturing, the gains in regional manufacturing seem to have a wider base.

Opportunities

Thursday I attended a seminar on the Opportunity Zones that were created as part of the Tax Cuts and Jobs Act at the end of 2017.  The overlooked provision of the law has the potential to attract a lot of investment in poorer communities. The short explanation is that investing in Opportunity Zone projects or businesses allows you to defer capital gains as much as ten years, and then increase the cost basis of the investments made in the Opportunity Zones by up to 15%. If you hold the investment for ten years, the gains on the investment are tax-free.

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There are 86 such zones in SW PA, some 300 statewide. Some of them are places where there is already redevelopment buzz or projects, like the Hill District, Hazelwood and Homewood. The bad news is there are still no regulations published by the IRS yet, meaning that investors are still waiting out to see what the rules will be. By year’s end (at worst) this should be accomplished. You can read more about the zones at the DCED web site.

Project news is quite lean. The economic news of the week was Friday’s jobs report, which showed the US employers adding 157,000 jobs in July. That’s a decline from June’s total but still brisk enough to keep the average monthly gain for 2018 above 200,000 jobs. Economists believe the hiring pace would have been better but for the lack of applicants in the job market.

Construction Employment Tops 2008

Digging into the weeds of the April employment reports, AGC reported on the metropolitan-level construction employment levels compared to the previous April peak and trough. Pittsburgh had 57,100 workers employed in construction in April 2018, 400 more than the peak in April 2008. Pittsburgh was one of only two PA metros (Altoona was the other) that had exceeded its previous peak employment level.

There was an interesting comparison of data that illustrated just how much better Pittsburgh fared in the last recession than other PA cities. In April, the new Pittsburgh level was 16% above the trough, the low point of 49,700 in April 2011. Compare that to Philadelphia’s suburban metro, which saw construction employment plunge to 38,900 in April 2011. Today, suburban Philadelphia employment still lags its 2008 peak and has but 1,000 more workers employed than Pittsburgh.

In construction news, Burns & Scalo Real Estate is excavating the site for its $35 million, 160,000 square foot Riviera office building (see below). The Riviera is being built 100% spec, although rumors of an anchor tenant swirl. Burns & Scalo is banking on the burgeoning tech industries and the proximity of Pittsburgh Technology Center to attract tenants as construction proceeds.

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The University of Pittsburgh is seeking Predetermination of Responsibility responses on June 20 for its Salk Hall Phase 2 renovation. This is the prequalification for contractors interested in bidding the four prime contracts for the $40 million project. The bidding will go through DGS but will be limited to the contractors Pitt approves through the PDR process. Read more about the PDR here.

Now, To Build It

With Memorial Day passed, the construction industry is moving into its busiest season. Colleges have graduated and schools are about to let out for summer. Construction in Western PA is ramping up and the pool of labor has already “ramped” up. Hiring in the Pittsburgh MSA was reported last week as up 14,000 jobs April-over-April, an indication that the 1.5% employment growth is sustainable; and construction hiring helped lead the way.

Peters Township School District meets tonight to vote on contracts for the $89 million new high school. Low bidders for the electrical and HVAC withdrew their bids, making for more alternate decisions than expected. The Builders Exchange reported that Franjo Construction was awarded the $6 million expansion at Rose Plastics in California. UPMC is taking proposals from PJ Dick/Rycon, Mascaro/Barton Malow, Turner Construction and Massaro/AECOM Tishman on it $280 million expansion of Hillman Cancer/Shadyside Hospital. The Allegheny County Airport Authority has short-listed teams for A/E services and program management on its $1.1 billion Terminal Modernization Program. Finalists for A/E services are AECOM, Corgan/Michael Baker, Gensler/HDR and luis vidal + architects/CannonDesign. The program management finalists are AECOM, Jacobs and Parsons Transportation. Walnut Capital is bringing its final plans to the city for approval this week for Bakery Square 3.0, the rumored future site of Phillips. PJ Dick and Strada Architecture are the team working on the 328,000 square foot office building and 794-car garage.

Commercial Real Estate Enthusiasm

Burns & Scalo Real Estate hosted a brokers luncheon Tuesday and its president, Jim Scalo, was exceptionally upbeat about the next few years. Scalo characterized 2016-2017 as slow years for transactions and decisions because of uncertainty surrounding the election and the ensuing Trump administration. Citing the Tax Cuts and Jobs Act that was passed in late 2017, Scalo explained that he had seen a dramatic upswing in activity since the start of 2018, both in terms of leasing and interest. His forecast was for a strong year for corporate and technology users in 2018, followed by at least two more great years. With the rapid pace of change in Pittsburgh’s economy, Scalo was reluctant to look beyond 2020, but he made it clear that there was no reason to expect a slowdown in 2021 or beyond.

Burns & Scalo is currently working to develop a 150,000 sq. ft. Class A Riviera office building in the Oakland/Pittsburgh Technology Center riverfront. Construction is scheduled for later this year, although the proposed riverfront zoning changes are a potential drag on the project. Burns & Scalo also plans to start a spec office in Robinson at its Boardwalk site, as well as Beacon II at the Abele Business Park in South Fayette.

Brokers at the luncheon echoed the enthusiasm Scalo had. Industrial brokers were beaming about deals pending in the Wheeling-to-Washington corridor and the airport area. One broker talked about the space at Nova Place, which was once thought to be a white elephant on the North Side, becoming scarce. With rents in the high $20s/sq. ft., Nova Place has succeeded in re-branding itself as a tech hub in high demand.

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Nova Place’s main concourse. Photo courtesy Perkins Eastman.

In project news, Mistick Construction was selected for the 183-unit, $30 million Solana at Cranberry project. CMU selected Landau Building Co. for the $3.5 million Warner Hall renovation. PJ Dick has started construction on the $6-7 million renovation of the former Cadillac dealership at Craft Place and the Boulevard in Oakland into offices. The developer, Walnut Capital, is said to have a single user for the project. St. Vincent University finalized its list of contractors for its $14 million library project. Jendoco, Landau, Mascaro, Massaro, PJ Dick, and Poole Anderson will be asked to propose on the project.

2017 Wrap-Up

The Pittsburgh Homebuilding Report released its year-end 2017 results for new construction in the six-county metropolitan Pittsburgh market. While the year unfolded mostly as forecast, there were a few noteworthy deviations.

Single-family housing construction was up compared to 2016 but the gains were in attached products, like townhomes and quads. Permits for attached homes jumped more than 25 percent to 1,035 units. Starts for single-family detached homes actually declined by 6.3 percent, to 1,971 homes under construction. In contrast to the national trend, permits for new apartments also increased last year. New apartment construction activity was expected to slow in 2017 but permits for new units increased by 11 percent, to 2,368 units.

Another trend that continued more strongly in 2017 was the migration to the city. Permits for new construction in Pittsburgh proper reached 1,714, or roughly one-third of the total construction for the entire metropolitan statistical area.

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In another measure of the economy, job growth returned to Pittsburgh during 2017. Hiring grew by an average of 11,625 jobs monthly in 2017; however, that average is well below the current trend. Job creation increased steadily throughout the year, with the monthly average reaching 16,000 jobs in the fourth quarter. In fact, December’s job growth of 19,300 was the highest year-over-year in 2017. Although there have been later revisions that deflated the preliminary jobs numbers in several of the most recent years, the consistent strength of employment gains in 2017 suggests that the trend of flat employment changed significantly last year.

Project news is light at this time of year but the hospital market continues to expand. Rycon Construction was selected as CM for the first of the AHN neighborhood hospitals in Greensburg. Turner Construction is bidding early packages and expects to release the main specialty contractors bids in mid-February for the $90 million UMPC Hamot tower in Erie. UPMC will be interviewing a handful of architects for its $700 million Transplant and Heart Hospital in Oakland (along with the Hillman/Shadyside expansion) next week, with RFP’s for construction management to follow within the month.

Reindustrialization & Amazon

This morning Amazon announced the 20 cities that had made the first cut down from the 238 submissions. Read one local newspaper story about the news. There was a lot of excitement, as you might expect, about the announcement but it’s worth remembering that there are 19 other cities still in the running, including every city handicapped to have had an advantage over Pittsburgh from the start.

The news reminded me of a comment a gas industry executive made during the research for a recent BreakingGround article. He was grousing about all the press for the Amazon HQ2 bid and scoffed at the idea of 50,000 added jobs over the next 10-15 years. By the time the natural gas and chemical industry built out, he said, there would be 100,000 new jobs added in that sector.

That executive might have been exaggerating a little but it’s becoming clearer that the industrial sector is the big reason we’re seeing tight labor conditions ahead of what will be a bigger boom in the next two or three years. With most of the research for 2017 complete, we’ve tracked $4.37 billion in commercial/non-residential contracting. Some $2.37 billion of that total was in the industrial market. While there were a few big commercial warehouses in that number, the lion’s share of the industrial starts came from manufacturing, processing and power generation. This isn’t a one-year phenomenon. The industrial total for 2016 was $1.85 billion; and in 2015, it was $770 million. Even the relatively small total in 2014 – $492 million – dwarfs the total of any other sector during those four years.

There are a number of the mega projects – like Shell or the combined-cycle power plants – that have garnered headlines and make up big chunks of the dollars spent, but there has also been a steady stream of smaller, regionally-focused projects started. Within the past couple of months, for example, Al. Neyer started a 75,000 square foot addition to Knepper Press in Clinton Commerce Park. Hallstrom Construction is working on a 180,000 square foot addition to the New Stanton warehouse for DeLallo Foods.  These are local companies making stuff and doing stuff here. These are project that add to the employment base too.

Think back to the P.R. of the gas industry when the Marcellus Shale play started ten years ago. The payoff, they said, would be in the boom in manufacturing that would follow the exploration. This reindustrialization is starting to become bricks and mortar (or concrete and steel). Along with the construction and jobs, comes a fundamental change in the way business decisions are made. Manufacturers think in terms of the return on their assets. An asset-based economy tends to be focused on long-term trends instead of the next quarter’s results. That usually leads to better decisions for the health of the regional economy. You can read an article on the subject in the Jan/Feb BreakingGround (it’s on p. 52).

What’s going on in the technology transfer for robotics, information technology, AI and big data is an incredible opportunity for transformation of Pittsburgh’s economy. There’s an equally transformative reindustrialization trend. In the race to see which sector takes the economy higher, the winner is Pittsburgh.