Category: Regional Economy

More Jobs and Who Might Be Renting All Those Apartments

Friday’s jobs report excited the markets again, as November’s expansion of 211,000 new jobs surprised analysts for a second straight month. In addition to the higher-than-expected November number, the Bureau of Labor Statistics revised both October and September – which was weaker – upwards by 35,000 jobs. Within the report, big gains in construction and retail offset declines in mining/logging (which is the category covering oil/gas drilling).

job creation history




A report from the Census Bureau on December 2 gave updated estimates of the number of people aged 25-35 who live in Allegheny County. Census used five years of estimates to show the change in population for that age range. The results are surprising and upbeat for the region’s apartment owners, since about 70% of that demographic group are renters.

While the Census report shows the percentage of those under the age of 35 as roughly unchanged in the U.S. since 2010 (6.8 percent are 25-29; 6.6 percent are 30-34), the data shows that the share of Pittsburgh’s population in those age ranges has jumped over the past five years. Those living in Pittsburgh who are 25-29 now make up 10.9 percent of the population, while 7.9 percent of the people living in Pittsburgh are 30-34. The same research showed an increase of .06 percent for that age group living in Allegheny County. In real numbers, that means roughly 9,000 more people of prime renting age live in metro Pittsburgh today than in 2010.

In project news, G. M. McCrossin was the low general/mechanical bidder on West View Water’s $61 million Baden treatment plant. Temple University released its $190 million library for bid. UPMC is looking at options for a new data center, including existing secure facilities and design/build proposals for new centers from teams that include Holder Construction, Whiting-Turner and PJ Dick as construction managers.

(From left) Bill Taxay, Brian Walker and Angelo Martini Jr. having fun at NAIOP Pittsburgh's holiday party Dec. 3.
(From left) Bill Taxay, Brian Walker and Angelo Martini Jr. having fun at NAIOP Pittsburgh’s holiday party Dec. 3.












Transforming Forbes Avenue

Last Friday, Carnegie Mellon selected PJ Dick as construction manager for what is called the Forbes Morewood project. Depending on the final scope and schedule the project will be somewhere between $20 million and $30 million but its impact will be much bigger. A lot of the work will be focused on changing and updating the university’s “headquarters” – Warner Hall – but the latter phases of the project will form the physical linkage between CMU’s iconic “Cut” to the new north campus under development.

The importance of the north campus development is that it is going to be the home of what CMU’s visionaries, especially Pres. Subra Suresh, see as the future home of its corporate partners. Under Jared Cohon’s leadership, CMU upped its game in technology transfer, which is the commercialization of its research in new technologies across many industries. More recently, Google’s explosive growth has shown a spotlight on the talent at CMU and highlighted the value that a company can derive from working closely with the university. Dr. Suresh’s vision for what is being dubbed the “Tepper campus” – because the new home of the Tepper School of Business will anchor the development – involves corporate partners locating on the university grounds. This same concept has become bricks and mortar at MIT, Stanford and other schools, and clearly CMU intends to be among that group.

Imagine turning left onto Forbes from Craig at the end of this decade, driving past a hotel filled with corporate visitors and a new incubator-style office between the Hollow and Scaife Gallery, and on up a Forbes Avenue that has a town center spanning the street and connecting to a new campus that has the Amazon Building or the GE Building or the Uber Building or all three. By that time, the Gates/Hillman and Scott Halls will have filled in the east side of Panther Hollow and connected all of the science buildings together. The flow of research and information from the minds learning chemistry, nanotechnology, information technology, physics, etc. will cross Forbes to reach those entities that can apply that enormous knowledge to the real world.

If the vision is fulfilled, there will be a lot of money made by that flow of information. Southeastern Oakland is not going to become the new Silicon Valley but it doesn’t have to to have a transformative effect on Pittsburgh’s overall economy. So if you have to go from Oakland to Squirrel Hill over the next few years, maybe don’t detour around all the mess on Forbes Avenue. Take the time to witness something that will make your life a bit easier in the long run.

Construction Ramps Up in Second Quarter

Owing to continued demand for apartments and the start of a number of long-awaited projects, construction activity in the first six months was up significantly in metropolitan Pittsburgh. Commercial and institutional construction jumped 24.3% to $1.38 billion from January to June. Residential construction was up 31% year-over-year, with 2,380 units started in the first half of 2015.

Within the residential segment, the increase in units started was all in the multi-family market, which had 1,488 units started compared to 843 for the same period in 2014. Because of lot shortages and continued regulatory pressures on development lending, construction of single-family detached homes remains depressed below the level of potential demand.

Along with apartments, hotels remain a hot property type. Fairchance Construction started work on an $11 million Hilton Garden Inn in Moon Township. Dynamic Building was selected as contractor on a $10 million Towne Place Suites by the Grove City Outlets.

Bear Construction has started work on the new 25,000 facility for Tri-State Supply outside Washington PA. Rycon has begun site work for the new Dick’s in Greenwood Plaza in Butler. PJ Dick has started the preliminary work on Google’s 66,000 sq. ft. space in Bakery Square 2.0. In State College, Clayco Corp. is taking proposals on the design-assist mechanical and electrical packages for the first phase of the $170 million East Residence Halls project.

PPG Stays in Town

PPG Industries has committed to renewing its lease in the signature One PPG Place when it expires in 2018. Highwoods Properties made reference to the renewal in its conference call April 29, letting the cat out of the bag on what had been whispered around town for a month or so. Avison Young handled the transaction for PPG.

The decision to take 350,000 square feet is a significant vote of confidence for the Pittsburgh region – and Downtown – from an employer that is growing its top and bottom line. It keeps the revitalization of Market Square on an upward arc as well. Coupled with Rice Energy’s decision to expand and take 150,000 square feet at Burns & Scalo’s third building at Zenith Ridge in Southpointe, the PPG announcement adds some upbeat news to the Pittsburgh office market, which had been buffeted a bit lately by the prospect of vacancy from USSteel’s downsizing and the Citizen’s Bank decision to sell the 525 William Penn Place building.

Chuck Bunch, PPG’s CEO, commented that the decision reflects the coatings manufacturer’s continued expansion in Pittsburgh. With the past year PPG has filled one of the vacated Westinghouse campus buildings in Cranberry and invested roughly $15 million to update research facilities in Harmar.

The East Liberty Story

This morning I attended the NAIOP Pittsburgh monthly chapter meeting at the William Penn. The meeting feature a panel that included developers Todd Reidbord (Walnut Capital) and Mark Minnerly (The Mosites Co.), along with Kyra Straussman from the URA. Councilman Dan Gilman moderated. It was surprisingly informative.

(From left) Dan Gilman, Kyra Straussman, Mark Minnerly and Todd Reidbord tell the East Liberty turnaround story at NAIOP Pittsburgh.
(From left) Dan Gilman, Kyra Straussman, Mark Minnerly and Todd Reidbord tell the East Liberty turnaround story at NAIOP Pittsburgh.

I say surprisingly because the story of East Liberty’s transformation has been told a lot. I mean, A LOT. But when these active participants retold what it took to redevelop East Liberty, especially when you heard the timeline of all the projects at once, it was impressive. Most observers have accurately characterized the turnaround of East Liberty as a long, painful process. While that’s true, it was also apparent from this morning’s presentation that much of what we consider to be the turnaround story has happened in just the last five years or so.  The thing that struck me was that Whole Foods signed on in 2002 and it was another six or seven years until Target arrived on the scene. After that, Bakery Square wasn’t open for business for another two years or so. That’s a lot of investment since the start of the Great Recession.

The presentation concluded with a brief discussion of the Larimer redevelopment, for which a $30 million Choice Communities Grant was received. I can’t see Larimer turning around like East Liberty, but then I can’t say I shared the vision of what would happen in East Liberty ten years ago. It’s an amazing change.

A bit of construction news: Continental Building Systems has started work on the $2 million, 17,000 sq. ft. Toby Keith’s I Love This Bar at North Shore Place II. JLL is receiving bids on March 24 for USAA on 56,000 sq. ft. of fit-out for Cabot Oil & Gas at 2000 Park Lane. Precision Builders, Rycon and Shannon are the bidders.

Wrapping Up the Week with RACP

Last week’s announcement of the first round submissions for Redevelopment Assistance Capital Program (RACP) grants included applications for assistance on a number of the region’s high-profile projects, including the ALMONO development, $100 million Union Trust renovation and Oxford’s 350 Fifth Avenue office tower. There were also some surprises.

While the zoo has been quietly doing some smaller expansion projects over the past year, the RACP submission included a grant to help with the Pittsburgh Zoo’s $30 million expansion program. Another project that had been advancing under the radar is Robert Morris’s new convocation center.

There were also several hospital projects on the submission list, which is fairly unusual and an indication of how the healthcare industry hopes to fund some of its capital needs that lead to job creation. Both UPMC and AHN had projects in the RACP pipeline. The former applied for funds for a $5 million OR-14 at Children’s Hospital. AHN applied for $9.1 million for a NICU at West Penn Hospital.

RACP grants will be made later this year. Most of the big project grants will go towards construction that will occur in 2016 or later.

Among the projects getting under construction, Mascaro has started on Chevron’s 120,000 sq. ft. TI at 700 Cherrington, which is space that will house its reduced shale workforce for now. Marco Contractors was awarded the new CVS store in Greensburg. Franjo was selected as the contractor for $6 million Bobby Rahal parking garage in Shadyside. PJ Dick’s small projects group started work on the Whole Foods shell and the 125-car garage at the Siena development in Upper St. Clair. Hillcrest Academy has narrowed the field for its $1.8 million classroom addition to Rycon & Bear Construction. Rycon was the low contractor on the $2 million CMU INI facility.

The bump in new work hasn’t shown up in slack bidding just yet. In northern WV, where work has been brisk, bids came in on top of each other for the new residences at Fairmont State. Massaro was low at $28,803,000 with Nello second at $29,597,000 and Yarborough and Manheim tied at $29,946,000.

The Gas Tax

Gov. Wolf surprised no one on Feb. 11 when he announced plans to create a severance tax of five percent on the natural gas extracted in Pennsylvania. Wolf campaigned on this tax – this exact level of levy — and has wasted no time following through. Unlike his predecessor, who was hamstrung by his ‘no tax’ pledge to Grover Nordquist – Gov. Wolf can make good on his promise without having to put it into effect. The severance tax will have to become legislation, meaning that something specific will have to get through the Republican-controlled legislature. As of the announcement, there were few specifics of the proposed law released.

The lack of specificity tempered the remarks of anyone who responded. The shale gas industry responded negatively. There were implied threats of further slowdown in drilling and development of the resource in Pennsylvania. Comparisons to the extraction taxes of other states brought reminders that places with higher taxes – like Texas – have virtually no corporate taxes. The comparison to West Virginia prompted the reminder that drilling and processing in West Virginia lagged the activity in PA by quite a bit. But again, it was hard to lodge too much of a complaint against the proposal without knowing what was in the proposal.

One tidbit that the governor did mention was that local government would still participate in the impact fees, which will still be charge to some degree. My belief is that the loss of impact fees to local government is the biggest negative in Gov. Wolf’s proposal. The gas industry will figure a way to profitably get at the largest gas deposit in North America. Local municipalities and counties bear the brunt of whatever impact drilling has. The use of those impact fees has brought new roads and infrastructure to places that the state has barely invested in over the years.

Washington County Chamber of Commerce President Jeff Kotula may have spoken for all local government yesterday when he expressed concern about the share of impact fees that would find their way from Southwestern PA to Southeastern PA, where there is no drilling but a lot of votes.

Don’t Bury the Apartment Market Yet

One thing I noticed when the year-end party circuit was in swing was that lenders have about had it with apartments, at least in Pittsburgh. After tow or three years of cautiously making loans to one developer after another, the Pittsburgh banking community seems ready to throw dirt on the apartment boom.

They may indeed be correct. After all, the combined total of apartment starts for 2013-2014 is four times what the average number of units started was for the previous 13 years. I’ve gotten several calls in the last three months from appraisers trying to estimate absorption and looking for starts information. I understand the mentality, especially in Pittsburgh, that looks for the ride to end. Here’s where I think the problem may be in that thinking.

First, there really isn’t any time in the working careers of Pittsburgh lenders and appraisers that is a comparable market reference – at least if the career was here. Population, particularly in the urban core, has been declining for much of the past 30 years so there hasn’t been an apartment driver like in the south or in major landlocked cities like New York or DC.

More important are the supply/demand dynamics. There is net migration into Pittsburgh and there are between 8,000 and 18,000 new jobs being created in the region annually – depending on whose estimate you’re using. Each new job essentially  creates a new household (if you compare Pittsburgh existing households and total employment, the numbers are almost identical). So take the 8,000 job number and do this math: there will need to be 8,000 new dwelling units created for those workers. Single-family homes are stuck at about 2,000/year with no increase expected in the next year or so. Even with 3,838 units started in 2013, there would still be a shortfall of more than 2,000 units.

Currently, some 3,500 units of apartments are in the pre-construction pipeline. Even with most of the 2,500 units from 2014 still to be delivered, that means there won’t be enough apartments to match up to job creation/household formation again in 2015 or 2016, unless the employment picture goes backward significantly – something no one foresees. And none of this takes into account the facts that suggest that the Millennials are starting to emerge from sharing apartments or their parents’ basements.

I imagine that the lenders are going to drag the apartment development down somewhat but I expect that developers will just find another source of funding seeking higher yields than the Treasury or their local bank is giving. With an impressive recent history of rental growth, apartments should still be a hot ticket in 2015.

Apartment development will probably push the envelope a few more years in fact, at least until the growth in rents and birth rate creates the next boom in home ownership.

The Data Doesn’t Lie

Even with the surprisingly strong fourth quarter for contracting, most involved in the construction industry will find 2014 a bit disappointing when the dust settles (especially when the financials are reported). That will be less because of the performance of the market than the underachieved potential.

The last quarter of 2013 showed real economic promise. National GDP was up 3.7% and job creation in Pittsburgh was estimated at 18,000 jobs for the year. That potential for loosening the market just didn’t kick in during 2014. Or at least it didn’t feel that way. The numbers mostly back up that disappointment, although they tell a mixed story.

Non-residential structures totaled $2.77 billion in 2014. That’s a mere $5 million below the $2.82 billion of 2013 but given the outlook coming into 2014, flat was disappointing. The residential market may appear way off the 2013 levels, falling over 24% year-over-year. But much of that decline is due to a 30% drop in multi-family starts to 2,572 units. That’s actually a pretty healthy year in Pittsburgh but the 2013 total of 3,838 dwarfs that number. It’s worth noting that the 2013 total was a 239% increase over 2012 and 2,572 units tops every other year going back to 1995 by at least 15%. More about the apartment market in a future post.

Total Pittsburgh MSA 2014 1,971 2,902 4,873
Total Pittsburgh MSA 2013 2,164 3,838 6,002
% Change -8.9% -24.4% -18.8%

There were over $900 million in non-residential starts in the 4th quarter of 2014. That’s a good start for backlogs. While the bid market isn’t racing out of the chute in the first 2 weeks of the year, more than $250 million has already been awarded or started already in 2015.

Last week NAIOP Pittsburgh presented PNC’s Gus Faucher talking about the economic outlook for 2015. Faucher was very upbeat, mostly because of the improved job market, lower gas prices and the lack of any economic headwinds from consumer or government de-leveraging. PNC is predicting GDP growth above 3%, even with the global economy tanking.  It’s worth pointing out that PNC’s Kurt Rankin was the one economist willing to say that he thought surprises in 2014 would be to the upside and he turned out to be very accurate in guessing what those upside numbers would be.

Business wasn’t as bad in 2014 as it felt. One of the tougher tasks of business is separating emotion from reality and that cuts both ways of course. My forecast for 2015 is that it will be a breakout year. That doesn’t mean gangbusters necessarily. I think too much Pittsburgh business is tied up in global business for the Pittsburgh economy to not be impacted a little by the world’s problems. But I do think that 2015 will be the year that we see the long-term optimism about Pittsburgh and its maturing technology and energy industries translate into bricks and mortar.

Confused? You’re Not Alone

I tend to meet with a lot of business owners in December and January to talk about the coming year. At the present time, confusion seems to be the prevailing wisdom about the market’s direction.

The fundamentals are very supportive of a breakout year in 2015. Space is tight in commercial property; industrial and manufacturing are expanding rapidly because of the natural gas exploration and its related businesses; employers are creating a lot of jobs in Pittsburgh; interest and investment in the region are very high. Add to that macroeconomic recipe the fact that construction has been stagnant for 5 years and you would expect a boom to begin. Somehow, no one seems to keen on that happening in 2015, including your correspondent.

Look for a better year in 2015, especially if your market is commercial construction, but don’t expect to fill up your belly in the first half of the year. By mid-year we’ll discover what a new governor might be thinking (especially about the gas industry) and what a Republican-controlled Congress will be doing or not doing. After that, all bets are off.

As the year turned, a couple of big projects that were out were resolved. The Cambridge Healthcare Solutions development team – which includes Mascaro Construction – was selected to build the $75 million VA Butler Outpatient Center. Johnson Controls selected a team that includes PJ Dick and IDC Architects for its $100 million office/research center in York, PA.

Bids were opened Jan. 8 on the Parran/Crabtree Hall project at the University of Pittsburgh in Oakland. The 3 low bidders on the prime contracts (from base bid #1) were:

General #1: Volpatt – $10,499,000; Gen #2: Burchick – $10,771,000; Gen #3: Massaro – $10,760,000

HVAC #1: McKamish $6,725,000; HVAC #2: Ruthrauff/Sauer – $6,798,000; HVAC #3: Tomko – $6,,887,000

Plumbing #1: Tomko – $1,857,000; Plmb #2: McKamish – $1,882,000; Plmb #3: SSM Industries – $1,937,000

Electrical #1: Farfield – $4,388,000; Elec #2: Lighthouse – $4,824,000; Elec #3: Westmoreland – $4,897,000