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Multifamily Construction Costs: An Investor Guide

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By Christpopher DeSantis, DeSantis Property Management

For the past 8-10 years, Pittsburgh PA has been experiencing an apartment building boom. Every single year since 2017, at least 2,100 new apartment units were added to the city’s existing stock, either by new constructoin or conversion of an existing building of another use. Yet despite the rash of new multifamily complexes,a recent CBRE report  ranks Pittsburgh at the bottom for cities with new apartment buildings.

At the same time, CBRE also ranks Pittsburgh as #4 among the smaller tech markets in the United States. CBRE’s Scoring Tech Talent report shows that the city has bright prospects for tech industry job growth and economic impact. Factors driving the growth are cheaper apartments, shorter commutes, and affordable living costs.

The implication is that Pittsburgh will become even more attractive to workers and businesses seeking new opportunities. For property investors contemplating a new apartment complex in Pittsburgh, there could not be a better time. As DeSantis Management explains, the relative shortage of apartment buildings and impending population growth makes this a potentially highly profitable proposition.

But what would be the likely cost of such a project?

What to expect when building a multifamily complex

The biggest obstacle when building a multifamily complex is multiple cost issues. The first of which is increasing prices. Building materials prices have been going up and are likely to continue rising. But the problem of heightening costs is not limited to building materials. There are three main areas of rising expenses:

1.              Regulatory compliance

The National Multifamily Housing Council (NMHC) estimates this as one of the primary costs when building a multifamily complex. Regulatory costs can take up a whopping 32% of the overall costs.

2.              Construction materials

Increase in prices of building materials following the outbreak of the pandemic has been unprecedented. Along with higher costs, there is continuing scarcity of the most vital building materials.

3.              Surging labor cost
The construction industry has always had labor shortages. But this has been exacerbated by the mass retirement of the mostly aging labor force due to fear of Covid-19. The result is higher labor costs.

Estimating your construction costs
The other cost problem is getting an accurate estimate of construction costs. In the early stages, you want a simple guesstimate of what the project might cost you. That will usually depend on the price of similar projects in the area within the last year or two. But this costing barely provides ballpark figures which serve as a general guideline.

That initial costing helps in deciding the feasibility of the project. Once you determine that the project is within the affordable range, you need a professional construction cost estimator to create a detailed budget estimation. It is expensive but necessary; failing to do it at the start of the project could set you back tens of thousands of dollars later.

The two primary costs in a multifamily building project
Your costs for the multifamily project will be divided into hard and soft costs.

Hard costs
These have to do with the physical construction of the building. They are mainly tangibles; foundation works, roofing, landscaping, appliances, and labor costs. They do not include land acquisition costs.

Soft costs
These usually include design costs, permit fees, legal fees, loans fees and interests, and other similar expenses.

On average, you can expect hard costs and soft costs to take up 37% and 24% of your total expenditures, respectively.

Sample of a typical multifamily project construction cost
Costs for multifamily buildings are estimated per square foot, and they increase with the number of units in the building. Buildings with less than six units cost less than mid-rise buildings, which in turn are less more than high-rise buildings. Whether the project is a luxury, mid-range, or builder-grade apartment will also affect construction costs.

Construction costs do not commonly include land acquisition costs, architect fees, parking lots, landscaping, and interior design. Expenses will also vary vastly between the least and most expensive markets. Furthermore, around 15% of the building’s total square footage will be unusable spaces like lobbies, common areas, and elevator shafts.

Here is a rough guide of what your costs will be like:

·               Land acquisition and, possibly, demolition costs: 19%.

·               Commercial architect fees: $125 – $250 per hour.

·               Contractor fees: It ranges from $85 to $200 per square foot. The average price is $125.

·               Mason, excavator, and carpenter fees: $70 per hour.

·               Painter’s fees: $20 – $35 per hour.

·               Electrician’s fees: $65 – $85 per hour.

·               Plumber’s fees: $45 – $65.

·               Average cost per square foot of apartment building: $85 – $400. The average price is $229.

·               Average cost per unit: $64,500 – $86,000. That includes the cost of appliances, finishing, and energy-efficient doors and windows.

Average costs per unit vary widely. In markets like San Francisco and Los Angeles, where the price per square foot is around $330 and $500 respectively, cost per unit can get as high as $352,400. In Pittsburgh, however, $75,000 per unit is a reasonable estimate.

DeSantis Property Management is a Moon Township-based manager of multi-family properties throughout metropolitan Pittsburgh.

U.S. Labor Market Surges Ahead of Delta Variant Surge

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The various reports on the labor market this past week drew a clearer picture of what the employment situation is. Many observers were disappointed in the report from ADP on private payroll growth on Tuesday. Private employers added 362,000 jobs in July, well below expectations; however, the forecasts for hiring focused on growing demand and apparently discounted the shortage in worker supply. Below the headline number, private employers reported overwhelmingly that they had openings there were going unfilled. You can’t add to payrolls if you don’t have applicants.

Thursday’s report on unemployment claims was encouraging top to bottom. The headline showed first time claims declining by 14,000 to 385,000 compared to last week. Better news was the low number of layoffs, which fell to the lowest level in 21 years. The best news was the 11% drop in continuing unemployment claims. The 365,000 people who came of continuing unemployment insurance brought the number of long-term unemployed to 2.93 million.

Friday’s Employment Situation Summary – the July jobs report – was the icing on the cake. Employers added 943,000 workers in July, bringing the unemployment rate down to 5.4%. The total number of those unemployed or employed part-time instead of full-time remained 4.39 million higher than in February 2020, more than double the pre-pandemic number. That number is falling more rapidly than expected, however, and is now well below the number of job openings that exist. Most encouraging was that the number of employed part-time for economic reasons fell to 4.5 million, just 100,000 above the February 2020 level.

Job creation was strongest in the hospitality fields, with the normalized travel season creating demand for 380,000 workers. Local government education sector gained 221,000 jobs. That bodes well for a fall reopening of schools, which in turn will have a beneficial impact on the available workforce that left jobs to supervise school from home.

Economists had expected roughly 100,000 fewer jobs to be created in July. While cheering the employment gains, most cautioned that the employment and household surveys were done in mid-July, prior to the surge in infections and hospitalizations from the Delta variant. The recent surge has altered plans for return to office and slowed activity at restaurants and other leisure businesses; however, thus far the resurgent COVID-19 infections do not appear to be altering the accelerated return to normal business activity. Where the surge is likely to be felt in the short-term is in consumer activity, and there is some data suggesting that is happening.

One measure of consumer confidence, Morning Consult’s consumer survey, fell 4.6 points in July after the Delta variant took over. Willingness to eat at a restaurant fell several points during the month. The dent in consumer confidence and activity comes at the point that the individual safety nets established during the pandemic are wearing off. That may move more people back into the workforce in September, but it also exposes more people to economic insecurity at a time when an unchecked rise in COVID-19 cases dampens hiring and activity. How quickly this latest surge can be beaten back by increased vaccination will determine how much the Delta surge damages the economic recovery that is underway.

The New York Fed’s Quarterly Household Debt and Credit Report showed that consumer credit jumped to an all-time high of $14.9 trillion in the second quarter. The important takeaways were the robust finances of the U.S. consumer and the benefits of the CARES Act. The former reflects how well the majority of U.S. households fared during an extraordinary economic upheaval. The latter remains a work in progress, as much of the feared deterioration of loan portfolios is being avoided by the continued forbearance provisions in the CARES Act. Loans in forbearance, especially those which were a result of forbearance offered by private lenders, have been declining; however, avoiding future increases in delinquency and bankruptcy will depend upon good fortune in timing the recovery ahead of the end of forbearance periods. That’s the economic reason why ending the spread of the Delta variant quickly is so critical.

Regional residential construction soared in the 6-county metro Pittsburgh area during the first half of 2021. The number of developed residential lots still lags the demand but new subdivisions started in the past two years have opened up new construction to levels unseen since before the Great Recession. Housing starts overall increased by 43.9% year-over-year to 2,755 units. New construction was higher in single-family – both detached and attached – and multi-family. With another 1,200 or so units in the pipeline for start in the second half of the year, housing starts should exceed 6,000 units in Pittsburgh for the first time since 2013. In commercial construction news, Rycon Construction was low on the $12.4 million University of Pittsburgh-Greensburg Life Science Building.

Recovery Gaining Steam for the Pittsburgh Construction Market

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I had the need to meet up with a customer during the lunch hour last Friday in the Strip District for a brief exchange of materials. The new Terminal Building was a convenient place to meet since it is about halfway between our two offices. The inconvenient part was the usual Strip District stuff: people all over the place, no place to park, impatient drivers on Smallman Street creating their own lanes where none exist. Except that those were the typical inconveniences of the Strip in June 2019, not of the past 15 months. The “business as usual” irritations of a busy streetscape were but another reminder that the economy is bouncing back better and faster than expected. The difference in the marketplace from December 2020 to March 2021 was night and day, and the same can be said of the difference between March and June. Bid boards are full. Backlogs have swelled. Firms are unable to find project managers, project architects, engineers, estimators, etc. Here are a few signposts:

  • Contracting volume for the first six months should be around $2.4 billion, compared to $1.8 billion during the first half of 2020.
  • The final report of U.S. GDP growth remained at 6.4% for the first quarter. Economists expect the full year expansion to be even higher.
  • There were 3 new cases of COVID-19 recorded in Allegheny County June 28. The 7-day average is 13.
  • Hotel occupancy reached 66% in the U.S. for the week ending June 12, the highest since Nov. 2019.
  • Apartment rents in Pittsburgh rose 2% last month and were 4.8% higher than in March 2020 before the pandemic hit.

Obviously, any number of factors can still slow the progress being made. Inflation looks to be easing, especially as home construction slows because of higher prices, but construction costs are still high. That could keep projects from starting. Construction labor is running short, which would cool expansion. Infections could rise again, especially if the Delta variant spreads quickly through unvaccinated people with relaxed virus mitigation. Economic activity outside the U.S. is sluggish, which could limit growth opportunities for global U.S. companies (and we have a few of those in Pittsburgh). The odds are, however, most of the potential hurdles for economic growth will not present themselves. The next 60 days should provide a good vision into where the market is heading. If bidding remains active, bid lists will become shorter as the summer ends, as contractors line up work that stretches capacity. It’s possible that anxiety left over from 2020 will fuel contractors to keep building backlog beyond their capacity, but few firms are struggling financially and that should mean prudence not risk-taking.

Friday afternoon, 20th & Smallman Street.

Braddock Library selected Jendoco Construction as contractor for its $13 million renovation. Mascaro Construction was awarded the $124 million steel structure and concrete decks package for the Pittsburgh International Airport’s Terminal Modernization. The big building envelope package for the TMP was recently advertised. Peak Construction started work on Scannell Properties’ $25 million West Hills Commerce Park in Findlay Township. NextGen Construction held a pre-bid for the $1.3 million Big Tom’s Barber Shop in the Hill District. Walter Mucci Construction was awarded the $44.2 million Paynter Elementary School in Baldwin. ICON is bringing its proposed Smithfield Redevelopment, an $8-10 million re-use of 635-641 Smithfield Street into 40 apartments and retail, to the Pittsburgh Downtown Partnership for review. Hampton Township School District advertised its $36 million high school project for bids July 22.

Note: The blog post written earlier this week identified the PIT Terminal Modernization Program package awarded to Mascaro Construction as stee/foundations in error. the foundations package bid on June 30. The three lowest bids were: Mascaro Construction $39,105,000; Burchick Construction $39,585,000; Mosites Construction $43,048,472.

Employers Are Hiring – Job Seekers Aren’t as Ready to Return (Part 2)

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There have been some interesting follow on articles about the jobs report Friday, which is being seen as a) great news; b) very disappointing; or c) a relief after April’s disappointing hiring. Which one you choose depends largely upon which political party you are fervently backing and which partisan media you are following. (If the last sentence does not describe you, chances are you would choose option C.)

My take on Friday was that our economic situation has been created by an almost unprecedented non-economic disruption that will require more than a few months to re-balance. One thing I thought was clear from Friday’s report on hiring in May was that the workforce was not ready to return to pre-pandemic work. Since Friday morning two things I read offer more color to the employment situation. One is local. The Pennsylvania Economy League of Greater Pittsburgh issued its Regional Consumer Confidence Trend Analysis for June. the report covers a wide range of consumer issues but has some insight into the employment trends. Among the employment data was that 14% of respondents said they were not working and not looking for a job. If that’s even remotely representative of the national sentiment, it means that workers will be hard to find this summer and the June jobs report (and likely July’s and August’s) won’t be showing that the economy is on a million-jobs-per-month tear either. Among those 14% not looking, 29% said that the lack of child care was the reason. That suggests that the situation won’t improve dramatically until school returns. Only 3% said they reluctance to look for work was due to higher unemployment benefits. That’s not necessarily surprising (or accurate) either. There are disincentives from reporting that government benefits are why you aren’t working.

The interesting response from that group was the 16% who said they were taking time off to reassess their careers. This group would identify with a New York Times editorial piece by economist Betsey Stevenson that suggested that the lag between employers and job seekers was wider because the pandemic caused more workers to take stock of their way of living and working that previous recessions. Stevenson cited a Pew Foundation study in January that found that while 51% of Americans were optimistic about their employment outlook, 66% had seriously considered or actively sought to change jobs. That Pew study found less optimism from people about finding a job that paid as well as their previous job, which squares with the idea that workers would be considering changing jobs rather than going back to what was before. That’s resonates even more when you consider that unemployment is twice as high among low wage earners than the rest of the workforce.

The Times article touched on a number of other factors keeping workforce participation lower than would be expected in a robust recovery of GDP like we are currently experiencing. Among them are continued health concerns about COVID-19 spread at work, an existing desire to change careers that a layoff accelerated, and an increased desire to work from home that is impacting the actions of people who are currently employed. The bottom line conclusion (which is backed up by JOLTS data) is that there is a reallocation of people and jobs underway that will take months to sort out. The author compared the situation to the singles scene, noting that it takes more than one date to find the right match.

If these survey results are indicative of the prevailing workforce sentiments, employers are likely to be looking for workers longer and making unexpected changes to wages and workplace conditions. In other words, don’t expect the jobs reports to be upwards rockets of employment growth until the weather cools.

One project news update: RIDC selected PJ Dick as construction manager for the third 100,000 square foot infill building at Mill 19 in Hazelwood.

Employers Are Hiring – Job Seekers Aren’t as Ready to Return

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Economists breathed a sigh of relief when the Census Bureau reported that U.S. employers added 559,000 jobs in May. That’s more than double the job creation in April and more in line with what expectations would be for a fully recovering economy. The unemployment rate renewed its downward trend, falling to 5.8%.

Forecasts for May job growth were slightly higher – most topped 600,000 – but after April’s surprising shortfall, no economist was making a confident estimate for May. The number reported Friday morning more closely mirrored Thursday’s data on private payrolls from ADP. The payroll processing giant reported 978,000 additions to payrolls in May.

New hiring in May was reported to be lower than the potential for job growth. The JOLTS survey in May showed a record number of new openings. Employers are increasingly citing an inability to attract applicants. Employment recruiters unanimously report that listings are outnumbering job seekers by a wide margin. This input, along with the fact that wages have jumped 1.2% in the past two months, adds weight to Republicans seeking to end the supplemental and extended unemployment benefits, which they say is an incentive to stay unemployed.

The reality is more complicated than politicians care to embrace. No conclusive surveying has been done that can keep up with the dynamic situation of this recovery but there are a number of factors keeping people out of the workforce that have been identified. First among them is lingering concern about health. The pandemic has not ended. Vaccinations have knocked down the candidates for community spread but with at least 40% of the adult population unvaccinated, those with concerns about COVID-19 have reason to worry. Related to that, childcare capacity still lags what is needed. The nation’s largest childcare provider – the public school system – has not returned to normal operations yet. Reports of difficulty finding workers cut across most industries but the most common complaints are for low wage positions. These positions will be the ones that benefit most from the enhanced unemployment benefits. ZipRecruiter reports that more than half of its job seekers want work from home options while only 10% of employers are offering that option. Perhaps the most overlooked factor is that the economic recovery driving new hiring is a few months old. In most states, workers in the prime age cohorts of 25-55 have only been eligible for vaccination since mid-April. For those unemployed by the pandemic, the renewed activity has not been here long enough to overcome the many conflicting factors that are keeping workers – particularly young mothers – from re-entering the job market.

One indicator that this is the case is the online job search market. Indeed.com reported that postings were 27% higher at the end of May than in February 2020. ZipRecruiter notes that its listings have increased much faster than online searches.

None of this should be particularly surprising. The world’s biggest economy ground to a halt in about three days last March. Our economy tanked because about 300 million people didn’t leave home for six weeks. All things considered, this recovery has unfolded much more smoothly than expected. I can’t forecast how quickly job creation will ramp up or at what point in 2022 or 2023 the U.S. economy reaches full employment, but I can confidently predict that we will see disappointing job creation numbers again at some point before September. Looking at all the factors influencing economic recovery, it will be a bumpy ride back to normal in 2021.

The one data point that concerns me is the variance between where job seekers want to work and what employers expect for work-from-home. As vaccination rates climb, the decline in infections and hospitalizations has accelerated even though restrictions on gathering have been removed. That has pushed more employers to accelerate plans for full-time return to the office or workplace. There has been a variance between what employees and their bosses predicted about work-from-home throughout the pandemic. Now that time has shown that employers can make the workplace safe from virus spread and the virus is on the decline, the gap has widened. If you think through how that gap may manifest itself, there could be some problems coming.

Employers that embrace work-from-home may attract more and better workers. That could be a competitive advantage. At the same time, if working from home is less productive than its proponents claim (and there is growing evidence that is the case), companies that attract good talent that works from home may fall behind its competition anyway. What will happen to workers with skills that translate well across industries when some industries can work from home better than others? It seems unlikely that a skilled construction worker would leave the trade to work in an industry that allows work-from-home, but will the office and administrative staff for a construction company change industries to work from home instead of the office? At minimum, I believe we will have to see these scenarios play out over the next couple of years before some sort of consensus on work-from-home is reached. And I’m not one who believes that we will end up with a hybrid solution, at least not one that looks different from the model that existed on Valentine’s Day 2020.

Construction is less likely to deal with as many of these uncertainties, including uncertainties about the economy. The nature of the industry is such that the ups and downs of 2021 will have an impact on 2022’s work. The outcome of 2021 is mostly baked in by June and the solutions to the problems of re-starting the economy in 2021 will be mostly worked out by 2022. Assuming that the U.S. can side step any lasting issues from the disrupted supply chain or inflation, construction will be booming in 2022.

Opportunities to land work are accelerating in Western PA. Bids on the $90 structural steel and concrete foundations package for the Airport Terminal Modernization Program was rejected and will be re-bid. The first bid packages for the $230 million FNB Financial Center in the Lower Hill District will go out to bid next week. Packages will include steel, foundations, concrete, and M/E/P. Braddock Library is taking CM proposals from Burchick, Jendoco, A. Martini & Co., PJ Dick, Massaro, and Sota for its 2-phase $13 million renovation. Diocese of Greensburg selected Volpatt Construction for the $2.5 million renovations to St Mary of Czestochowa Church. A. Martini & Co. was selected for the $1.8 million UPMC Passavant Cranberry Cancer Center renovation. C.H. Schwertner & Son started construction on the new Target store at the Kaufmann’s Grand on Fifth. BRIDGES & Co. is building the new $3 million Dialysis Clinic Inc. facility on Perry Highway in McCandless. Extra Storage Space selected Brackenridge Construction for its $6.5 million, 65,000 square foot expansion in Homewood. Continental Real Estate has shifted its Lot 10 building on the North Shore from office/retail/condo to 110-125 apartments. Thompson Thrift will be building the 336-unit, $60 million Prism at Diamond Ridge apartments at the end of 2021.

Inflation Helps Chill Housing Starts But We Should Chill Out About Inflation

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Last week’s report on inflation seems to have triggered more fears than the report on March’s inflation, even though there was every reason to believe that prices were racing much higher as the economy raced ahead. The 4.2% jump in consumer prices (CPI) and 6.2% hike in producer prices (PPI) were remarkable only if compared to the consensus expectations for April’s inflation. The economy is bursting back open much faster than was anticipated just four months ago. The supply chain for virtually every product is disrupted and the labor force remains 3 million people smaller than the number of people working in February 2020. Soaring demand meets tight supply. That’s the simplest equation for price increases known to man. I’m not sure what model drove the lower expectations but there was runaway inflation in a handful of categories that all but assured a major (short-term) hike.

The counter argument against panicking about the April “surprise” is patience combined with capitalism. Imbalances in supply and demand exist to a greater degree than normal because of COVID-19 but those imbalances are already being addressed. Higher prices attract suppliers to increase supply and discourage consumers from purchasing. Eventually (or soon), equilibrium returns. There is a great commentary on the current inflation situation in this week’s Pensford letter. (I highly recommend subscribing if you don’t already.) Pensford distills the market pretty succinctly below:

Nearly 60% of the increase came from just five components – used cars, lodging, rental cars, airfare, and eating out.  Used cars and truck prices were up a staggering 10%, comprising almost a third of the total CPI jump.  That’s not sustainable over the long term.  Compared to April 2019 (two years ago), inflation is up 2.2%.

More likely, we are experiencing a temporary shock of re-opening all at once, just like we experienced a temporary shock of shutting down a year ago.  Remember when there was a toilet paper shortage?  Demand exceeded supply.  Same thing is happening now across multiple supply chains.  You think Chick-Fil-A won’t figure out how to fix its shortage of sauce?  These disruptions will be resolved.

Pensford notes that a key inflationary metric, the velocity of money, is definitely pointing away from inflation. Velocity is the number of times that a dollar (or unit of currency) is used to purchase goods or services domestically. If the Federal Reserve Bank increases the supply of money by buying bonds, inflation only occurs if the money is used to buy things and drive prices up. A look at the velocity of the money supply going back 40 years shows why inflation has been trending lower even in times of increased money supply, like in the early 2010s. This trend, like the others mentioned above, doesn’t guarantee that demand won’t squeeze out supply or drive wages upward into an inflationary cycle, but absent a sharp increase in the velocity of money, equilibrium in supply and demand will bring inflation back under 2% within this year.

Source: Federal Reserve Bank of St. Louis

Probably the simplest antidote for inflation panic is to remember that April’s prices were being compared against those from April 2020, a time when there was almost no demand because we were all hunkered down at home. Consumer prices in April 2021 were 2.2% higher than those of April 2019, just to give a bit of perspective and inspire a deep breath. It is possible that the CPI next April will be lower than last month’s, but that won’t mean we’re in a deflationary cycle.

Inflation in construction is a bit more panic-worthy. the dynamics of supply and demand are consistent with what we’re seeing in consumer prices but are exaggerated because manufacturing has been recovering for nearly nine months. the change in PPI for copper year-over-year is 49%, for steel it’s 67%, for lumber it’s 85.7%, and for diesel fuel it’s 126%. Scrap prices for iron, steel, and copper range from 77% to 79% higher than April 2020. Of the dozens of categories of materials tracked by the AGC, another 14 experienced double-digit increases. But, of all these categories, only lumber seems to be in danger of a long-term, secular shift in supply. And even lumber is likely to see prices fall back again in late summer, although probably not to the $460/thousand board foot levels of September 2020. Since May 10, in fact, the price has dropped 27%.

Inflation will recede as production catches back up to demand going into 2022. In the meantime, higher prices will cause construction projects to go on hold or to be cancelled. That’s not good for an industry in recovery but that trend will also reduce demand and hasten the point of equilibrium between supply and demand. The 9.5% drop in housing starts in April is an indicator that the shortage and price of lumber is already denting new residential construction.

Construction projects moving ahead in Pittsburgh despite the higher inflation include the $22 million Clairton Wastewater Treatment Plant Phase 2, which bids July 12, and the $25 million renovation of Verizon Wireless’s Bridgeville center. Walsh Construction is the CM for Verizon Wireless. New-Belle Construction started work on the $5 million Fossil Industries new facility in Hempfield Township. Rycon Construction was the low bidder on the $11 million Rolling Hills Aquatic Center in Peters Township. Dick Building Co. was awarded the contracts for new GetGo Stores in McKeesport and McKees Rocks. MBM Contracting will be the contractor for the buildout of Goehring Rutter & Boehm’s space in 525 William Penn Place. C.H. Schwertner & Son started construction on the new Target store at the Kaufmann’s Grand on Fifth. BRIDGES & Co. is building the new $3 million Dialysis Clinic Inc. facility on Perry Highway in McCandless. Extra Storage Space selected Brackenridge Construction for its $6.5 million, 65,000 square foot expansion in Homewood.

 

A Week of Mixed News for the Pittsburgh Construction Market

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The title of this post is a bit misleading. The past week was something of a tidal wave of good news that was doused by one bit of very bad news. Rather than burying the lede, let’s start with the bad news: U.S. Steel cancelled its billion-dollar upgrade to the Mon Valley Works. The project involved a $250 million cogeneration plant at the Clairton Coke Works and a billion-dollar new rolling mill at the Edgar Thomson Works in Braddock. You can read the labor/industry reaction here and some of the environmentalists reactions here, or read some of both here. For the construction industry, the project’s end means the loss of about 1,000 construction jobs over the next two years. There are lots of other mega projects in the pipeline, so those jobs lost might not be felt; however, the decision to cancel the project sends a chill through the Mon Valley. There is a precedent for that.

U.S. Steel’s CEO, Dave Burritt, said the right things when announcing the decision. He took a couple shots at the state and county for dragging out permitting but mainly blamed the changing global markets and need to de-carbonize as the drivers of the decision. He also committed to steel-making in the Mon Valley. For residents who lived in the Mon Valley in the 1980s, that probably sounds eerily similar to what David Roderick said then about the mills that were closed a few years later. Perhaps the outcome will be different. It is quite feasible that Burritt will be standing in Braddock in a year or two announcing that conditions allow for reinvestment after all, or at least announcing a smaller-scale reinvestment. Regardless of what the future holds, the decision isn’t great for construction or the economy in the Mon Valley.

Now on to the good news. The big news last week was the first estimate of gross domestic product (GDP) growth, which was an annualized 6.4%. Revived demand, driven by vaccinations and government checks, pushed consumer spending and business investment much higher than expected. Consumers increased spending by 10.7% and business investment jumped 9.9%. The latter is especially encouraging because business investment had been steadily falling since mid-2019 in anticipation of an end to the cyclical boom in 2020 or 2021. COVID-19 was not what businesses were anticipating. The U.S. government’s responses, especially since the end of 2020, have allowed businesses to keep dry powder and consumers to boost personal savings rates to 27.6%. Stocks are at record levels, so publicly-traded corporations also have lots of working capital in reserve. After the sharp rise in the first quarter, total GDP stands just 1% below the record-high levels of the end of 2019.

Economists seem to think that good economic news was going to shoot construction much higher in March than what occurred. The Census Bureau report on total U.S. construction spending came out May 3. It showed spending was basically flat from February to March, rising only $4 billion to $1.513 trillion. Economists had forecasted an increase of 1.2%. The rationale for the increase must have been tied to the robust economic growth in the first quarter but such an increase was unlikely given the lead time needed for construction and the dampening impact of the supply chain disruption. That disruption is causing significant delays and inflation that has slowed construction activity. Demand for construction is probably closer to the growth expectations, but it’s unlikely that construction will reach the levels that demand is driving until the third quarter.

Construction activity in Pittsburgh is noticeably higher. Following an unexpected $1.39 billion in first quarter construction contracting, the pace of bidding and construction starts has not slowed through April. New project announcements keep coming. Architects are busy and struggling to hire staff. Bidding is still very competitive, as contractors are anxious to line up work now after nine months or more of difficult backlog building. Mosites Construction was the low general on the $12.7 million Port Authority LRT station platform renovations. Liokareas Construction was the low general on Gateway School District’s $30.4 million middle school addition and alteration project. Mele & Mele & Sons were the low bidder on the $30 million Center Township wastewater treatment plant modernization in Beaver County.

Monroeville VA Outpatient Clinic. Rendering by Plunkett Rayisch Architects

Summit Smith Development announced this morning that it had been selected by the Veterans Administration to build a new $91 million outpatient facility at the Monroeville Mall. C.D. Smith Construction from Milwaukee is the construction manager. Developer Craig Rippole is teaming with Michael Keaton to help Nexii Building Solutions build a 200,000 square foot plant in the Pittsburgh area. No site has been chosen. Rycon Construction was selected as CM for Duquesne University’s $54 million College of Osteopathic Medicine. Tree of Life announced it had hired architect Daniel Libeskind (working with Rothschild Doyno Collaborative) on its $20 million renovation. The Tree of Life is taking CM proposals from A. Martini & Co., PJ Dick, Jendoco, Mascaro, Massaro, and Mosites on May 7. Hudson Group from Sharon brought the $30 million Julian Apartments on Melwood Avenue before the Planning Commission. Mistick Construction started work on the $10 million Granada Square Apartments in the Hill District.

Some Spring Pittsburgh Construction News

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Perhaps construction has not thawed in your corner of Pittsburgh, but the market has noticeably come to life. The $1.4 billion first quarter construction volume was an unexpected upside surprise. Recent project announcements mirror the strengths of the Pittsburgh economy: more industrial space being developed, healthcare construction on the upswing, college work rebounding after better-than-expected enrollment results, big public bids receiving lots of competitive attention.

To the former point, ALCOSAN’s board will award contracts totaling $87 million for its East Head Works project, which came in under the estimate by around 20%. PJ Dick will be awarded the general construction piece at $78 million. Last week, Fayette County Commissioners received bids and awarded contracts for its new $39 million county prison. Nello Construction is the general trades contractor.

Pittsburgh’s mega projects are coming into the market as well. Packages worth $182 million are out to bid for the airport’s $1.39 billion Terminal Modernization Program. The PJ Dick/Mascaro/Massaro partnership is taking curtain wall design assist proposals on the $230 million FNB Financial Center (see rendering below). Turner/Mosites is taking bids on University of Pittsburgh’s new $100 million chilled water plant.

Massaro Corp. will be starting construction on the $60 million Landing at Rivers Casino Hotel in mid-May. Turner Construction was awarded the $23 million renovation of Google’s Bakery Square One offices. Penn State selected Rycon Construction as CM at Risk for the $5.8 million renovation of its General Classroom Building at Penn State-Beaver. Rycon was also awarded the $25 million warehouse that Trammell Crow is developing at the Eastland Mall site in North Versailles, reported (but unconfirmed) to be for Amazon. PJ Dick will be renovating 4951 Centre Avenue for Winchester Thurston to create the $6.5 million Joan Clark Davis Center for Interdisciplinary Education.

Construction Economic Rebound in March: Vaccines, Jobs, and Manufacturing

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Good Friday began with good news from the labor market. The monthly Employment Situation Summary was released by the U.S. Census Bureau and it showed that employers had added 916,000 jobs in March, the largest increase since August 2020. The gains in employment were spread across the spectrum, with the largest increases in hospitality (280,000) and construction (110,000). Unemployment decreased to 6.0 percent, with 9.7 people unemployed. That’s 4 million more unemployed than at the peak in February 2020. A total of 8.4 million fewer people were working in March 2021 compared to February 2020, meaning that 4.4 million people are no longer in the workforce. Although a portion of those who left the workforce have retired, the largest share of those out of the workforce (most of which are women) are likely to need to be re-employed once the slack in the economy has recovered. The three-month average for job creation suggests that the pace of hiring is accelerating rapidly but would need to continue for 15 months to two years to return to the same level of employment that existed pre-pandemic. Should the March pace continue, that level would be reached at the start of 2022.

Whether the March pace continues is largely a function of how quickly vaccines can be distributed to herd immunity and how well the virus spread can be contained. The current trajectory for vaccination indicates that vaccine supply will outstrip demand in May. The pace of virus spread, however, suggests less optimism. Infections are growing at an alarming rate in northern and midwestern states that have relaxed limitations on public gatherings. In virtually every one of those states there have also been an decline in mask wearing, even though mask requirements have not been removed. The economic progress that has occurred in February and March is likely to be stalled in April or May if the pace of infections remains on the current trajectory. That’s not a prediction so much as an observation of similar periods of relaxation and COVID fatigue that occurred in late summer and during the holidays. COVID-19 has proven to be easy to forecast, with very consistent outcomes following increases and decreases in infections. The good news in spring 2021 is that vaccinations should shorten whatever spike occurs and the economic momentum should rebound quickly if a slowdown follows in the coming month or two.

New hiring increased again in March following the holiday slowdown.

There were other reports on the economy’s rebound this week. On April 1, the Institute for Supply Management (ISM) said its index of national factory activity jumped to a reading of 64.7 last month from 60.8 in February. That was the highest level since December 1983. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists had forecast the index rising to 61.3 in March. The survey’s manufacturing employment gauge shot up to its the highest reading since February 2018. The ISM survey also found significantly more firms hiring than not. The outplacement company, Challenger, Gray & Christmas, showed planned layoffs by U.S.-based companies dropped 11% to 30,603 in March, the fewest since July 2018. Through the first quarter planned layoffs plunged 35%, compared the October-December period. At 144,686, job cuts last quarter were the fewest since the fourth quarter of 2019.

Industrial construction in Washington County was boosted by the start of construction of HW70, a 28,200 square foot spec warehouse in Bentleyville, and Aragra’s new 50,000 square foot facility in Starpointe Business Park. W. K. Thomas & Associates is building the Aragra facility. Rycon Construction was the low general contract bidder at $11.5 million on the $17.5 million Hillman Library Phase 3 at Pitt on Wednesday. TEDCO was successful on the new $2 million PNC branch on Broadhead Road in Moon Township. Arco/Murray Construction is taking a 35,000 square foot expansion and renovation of Frito-Lay’s facility in Thomson Business Park through the entitlement process Cranberry Township. Jendoco Construction started work on the $10 million Distillery on the South Side. Two multi-family projects got underway in March in the city. Elford Construction started work on RDC’s $60 million 334-unit Brewer’s Block Apartments and PMC Property Group began renovating the Allegheny Building into 177 apartments. Continental Building Co. started construction on the first 78,000 square foot building at Elmhurst Innovations Center.

Be Careful with the Data: February Was Not That Slow

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On Friday, the Pittsburgh Business Times ran an article on construction activity in February that quoted Dodge Data & Analytics’ report that a mere $36 million in construction started in that month, The lede was that construction declined 88% year-over-year. (In the interest of full disclosure, I worked for what was formerly the F. W. Dodge Division of McGraw-Hill for 14 years at the beginning of my career.) Given the increased level of activity in the construction market since February 1, this headline and data seemed out of step with reality. I did a few minutes research and found that February was indeed down significantly compared to the same month in 2020, but the conclusion of the article was misleading. That’s not the Business Times’ fault. They are relying on data that is very inaccurate.

The construction market in Pittsburgh is rapidly picking up steam as spring begins. That’s a great indicator for 9-12 months out. The optimism and activity are better than what would have been unexpected just 90 days ago; however, the improved prospects for recovery will do little to improve the prospects for 2021. This year is going to be tougher financially than 2020 because the extreme slowdown in the second and third quarters of last year will be echoed in the first half of 2021. Construction businesses need data to manage 2021 so that they can be best positioned to take advantage of what should be a booming 2022. And bad data is worse than no data.

So here’s the data Tall Timber has from its research of building permits, construction reports, architects, owners, and contractors in the region:

Starts ($M) Variance
February 2020 $370.1
February 2021 $185.5 -49.9%
March 2020 $237.9
March 2021 $354.3 ** 48.9%

** Actual through March 26

The data in February 2020 was a good indication of the health of the market. Projects that were permitted or awarded that month included the $80 million Arsenal 201 apartments, a $5 million Behavioral Health Unit at Ohio Valley General Hospital, $25 million shell building for Krystal Biotech in Findlay Township, The $20 million airport micro-grid, $10 million Kraft Heinz research kitchen renovation, $12 million Heinz Field expansion for the Steelers Pro Shop, and a $16 million slag processing facility at Allegheny Ludlum’s Brackenridge facility. It was cross section of the economy. Of course, that was all about to change. The impact of the pandemic showed up almost immediately, as starts in March (typically a much busier month than February) fell off by 35.7%.

That March decline makes sense now, but at the time, such an immediate slowdown would have seemed unlikely. Bear in mind that our methodology for construction starts seeks to identify when work starts or is about to start. We are not tracking construction put in place, so the mandated shutdowns that followed the outbreak should not have influenced March’s start data. The preconstruction process is lengthy and I would have expected that starts would remain higher for a few months when a downturn began. Such was the jarring nature of COVID-19’s impact on the economy that projects were stopped in their tracks, even if they had already bid. Seeing that data by mid-April 2020 informed me that work was going to decline precipitously in 2020. At that point in time, my forecast for 2020 was for 30% lower start volume; but, as it worked out, the market held up better, falling “only” 17% year-over-year.

On the other side of the coin, the optimism that began to build when vaccines were announced in December 2020 has taken a few months to translate into construction starts. Like in February 2020, the work started over the past 30 days represents what the post-COVID economy may present: $60 million in new industrial properties, including Suncap’s and Northpointe’s developments of over 200,000 square feet; a handful of emerging tech fitouts, including multi-million expansions by Intervala at RIDC Westmoreland and Google at Bakery Square.

Construction companies feel good when their bid boards are full but analysis isn’t about feelings; it’s about data. Bidding is a predictor of activity to come. This coming year will see economic growth that comes in fits and starts. It is easier for executives to make decisions about opportunities if they are able to see February’s activity accurately measured, and the expected gains in March follow suit. Put in the context of the conclusions drawn by the author of the Business Times article, contractors that believe the market is slow because their activity is slow can make incorrect decisions about what and how to bid. The value of accurate data is that you can judge how you are doing against the market, rather than your own observations. To wit, if your company worked primarily in the office market, you might think there were few construction opportunities available in March, but there were plenty, just not in the office market.

I’m not familiar with Dodge’s methodology anymore, other than the fact that they don’t employ local reporters as they once did. Perhaps there will be a revision issued in April that shows the February data was higher or a much higher March that shows that the February data was just a timing issue. Regardless of whether the grossly understated February report changes, be careful about the data you use to measure the market in 2021. It will be a volatile and potentially active year. We already know that pricing is out of kilter, which could create a halting recovery from 2020’s malaise. Perhaps you are going to put your head down and hustle your way through 2021, but if you are the type of businessperson who wants to understand what the market is doing, be careful of the data you use. If it seems like the information isn’t matching your reality, look closer. This is not a year you want to miss the market.