Category: Regional Economy

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

Reflections on a Week Out on the Town

This is the time of year for “annual” events and this week has already been full of them. A few observations:

I admit to being a fan of the Allegheny Conference’s work and their announcement of the goals of their next three-year strategic plan hasn’t changed that view. The top goal addresses a problem I’m hearing about with shocking frequency – not enough good (meaning appropriately skilled) workers to hire. If this is a problem for construction today, it will be a crisis when work picks up next year. Attracting qualified people from IT to iron workers is a “must win” for Pittsburgh to remain on the current growth path.

The buzz at Thursday night’s Night at the Fights, put on each year by NAIOP Pittsburgh to benefit Habitat for Humanity, was amazingly upbeat. A lot of commercial real estate brokers there and while they are a positive bunch, in public brokers usually talk poor. It seems there are just too many deals and users right now to suppress the optimism. The talk was of a Walgreen’s operations center, Ensinger Plastics, mysterious 250,000 sq. ft. users ready to sign and, of course, the Shell cracker.

The team from Continental Office enjoying NAIOP Pittsburgh Night at the Fights.
The team from Continental Office enjoying NAIOP Pittsburgh Night at the Fights.

Shell’s Ate Visser told the Post-Gazette this morning that the company was exercising its option to by the site from Horsehead Corp. (http://tinyurl.com/mr46xkb). That’s a big deal in and of itself but the crowd last night seemed to be looking for more. If I assimilate what I heard from dozens of people who seem to be in the know about Shell’s plans (all of whom can’t actually be in the know, of course), I would say that our collective impatience will be satisfied next week. Commercial real estate people have been known to spin self-fulfilling prophecies before. We won’t have to wait long to find out on this one.

The other heartening takeaway from two nights of rubbing elbows with regional leaders and real estate execs is that it’s clear that more investors and industries are looking at Pittsburgh than we even know at this point. At the risk of sounding like a sunshine pump, it’s hard to imagine the region being better positioned.

It feels like the polar opposite of 1983. Back then, we couldn’t imagine that the steel industry was really gone for good. Now it seems unreasonable to think that another industry might come back and replace the ones that left 30 years ago. If there is an industrial train pulling into the station right now, there will need to be a monumental coalition of government, foundations, labor and business owners to move the dial on infrastructure, pensions, immigration, etc. Solutions will need to rise above politics or Pittsburgh’s growth will be stunted.

Real Estate Remains Bubbly

Last night’s annual meeting of the Allegheny Conference on Community Development was focused on the agenda for the Conference’s three-year strategic plan for 2015-2017. The number one priority is one that is on the minds of a growing number of business owners – attracting enough talent. Growing the region’s population is the general way to describe the Conference’s mission for the coming years.

Assuming there is success in that mission, one of the correlative problems to tackle will be having sufficient housing and amenities. That means increasing opportunities for commercial real estate – offices where people work, stores where people shop and homes where they live. Building permits for October show that the will to develop apartments remains strong. After a slow first nine months, permits for apartments in October reached almost 600 units. A similar number is expected in November/December, bringing the total for the year to roughly 2,500 units. The activity in commercial development that would bring the people here is also building.

Reports of deals in the works for industrial and office users include as many as ten or more projects of at least 100,000 sq. ft., including a few over 250,000 sq. ft. Now, there can be redundancy in these but even with a couple of duplicates in the list, there is clearly an uptick in commercial users. And that activity is, of course, without any direct influence from a green light at the Shell cracker.

The rumors of a pre-election announcement or one coming yesterday from Shell have proven to be simply rumors but the activity below the surface seems too urgent for some imminent word. If I’m still writing this by Thanksgiving, feel free to remind me what urgent actually means.

Disappointing Results – Brightening Forecast?

Budgeting for owners/developers and bidding at the subcontractor level has ramped up in recent weeks. Among the general contractors, as many as ten major projects are being budgeted right now for a variety of owners. Construction is getting underway on several large projects that have been in development for a year or more. These developments raise optimism for 2015 and hopes that the fourth quarter will be a boost going into the coming year.

Among those ramping up, Massaro Corp. is doing the demolition and abatement at the former Allegheny Health Dept. site to start the 389-unit Ambling Apartments in Oakland. Mosites is doing the prep work for the $22 million Cohon Center expansion at CMU. Also at CMU, Mascaro is supposed to start work on the $18.5 million Hamburg Hall addition. Mascaro was awarded the Union Trust Building and is awaiting the green light for the $32 million Heinz Field South Plaza expansion in January. Up north of Zelienople, the Jackson Twp. supervisors have approved the 350,000 sq. ft. FedEx Ground distribution center, to be built by Jackson Taylor Contractors.

Setting optimism aside in favor of reality (or at least results) the construction activity through the first 3 quarters of 2014 remains disappointing. The Pittsburgh Homebuilding Report for Jan-Sept shows residential construction down 30% from last year, mostly due to a drop in apartment construction. In part this is a reflection of the unusually high activity levels in 2013, but housing construction in general is softer. Another 1,200 apartment units are expected to get underway in 2014 but the market will still fall short of 2013.

pgh housing 2014-3

Non-residential construction is off 15.4% from the first nine months of 2013, according to Tall Timber Group’s research. Contracting through Sept. 30 totaled $1.92 billion compared to $2.27 billion during the same period in 2013.

 

Something Has to Give

After doing some preliminary work on construction volume in metro Pittsburgh thru the first three quarters – with an estimate for September – I am expecting that less than $2 billion will have started during the first nine months. Only in 2010 was the volume so low through three quarters, at least since the 2001-2003 slowdown. Architects and engineers continue to be busy but the amount of work getting through the pipeline is still a trickle.

Last Wednesday, CBRE presented its annual real estate symposium at the Westin. The global real estate firm was upbeat about the economy in general and commercial real estate in particular. Local managing partner Jeffrey Ackerman characterized the Pittsburgh market as “booming.” Given the data on high occupancy and absorption of space, his assessment is correct. What isn’t booming is the new construction that should result from such incredibly tight supply and demand fundamentals.

The last time the construction market felt like this was during the summer of 2004. Following the Plan B boom of stadiums and the school construction boom of the late 1990’s, there was an implosion of construction when the 2001 recession hit. That slowdown lasted over three years, breaking in the fourth quarter of 2004. Like then, the fourth quarter of this year will be an indicator for the coming year.

By November, we’ll have elections won and lost. Any owner waiting for signals will have them by then. Look for the opportunities to build backlog before Christmas to get an inkling about whether the pipeline is going to break loose in 2015 or not.

Hola Pittsburgh and a Workforce Solution

Yesterday’s Allegheny Conference Regional Investors’ Council meeting offered a few things beyond the usual regional cheerleading. More important to the construction industry were two programs that may help with workforce issues.

First there was an interesting video and short speech about the Hola Pittsburgh initiative. This is a effort aimed at attracting the professionals and workers leaving Puerto Rico because of the poor economy. The figures the Conference gave were about 50,000 people emigrating every year. Pittsburgh may not seem the most likely place for Puerto Ricans to land but there is a connection because of career of Roberto Clemente of all things. If successful, Hola Pittsburgh would have the unintended benefit of making the region seem more like home to Hispanic workers in all industries. And construction is an industry that has been attractive to Hispanic workers in other major cities.

The second initiative is the Service to Opportunity effort, which connects returning veterans to jobs. The thrust of the initiative is to match valuable skills learned in combat and service to the civilian opportunities, especially in energy and construction.

Construction is facing a serious workforce shortage as Baby Boomers retire with no backfill of labor ready to move in. Trades have been increasing recruiting but this segment of the population – veterans – comes equipped with transferable skills and excellent attitude. Both these regional initiatives have potential to draw people to our industry.

Not much construction news this week. UPMC selected Alexander Building Construction as CM for its $20 million Altoona Hospital job. Another big piece of the Route 219 extension in Somerset has been put out by PennDOT. The $80 million Garrett Bridges project is due October 23.

A Slow First Half

Construction of all kinds lagged significantly behind the activity in the first half of last year. Housing starts in Pittsburgh plunged 37.3 percent in the first half of 2014 compared to the same period in 2013. The drop in activity was driven by a significant drop in apartment starts coupled with a downturn in single-family permits that is attributable to weather and market conditions.

New home construction is still lagging the pent up demand for housing of all kinds. Some of the decline in starts can be explained by the severe winter, but much of the decline is due to the profile of the custom builder and the lot shortage in Metro Pittsburgh. The average builder is smaller here than most markets and it’s difficult for smaller builders to catch up when weather holds down buying for an extended period. More importantly, the dominant share of NVR’s Ryan/Heartland brands has made it very appealing to develop new lots for that juggernaut and unappealing to develop traditional neighborhoods that feature multiple custom builders.

Total residential starts fell to 1,813 during the first six months of 2014. Because several large multi-family projects got underway in the second quarter of 2013, the year-over-year comparison reflects a steeper decline than the Pittsburgh market might normally support. With another 2,000 units in the multi-family pipeline, permits for attached and multi-family units will still top 2,000 units for the full year, a total that is roughly 25 percent above the historical norm.

The top municipalities for residential construction during the first half of 2014.
The top municipalities for residential construction during the first half of 2014.

Demographics are really behind this part of the market. For as many apartments as have started since late 2012, leasing remains brisk, even accelerated compared to 2013.

Nonresidential contracts reached only $1.02 billion from January to June 2014, down 29.7percent from $1.45 billion during the same period in 2013. The pace of activity seems to be finally increasing, although the market is nothing like the boom of construction that took place after the last recession. Because of the cold winter and slow spring bidding, there is little expectation of a significant turnaround in 2014 but the pipeline is filling up with projects that bode well for 2015. Jobs like CMU’s Tepper School and the Cohon Center, the next phases of Bakery Square 2.0 or the Three Crossings are some examples of projects that will get underway in the next six months.

The big trigger will be the Shell cracker in Monaca, I believe. There are bigger industrial users looking for space now but the demand for manufacturing and industrial space will explode once plans for the site are announced. Jacobs Engineering took bids on some early packages over a week ago and confidence is still very high that work will go ahead by the end of this year on the preparation for the chemical processing facility, even if only to prepare it for Shell to sell to another producer. That prep work should be in the billion dollar neighborhood.

Amazon Lands

Online retailer Amazon has apparently selected the former Roomful Express warehouse in Crafton for its fulfillment & distribution center in Pittsburgh. While no one directly involved in the deal can confirm the selection, brokers involved in other space searches say that the Crafton warehouse has gone off the market. The deal is reported to be for 300,000 sq. ft.

Amazon’s decision to move to Pittsburgh doesn’t mean a ton of jobs but it puts the industry leader in online sales in this region. With online shopping expanding into all retail segments, the trend is for more regional fulfillment centers. Amazon’s CEO Mark Bezos plans to sell “everything to everyone” and is aggressively moving to one-day or same-day fulfillment. That he chose Pittsburgh is likely a sign that competitors will view this region as an expansion site.

Building automation and controls giant, Johnson Controls, is close to making a decision about the design/build team for its new $100 million office/research facility in York PA. The University of Pittsburgh is making a final selection for construction manager for the $17 million Murtha Center project at its Johnstown campus after interviewing Massaro Corp. PJ Dick and Volpatt Construction.

Commercial Real Estate Booming

Commercial real estate is the hottest segment of the construction market in 2014. Spec office projects are moving forward in strong submarkets across the city. Highmark’s medical mall has sparked construction of 3 new medical-related office buildings across Route 19. One of the developers, ACRES, is contemplating another new office building further north in the Warrendale area and there are 2 new 42,000 sq. ft. office buildings proposed at the Brooktree Center in Wexford. Burns & Scalo announced the signing of a 30,000 sq. ft. lease for the second building in its Zenith Ridge project at Southpointe. The developer is more than half leased there and plans to start the third 150,000 sq. ft. building next spring. Burns & Scalo has also leased half of its Concord project in the RIDC Park West.

These offices complement the spec construction at Southpointe Town Center by Horizon Properties, Elmurst’s Schenley Gardens in Oakland, Millcraft’s Gardens project downtown and the Three Crossings and 350 Fifth Avenue projects that Oxford is planning. Expect to hear more about the latter in August, along with possible news about the ALMONO site from Oxford and Millcraft.

The demise of the bricks and mortar retail store hasn’t occurred yet in the far northern and southern suburbs. Dynamic Building Co. is starting construction on The Street, a 132,000 sq. ft. retail town center Horizon is developing near the Meadows. Work is underway on the Field & Stream and Hobby Lobby spaces at the Old Mill, another 100,000 sq. ft. plus being developed by TSG Properties and Mosites Construction. In the north, WalMart is dipping its toe back in the water in Pittsburgh with a 150,000 sq. ft. store planned for McKnight Rd. at Blazier Dr. in McCandless and Dominic Gigliotti is proposing another neighborhood retail center in Cranberry, a 93,000 sq. ft. center similar to the retail portion of the Village at Pine. At the same time, Wexford is seeing a boom in small retail, with a Wendy’s, Auto Zone, Chick-fil-A, new branch bank and a handful of new tenants in the Wexford Plaza. And all of this is in addition to another 90,000+ sq; ft. of new construction at McCandless Crossing.

The other leg of the CRE boom in Pittsburgh is the apartment market. The Business Times reported yesterday that Ambling University Development Group would be presenting a plan to Zoning Hearing Board for 389 apartments at the former Allegheny Health Dept. site at 3333 Forbes Ave. in Oakland. That property is the site of a mixed-used hotel/apartment/office project proposed by MWK Development, a partnership of the Massaro Corp., Gary Wilson of LWE and Tasso Katselas.In the 2 weeks prior to that hearing. The ZHB will also hear plans for a new 7-story, 74-unit apartment Uptown from Castlebrook Development and for a 7-story, 32-unit building at 2607 Murray Ave. in Squirrel Hill being developed by AHI Development. During those same 2 weeks, adaptive re-use projects from Solara Ventures and Collier Development in the Strip will be reviewed. In total, the number of units under construction and in the pipeline tops 5,000.

One legitimate concern about commercial real estate in general is the push to build by investors rather than supply and demand. Fed Chair Janet Yellen addressed this in her comments to Congress yesterday about yield-chasing, even though she didn’t refer specifically to CRE. Most of the recent real estate bubbles have had an element of overzealous investing pushing construction near the top of the boom. Multi-family is the poster child for this right now, although other categories will attract investment soon, at least as long as interest rates remain low.

These dynamics aren’t as important in Pittsburgh. There remains an abundance of demand compared to supply in all segments of commercial real estate. While no one can predict the impact of the ethane cracker plant, its construction will likely kick start another surge in demand for commercial and industrial land and space. Bids are coming in this week for some of the first packages on the cracker, by the way, although nothing has been officially announced. That announcement may still come at a time when such news is politically advantageous to a gubernatorial race, but the real work seems to be moving anyway. Even without that catalyst, it’s a good time for commercial development.

Some Construction News

Last week’s jobs data helped put a happier face on the state of the overall economy. The comments from a Shell executive about the signing of 10 third-party agreements for supply and product from the proposed ethane cracker also should add optimism to the business outlook in the region; however the bidding activity remains very light, even for June.

The highlight of this week’s bid board is the addition and renovation to the Fox Chapel Golf Club. FCGC has invited BRIDGES, Franjo, Jendoco, A. Martini & Co., Mascaro, MBM & Volpatt to bid the $6 million, 12,000 sq. ft. addition, which also includes a similar amount of renovation. MIllcraft is reportedly interviewing Mascaro, Massaro, PJ Dick, Mosites and Turner in follow-up to an RFP for the redevelopment of the former Saks Fifth Avenue site.

Harrison County Board of Education awarded Landau a $2.5 million contract for work at the Simpson Elementary. Volpatt Construction was selected to renovate the Hamburg Theater, the first phase of the City Theater’s $7 million capital project on the South Side. A. Martini & Co. was selected by Excela Healthcare to act as the design/build contractor for a $9 million renovation to Frick Hospital’s entrances. Work is beginning on the emergency entrance. Excela also gave Martini the green light to do site work and access road construction for its $20 million-plus new ambulatory center in Latrobe.