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Commercial Market Update

This morning’s NAIOP Pittsburgh chapter meeting featured a distinguished panel of commercial real estate veterans discussing the state of the market. Lou Oliva from Newmark Grubb Knight Frank, Jason Stewart from JLL, Herky Pollock from CBRE and IRR’s Paul Griffith had generally upbeat things to say about the market in 2017. Notably, the apartment market inspired caution and the growing appetite of investors outside the city was raised up as a big influence on the market. None of the four were particularly concerned about interest rates impacting values in 2017 but all expected the increases to continue.

The brightest segment of the market seems to be industrial. Oliva mentioned that some 800,000 sq. ft. of spec industrial space had been delivered into the market in 2016, with more than 500,000 sq. ft. already absorbed. Here again, the largest deals all involved out-of-town developers.

(From left) Lou Oliva, Jason Stewart, Herky Pollock and Paul Griffith update the audience on the real estate market at NAIOP Pittsburgh’s meeting Feb. 16. Photo by James White Media Production

In addition to the industrial deals mentioned this morning several large projects in the pipeline. Buncher has increased its land stake at Findlay Industrial Park, with the ability to build another 100,000 sq. ft. beyond the 80,000 sq. ft. under construction. Al. Neyer will be building a 200,000 sq. ft. warehouse in Jackson Township near the PMF Trailer facility. Castlebrook Development and Wesex Construction are in the planning stages of the Turnpike Distribution Park in Beaver County. Site plans for that call for 3-5 buildings totaling more than 900,000 sq. ft., including two 400,000 + sq. ft. buildings.

In other news, Rycon Construction was selected for McGuire Woods’ $4 million TI at Tower Two-Sixty. East Liberty Presbyterian Church shortlisted Jendoco, Landau and A. Martini & Co. for its $5 million renovation.

End of Week Roundup

As chaotic as US politics is right now, the economy continues to hum along. Today’s jobs report outperformed the expectations of analysts, with 227,000 new jobs added to payrolls last month. That continued expansion is in contrast to the story in Pittsburgh, which last year added only 4,400 jobs. At Thursday’s Viewpoint presentation – one of the best forecasting events for commercial real estate – Integra Realty Resources’ President Paul Griffith explained how the healthy job growth early in the business cycle has faded to a flat line since 2013. Pittsburgh’s strong economic sectors have been offset by declining employment in energy and manufacturing.

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In project news, Volpatt Construction was awarded the $2.4 million Nursing Unit 5A renovation at St. Clair Hospital. Developer Alphabet City selected Brubach Construction to build its $7 million, 60,000 sq. ft. East Liberty Centre office building. Campus Advantage interviewed Turner, PJ Dick, Continental and Rycon for its $40 million apartment on Forbes Avenue in Oakland. Rycon Construction is underway on the $27 million, 172-unit Emerald on Centre apartments in Shadyside. Sota Construction is taking bids from subcontractors on the renovation of the Allequippa Place apartments and construction of the 49-unit new Wadsworth Street Apartments, roughly $8 million in total construction. And McCaffrey Interests is taking RFP’s next week on the $66 million Terminal Building redevelopment in the Strip District.

Uber On

Tuesday’s NAIOP Pittsburgh chapter meeting was a luncheon that hosted executives from Uber, who explained the company’s Pittsburgh growth strategy. Started in 2009, Uber has grown to more than $20 billion in revenue, with 11,000 employees worldwide. The company’s VP of Strategic Initiatives, David Richter, presented a dizzying set of facts about Uber’s astonishing growth. And while the ride sharing business represents its major revenue stream, it’s clear its future is elsewhere, like autonomous vehicles.

Richter spoke glowingly of Pittsburgh, claiming that Uber was beginning to see cases of San Francisco employees choosing to relocate to the Steel City because of quality of life and the opportunity to work on the next big thing. He also made it clear that it was CMU’s engineering research and grads that were the reason Uber was here.

“There are only four or five cities in the world with that kind of talent in robotics and Pittsburgh is one of them,” he said.

Uber’s David Richter addresses the crowd at NAIOP Pittsburgh.

Uber also did a slideshow of its incredible new offices in Lawrenceville, which were designed by Strada and built by Continental Building Co. The $32 million project is modern and clean, with many spaces designed for collaboration. During the course of the presentation Richter also mentioned the payoff for the region: after starting at zero employees in January 2105, Uber now has 550 in Pittsburgh, with roughly 100 new positions open now.

He also noted that the company anticipated needing more space in the near future. After building its new Advanced Technology Center and fitting out about 100,000 sq. ft. in Schreiber Real Estate’s building on 30th Street, Uber has invested nearly $50 million in new testing facilities and track at Almono.

Off to a Solid Start

The bidding activity to kick off 2017 has not been spectacular but there are more projects going out than at this time last year. More importantly, there are more projects getting underway or being awarded than at the same time in 2016. Without any building permit research for 2017 yet there are already nearly $200 million in starts or contracts awarded, an indication that January’s volume will far exceed that of the past few years. The key to a strong 2017 will be that owners maintain this newfound level of economic confidence and keep the flow of projects coming. The stop-and-start nature of 2016 – particularly the lull in late spring and post-Labor Day – played havoc with contracting businesses last year.

The industrial sector of the market continues to shine. Construction has started on an 80,000 sq. ft. warehouse that Buncher is building in Findlay Industrial Park. Chapman Properties is starting work in its 74,000 sq. ft. flex building at 110 South Campus Drive at Chapman Westport. Al Neyer Inc. is close to a deal for a 200,000 sq. ft. warehouse in Jackson Township, north of Cranberry. Castlebrook Development is edging forward with plans for 900,000 sq. ft. of distribution near the I-376 and PA Turnpike interchange in Beaver County. Much of this spec activity is being driven by the expansion of retail fulfillment services (e.g. Amazon, Zappos, etc.) into the Pittsburgh market.

There is real momentum for healthcare construction also. UPMC has asked for architectural proposals for its proposed 200,000 sq. ft. ophthalmology building at the UPMC Mercy campus. The hospital has not announced its decision about its South Hills expansion but is reported to be looking at two separate developments, one near the site announced earlier in the Pleasant Hills/Route 51 corridor and one near its Children’s Hospital south satellite in South Fayette. Most of the hospital projects being contemplated will have little construction impact in 2017, although contracting in the fourth quarter should be robust.

Rendering of the $51.5 million, 221-room hotel proposed by the Rivers Casino. Image by Stantec Architecture Inc.

And the news in the Downtown office market continues to be good. Citizens Bank announced that it will be staying put in 525 William Penn Place and sees the location as a growth driver. The company’s 150,000 sq. ft. lease was seen as a source of anxiety by the commercial real estate community as recently as last year. Cleveland-based Stark Enterprises announced that it had agreed to buy the former Frank & Seder store building (AKA 441 Smithfield Street) from Oxford Development, thus ending the plans for a 28-story new office at 350 Fifth Ave. The transaction continues the trend of purchases in the Central Business District by companies from outside Pittsburgh.

A Final Look at 2016

Our research at the granular level is about completed for 2016 data and it appears we underestimated the housing market a bit and had the non-residential market pretty close. For the latter, the final number for non-residential/commercial contracting in 2016 was $4.13 billion. That’s the highest number since Tall Timber (or the Pittsburgh Construction News before it) has tracked going back to 1995. In that number is about $1.9 billion for natural gas processing plants, the Tenaska combined cycle power plant and the Shell cracker progress. That leaves a lot less for the mainstream commercial construction industry.

Residential ended a bit higher than expected. Single-family detached home construction finished up more than expected, as did the apartment market (although the latter was off more than 10%). The final numbers are below:



2017 is shaping up to be a surprising year for higher ed construction. Overall the category is depressed compared to the volume of most of the past decades. PASSHE schools will again have about $65 million to share, leaving few significant projects. Private colleges are facing some real challenges too but those in the region have some nice projects in the hopper. Yesterday’s announcement from Robert Morris about its $50 million new convocation center/practice gym is one of a dozen or so throughout the footprint. PJ Dick will be building that project (although they are not one of the funders, as the PBT reported). There are plans for a new building at W & J; a $25 million STEM facility at Westminster; a new $15 million field house at Grove City; several new buildings at CMU (Tata Consulting, ANSYS and the planning for a new science building); and Pitt should be looking for its team for the $100 million new building at the Syria Mosque. That’s not bad for a segment in tough straits.

Confidence is High

The prospect of lower corporate taxes and less regulation has business swooning at the start of 2017. One of the measures of small business confidence – the National Federation of Independent Businesses index – soared more than 7 points in December to 105.8. That’s the highest since the end of 2004, when the economy took off after an uneven recovery from the 2001 recession.

PNC Senior Vice President and Chief Economist Stu Hoffman gave an equally confident forecast for 2017 (and 2018 for that matter) when he addressed a crowd of NAIOP Pittsburgh/BOMA members this morning at the William Penn. Hoffman liked the chances of tax cuts, stimulus spending and less regulation during this year and forecast that GDP would respond by growing closer to three percent. Hoffman saw that happening in late 2017 and into 2018 – maybe even a quarter or so of 4% growth – assuming the stimulating measures are enacted during the first months of the Trump Administration. He also warned that overplaying trade sanctions could blunt the growth from the stimulus.

BOMA President Tony Young from the Carnegie Museums (left) with PNC’s Stu Hoffman and NAIOP President Dave Weisberg from BNY Mellon.

Confidence in the construction industry has been boosted by the strong year-end activity. In addition, there are a half-dozen or so major projects that are in the process of moving forward in 2017, although few will start construction until afterwards.

UPMC announced its big investment in Hamot in Erie but the healthcare system is also on the verge of an announcement about its direction in the South Hills, where a new hospital or multiple mini-hospitals may be built to serve its patients. Another major South Hills hospital project, the St. Clair Hospital expansion, is getting a redesign but should be put before selected CM’s for proposals before spring. Reports are that the Dick’s HQ expansion is back on the front burner. And Pitt is moving forward with early programming for a new building at the Syria Mosque site that is in the 350,000 sq. ft. range.

A couple of $30 million-plus projects that have been kicking around for a while appear to be heading for a competitive hard bid. Oxford Development is rumored to be close to a major tenant announcement for its Riverfront West project at 3 Crossings. In Oakland, Campus Advantage will be bidding its 300,000 sq. ft. apartment project on Forbes Avenue.

Murland Associates selected Mascaro Construction as contractor for its proposed 97,000 sq. ft., $15-18 million office at 3422 Forbes Avenue. Landau Building Co. was selected as contractor for the $4.5 million Mars Library. Pitt awarded the $3.4 million Barco Law Library project to TEDCO Construction. Chapman Corp. is the apparent successful bidder on the mechanical piece of three major compressor stations for Energy Transfer Partners, in Clarington OH, Majorsville PA and Burgettstown PA.

Mall Closings Shouldn’t Surprise

Today’s announcements from Sears, K-Mart and Macy’s were headline news around the country but the closings are really “dog bites man” news. The ever-growing share of online shopping is a five-year story that has left retailers struggling to find the right mix of bricks-and-mortar vs. online retailing. Research has shown that retailers that do both well get more money from shoppers than those that just do one or the other well. I don’t envy any company trying to figure that out, especially since the landscape is constantly shifting.

Macy’s Ross Park Mall store was one that escaped closing.

Pittsburgh was left relatively unscathed by the closings, with only a few malls in outlying areas affected (although you have to wonder about the wisdom of closing Beaver Valley Mall stores at this point). On the upside for the region, it seems that Pittsburgh is on the radar for fulfillment centers, which is the upside of retailing these days. Several of the big warehouse leases signed in the past 6 months have been for online fulfillment and the prospect of Amazon as the user for the million-square-foot warehouse at Chapman Westport remains strong. One of the many companies scrambling to get into this business is Macy’s, which is converting some of its big closed stores into fulfillment centers. Perhaps that fate awaits one of the two stores announced for closure in metro Pittsburgh.

Look for this industrial market niche to be a hot – if not huge – property type over the next few years. FedEx Ground has invested significantly in facilities over the past decade but expect to see it, and its competitors, try out new ways to get products to consumers quicker. Amazon’s arrival will signal to others, like Zappos and Wayfair, that Pittsburgh is a viable next-step market. With the industrial demands that will come from Shell’s cracker and related industries, warehousing will be a steady source of millions of square feet of new construction between now and 2025.

New Year, New Opportunities?

Small businesses, which are the drivers of the business economy, are entering 2017 with a renewed sense of optimism. Whether it’s the belief that a Trump Administration will drop regulations or roll back Affordable Care Act, owners of small businesses are responding to surveys about 2017 in a significantly more upbeat manner than they did in recent years. If that optimism survives the first few months of transition, that is a very good thing for construction. More small companies grow than big ones and that means more expansion and new construction opportunities.

There is growing excitement in Pittsburgh about the impact of the Shell cracker project but its effect on 2017 will be mild compared to the years that follow. According to Bechtel, it’s estimated that “only” around 1,000 workers will be on the site by the end of 2017. That’s a fraction of the 6,000 that Bechtel still says will be needed during the following two years, when most of the plant facilities are brought on site.

This is what $500 million-plus in “ready” work looks like at the Shell site.

One construction buyer that has come back into the market is the General Services Administration. The GSA manages the federal government’s property and has been all but missing for the past decade. The agency currently is seeking qualifications for a 3-step best value process that will occur next spring for $20 million in renovations to the federal courthouse Downtown. GSA is also looking at sites in Butler/Beaver/Lawrence to locate a 400,000 sq. ft. records warehouse. Here again, if the Trump Administration can deliver on promises to stimulate spending on construction, GSA may become a regular buyer in the region.

Some projects that are active in Pittsburgh include the new $25 million Waters Senior Living community underway in Marshall Township, which is being built by Continental Building Co. The PA Builders Exchange reports that the $28.7 million Latrobe Elementary School is due Feb. 16. Pitt took alternates that made TEDCO Construction the successful contractor on the $3.4 million Barco Law Library. Rycon Construction is starting work on converting the 65,000 sq. ft. Latitude 360 into a Main Event entertainment complex. Rycon is also the CM on a 20,000 sq. ft. renovation to Mellon Pavilion’s second floor at West Penn Hospital. That’s mainly an MEP upgrade.

Big Year for Industrial Construction

As the year winds down we’ve done the first estimates for the total construction and the big factor in 2016 was heavy industrial/energy work. The total non-residential construction volume for 2016 is $4.07 billion, the highest level of activity since 2000. Hidden in that number is about $1.3 billion from just three jobs: $580 million Tenaska Westmoreland combined-cycle power plants; the $500 million Revolution cryogenic gas processing plant in Burgettstown; and about $300 million in construction at the Shell petrochemical site in Monaca. Because of the Shell project, volume in this sector will be extraordinarily high for the next three years as well.

Brian Chlop, Eric Starkowicz and Jason Sigal enojy the YC Holiday Party, which raised $4,000 for the Lemieux Foundation and 200 toys for Toys for Tots.

In commercial construction, Massaro Corp. is finalizing the GMP for the $50 million Campus Advantage apartments in Oakland. UPMC announced its $111 million Hamot Hospital expansion. The first phase of that project is $10 million of relocations for users in Hamot’s professional building. Building Systems Inc. is doing relocations in the hospital and Massaro Corp. is handling relocations in non-hospital sites. Burchick, F. J. Busse and Landau are putting in proposals today for a new $4.5 million Mars Library. Zamagias Properties has asked Continental Building Co., PJ Dick, Massaro and Rycon for proposals Jan. 10 on its 26-unit Sewickley Lofts, a high-end condo project being built in Sewickley’s village.

Hope the year has been prosperous and 2017 will be better. Happy Holidays!