Blog - Page 12 of 49 - Tall Timber Group

PIT Airport Modernization Update

Posted on November 7, 2019 | Leave a comment

In December, the Allegheny County Airport Authority will put the first packages out to bid for the Terminal Modernization Program (TMP). The packages will be access roadway and site work that are enabling projects for the main program. These packages will be worth roughly $15 million.

The TMP overall consists of two main components, the $750 million new terminal (including renovations to existing) and the $250 million Landside/Ground Transportation Center. PJ Dick/Hunt is the CM on the terminal. Turner Construction is CM on the Landside portion.

During the middle/latter portions of 2020, there will be multiple packages bid, many with multiple prime contracts (as required by the PA Procurement Code). By the end of 2020, more than $500 million in contracts will have bid. The packages have been designed so that there are opportunities for general contractors and specialty contractors of all sizes. Some of the contracts will exceed $50 million, and approach $100 million. There is a Project Labor Agreement being negotiated for the TMP.

One pre-TMP project has already been let to Mascaro Construction for $3.4 million worth of demolition and renovations to the access and passenger boarding bridge areas that will be adjacent to the new terminal.

In other project news, Thompson Thrift Construction took bids on the $50 million-plus Watermark at Meeder Apartments in Cranberry Township. Fontainebleu Development agreed to purchase the Kaufmann’s Grand project and complete the construction started by CORE Development. Sentinel Construction will manage the $8 million renovation. Trek Development’s $12 million Garden Theater redevelopment is being presented to Pittsburgh Planning Commission. Mistick Construction is the contractor for the mixed-use development, which includes 47 apartments. Franjo Restoration Services has begun the $2.2 million fire restoration of the Durham Court Apartments in McCandless Township.

High Mortgage Rates are Decreasing Mortgage Applications

Posted on November 7, 2019March 9, 2020 | Leave a comment

For the majority of Americans, buying a home requires a mortgage loan. There are many factors that impact a person’s ability to purchase a home, but a mortgage will always be one of the most significant factors in determining whether a house is affordable or not. Given the impact they have on your monthly payments, mortgage rates are also relevant.

Mortgage Rates

When mortgage rates are higher, less mortgage applications tend to be filed. What has been happening as of late, is a fluctuation of mortgage rates that has made home purchases difficult to predict. The Mortgage Bankers Association keeps track of changing mortgage rates, and publishes the numbers. In the last month, the country has seen mortgage rates plunge, and then recover, and then go back down again. The market is volatile right now because of the US’s relationship with China, and home buyers are making sure to only act when rates are low.

Refinancing of homes is also impacted by mortgage rates. Generally homeowners will refinance their mortgages for the purposes of lowering their monthly payments. Due to this, applications for refinancing loans are extremely sensitive to changing mortgage rates. Mike Fratantoni, the Senior Vice President and Chief Economist of the Mortgage Bankers Association, commented on interest rates:

Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day…Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.

Home Sales Projections

Mortgage applications to purchase a home have certainly been falling compared to weeks prior, but the good news is that the numbers are still better than a year prior. This is good news for the market. Additionally, there is hope that the market could be improving in the near future. Joel Kan, the Mortgage Bankers Associations’ Associate Vice President of Economic and Industry Forecasting, had his own comments on the state of mortgage rates.

U.S. Treasury yields trended downward over the course of last week, as the Federal Reserve meeting highlighted the elevated uncertainty in the economic outlook. However, despite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks…The increase in rates led to fewer refinances, and activity has now dropped 17% over the last two weeks…The recent data on increased existing-home sales and new residential construction points to the underlying strength in the purchase market this fall.

Kan believes that buyer demand was stronger than expected. If this trend continues, prices on homes will be higher, and the supply of homes for sale will lead to a stronger housing market. That would, of course, be the preferred outcome, however sales are not increasing as much as they should be given the lower mortgage rates as compared to those from one year ago. Home sales should be increasing, but due to home prices being too high, any savings made through lower mortgage rates is being negated.

The National Association of Realtors reported the increase in September’s home prices, and experts point to a lack of supply for the unexpected falls in sales. Diana Olick, a real estate correspondent with CNBC explained:

The problem is low supply combined with high prices; prices jumped nearly 6% annually, according to the National Association of Realtors, the biggest gain since January 2018. Prices are being juiced in part by lower mortgage rates. Lower rates help with affordability, but they also give buyers more purchasing power, which in turn causes prices to rise.

Matthew Speakman, a Chief Economist at Zillow, agreed with Diana, and doubled down:

Much of the sales boost this summer can be chalked up to interest rates dragging along the bottom this year, which enticed more would-be buyers into the market…Now, sales are coming back to earth, largely because of an ongoing shortage of inventory. There simply are not enough lower-priced homes to keep the market humming. While builders are putting up more homes, their pace is not keeping up with what buyers demand.

Going Forward

Mortgage rates have fluctuated quite a bit, and these rates have negatively impacted mortgage applications, refinancing, and home sales. The fluctuation can be attributed to many things, but the fact remains that at the moment, the housing market has seen dips in sales. When the mortgage rates are high, potential homebuyers don’t buy, and homeowners don’t refinance. When mortgage rates are low, demand ends up driving prices up, which keeps people from purchasing. The foreign influences on mortgage rates are also a factor in the fluctuation.

Going forward, the market needs to see an increase in construction, and the best way for this to take place is through competition. With new players breaking in to the industry, the burden of additional home development won’t be placed on the builders that are currently holding back on the number of production projects they take on.

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

Posted on November 6, 2019March 9, 2020 | Leave a comment

The US Department of Labor’s Wage and Hour Division published a notice to announce that minimum wage for federal contractors will increase to $10.80 per hour from $10.60. A change that has become a regular occurrence thanks to the Obama Administration.

This regular minimum wage increase is the result of the Obama Administration’s Department of Labor’s final rule which implements Executive Order 13658. The order determined that a minimum wage would be set for contractors to pay their workers for work completed for federal contracts. This minimum wage started at $10.10, but has had consistent annual increases.

Explaining the Minimum Wage Increase

The executive order states:

This order seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage paid by those contractors. Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.

As stated in the executive order, the original minimum wage standard was $10.10, and now (over the course of 5 years), it has grown to $10.80. Assuming that the executive order is not undone, there will be more minimum wage increases in the future. Is this what’s best for the construction industry though? Some people don’t think so.

Opposition to the Executive Order

Associated Builders and Contractors, Inc. submitted a letter to the administration with concerns over the executive order. They claimed that it would cause confusion amongst government contractors, and lead to additional burdens thanks to unnecessary regulation.

The regulation itself was seen as unnecessary due to the majority of government contractors already surpassing the $10.10 threshold in paying their workers. There were also concerns about setting a precedent where a government can come into an industry and tell them what to pay workers. Years later, the opposition to the executive order still exists, however, the order has not been rescinded.

Explaining the Execution of the Minimum Wage Increase

The final rule/fact sheet attempts to address the concerns of contractors by breaking down the obligations that contracting agencies, contractors, and even the Department of Justice have. Not only does this attempt to address those concerns, but it also explains how the order is to be enforced. The final rule explains that the process itself “should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage. The Department of Labor generally has adopted existing mechanisms for enforcing long-established prevailing wage laws to enforce the provisions of the Executive Order”. It even confirms that around 200,000 workers will benefit from the order.

The obligations for contracting agencies, contractors, and the Department of Labor are broken down as follows:

Contracting agencies are responsible for ensuring that the contract clause implementing the Executive Order minimum wage requirement is included in any new contracts or solicitations for contracts covered by the Executive Order. Contracting agencies are also responsible for withholding funds when a contractor or subcontractor fails to abide by the terms of the applicable contract clause, such as by failing to pay the required Executive Order minimum wage, and for forwarding any complaints alleging a contractor’s non-compliance with Executive Order 13658 to the Wage and Hour Division.

Contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts. They also must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. Contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts, and must comply with pay frequency and recordkeeping obligations. Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

The Secretary of Labor is required to determine the Executive Order minimum wage rate yearly beginning January 1, 2016, and publish this wage rate at least 90 days before the wage is to take effect. The final rule outlines the methods that the Department will utilize to notify the public of the Executive Order minimum wage,

Finally, the order explains how complaints against it can be taken up. It outlines a process for filing these complaints with the Wage and Hour Division. It also allows for investigations into instances of believed violations or abuses of the executive order, as well as resolutions/consequences for these violations. Lastly, the order provides an administrative process for resolving legal disputes over the order’s enforcement.

Going Forward

Despite opposition by contractors and contracting organizations, the executive order was submitted and enforced. This bill focuses on workers, and paying them a wage that the government believes to be fair. The final rule also states that it accomplishes this in a way that has long-been accepted, and in a way that multiple industries are familiar with. This should not only limit confusion, but prevent legal challenge due to the precedent of such laws being deemed as constitutional and acceptable.

There may still be opposition from contractors, however, the order is still in effect, and for now it looks like it will stay in effect moving forward.

Fannie Mae and Freddie Mac Now Retaining Profits

Posted on November 5, 2019March 9, 2020 | Leave a comment

In 2008 when the economy crashed, the housing market was not immune to its effects. Companies like Fannie Mae and Freddie Mac, which guarantee the majority of America’s mortgages, received bailouts in order to stay alive. At the time, the government made the decision to take control of the two companies in order to keep the housing market afloat. Now, however, it seems that action is finally being taken to free them from that control.

Bailing Out Fannie Mae and Freddie Mac

With two giants losing money as a result of the declining housing market, the government felt the need to step in in order to prevent further losses, and to ensure that Americans still had somewhere to turn for mortgages. In 2008, NPR discussed the news, saying:

In the short term, the rescue is meant to help calm the markets and to offer some measure of stability to help the U.S. economy weather the housing correction. In the longer term, the goal is to keep the two companies afloat so that they can continue to support the U.S. housing market.

The Treasury Secretary at the time, Henry Paulson, agreed stating that, “Action was taken to ensure the continued availability of mortgages and to protect taxpayers.”

What did these actions entail? This requires looking into the original agreement made between Fannie, Freddie, the Treasury, and the Federal Housing Finance Agency (the FHFA). The agreement that was put together took control away from the companies’ executives, and gave it to the FHFA. The agreement also gave the Treasury Department 80% of the common stock for both Fannie Mae and Freddie Mac, as well as stock agreements. Lastly, a 2012 addendum instituted a profit sweep, which prevented the two companies from retaining any profits.

Freeing Fannie Mae and Freddie Mac from Government Control

After a decade of working under these conditions, the call has finally been made to begin putting an end to this agreement. Earlier in the year, the Treasury Department was ordered to put a plan together with the Housing and Urban Development Department to reform financing for housing. Freeing Fannie and Freddie from government control was a part of that plan.

Giving Fannie Mae and Freddie Mac independence is not something that can happen all at once, however. This will be a process that takes several steps, and the first will involve altering profit structures. The aforementioned report was released recently, and in it, the Treasury Department recommended ending the profit sweep of both Fannie Mae and Freddie Mac.

The Treasury recommended ending the profit sweep as part of a comprehensive effort to shore up their finances and shrink their overall footprint in the market.

Pete Schroeder at Reuters commented, saying, “Ending the government’s sweep of their quarterly profits was widely seen as a first step in any effort to end the 2008 bailout.” He goes into further detail explaining that in order to remove Fannie Mae and Freddie Mac from government control, the two need to have their own cash reserves (as opposed to relying on government funds). The first step to accomplishing this is to allow them to keep profits. Specifically, Fannie Mae will be allowed to retain $25 billion, and Freddie Mac allowed to retain $20 billion. The original 2012 sweep barred the two companies from retaining profits, so undoing the sweep can only mean that the companies are moving forward towards independence.

When originally taken over by the government, Fannie Mae and Freddie Mac together received $191.5 billion in aid. Since then, the two companies have paid the Treasury Department back over $297 billion; a sign that the bailout was successful, and the two companies are back on their feet. These results contribute to the confidence that Fannie and Freddie can survive on their own now.

Going Forward

Now that Fannie Mae and Freddie Mac have regained some of the government’s trust, the two companies will now be able to regain the trust of homebuyers throughout the country. The further this plan for independence progresses, the more the landscape of the housing industry will change. Homebuilders should keep track of these changes, but also understand that more may be on the way.

There may still be more changes on the horizon for Fannie Mae and Freddie Mac. The current FHFA director, Mark Calabria, wants to explore other ways for the two to raise capital. In a statement he released, Calabria said that he did not see retained earnings alone providing the reserves that Fannie and Freddie would need to operate comfortably. This implies that the FHFA could be instituting more changes to the two companies’ operations throughout this independence process.

The landscape of the housing industry changed significantly when Fannie Mae and Freddie Mac were taken over by the government, and the landscape will change again now that they are regaining that control. The process will not be instant, and there will be many steps to accomplishing this. Homebuilders should stay on the alert so that they will be prepared for every change that is made to the current operational structure of the two companies.

Developing University Buildings for the Biotech Industry

Posted on November 4, 2019March 9, 2020 | Leave a comment

The University of Pittsburgh is actively seeking proposals from developers for multiple parcels on or near the university. Part of Pitt’s master plan is the private development of property along Forbes and Fifth to be space used for research partners from industry and government. These projects won’t be university-owned but the tenants will be driven by the university’s technology transfer activity, much like as happened with the Murland building, which is being occupied primarily by Pitt users. This search is in addition to the Walnut Capital research tower and Wexford Science Technology research building that have been proposed to Pittsburgh Planning Commission.

What is being proposed and envisioned for the future of Oakland’s “Main Streets” is very much part of a national trend for university-adjacent development.

Alexandria Real Estate Equities Inc. recently won the rights to develop a property in Stanford University’s research park. The company will be opening a San Francisco Bay location for its life science and biotech start-ups. This area of the country has a thriving life science industry, and could serve as a target demographic for developers moving forward.

Growth in Biotech and Life Science

A study by commercial real estate firm CBRE explains that the San Francisco area is the country’s second largest biotechnology/life science cluster (with Boston being number one). San Francisco’s growth as a biotech hub facilitates the creation and maturation of start-ups and businesses in these fields, while also attracting venture capitalists who are looking for investment opportunities. Many venture capital firms are located in the area because they anticipate investing in the biotech field, and want to be close to the start-ups that they foresee themselves investing in. This is in addition to the fact that Stanford itself is one of the top recipients of funding from the National Institutes of Health. This allows Stanford to provide additional support for biotech initiatives on its campus.

Clare Kennedy, a commercial real estate reporter at CoStar, addressed why biotechnology is an attractive investment for venture capitalists:

Some of the proliferation of these companies stems from the region’s robust venture capital, which built Silicon Valley and is now pouring money into biotech-oriented businesses in fields such as pharmaceuticals, genetic research and medical devices that don’t directly provide health care services, but serve a fast-growing life science industry developing treatments for an aging population, whose need for medical interventions is expected to rise in coming decades.

Developing for Biotech and Life Science

How is Alexandria going to take advantage of this space? Currently, their plans are to use the facilities to house its many life science start-ups. Alexandria has a program called LaunchLabs, which provides member companies access to multiple perks as described in its press release:

The unique, full-service platform will provide member companies with highly flexible, move-in-ready office/laboratory space, sophisticated mentorship and access to strategic investment capital through the Alexandria Seed Capital Platform, the company’s innovative seed-stage funding model.

Alexandria has put LaunchLabs into practice in other areas of the country and is now expanding it to one of the top biotech hubs. The culture, infrastructure, and assistance that they provide does, in fact, facilitate the growth of its member companies, so expanding it to San Francisco is the next logical step. The start-ups and small businesses that take advantage of this opportunity will find themselves benefiting thanks to the LaunchLab philosophy.

According to Alexandria, biotech companies are best able to succeed “when they are in close physical proximity to capital, academia and other firms that have a complementary purpose.” Jennifer Cochran, the Shriram chairwoman of bioengineering at Stanford, adds in that, “biotech entrepreneurs often need to commit to multi-year leases, large footprints and expensive lab build-outs when they aren’t even sure they have a viable product yet.” Stanford and Alexandria believe that the addition of LaunchLabs should serve as a lifeline to these small and mid-sized companies.

Partnership with Stanford University

Alexandria’s confidence is clear. There was a bidding process to determine who would be able to develop this property within Stanford’s research park, and Alexandria won. At a cost of $26 million, the company was able to get the rights to use, and redevelop the land over the course of the next 51 years. Stanford discussed the thought process behind this move, and what lead to its deal with Alexandria.

When the building was recently vacated, Stanford saw an opportunity to create a flexible and vibrant space that would enhance the connections between the existing life science ecosystem of medical facilities, researchers and companies in the surrounding area, while also encouraging progress toward an even more diverse life science community. The university held a competition for firms that specialize in this work and chose Alexandria, an experienced developer and operator of successful life science communities near academic campuses.

Together, Stanford and Alexandria are aiming to continue the growth that the biotech and life science industries are seeing in San Francisco.

Going Forward

What the partnership between Alexandria and Stanford shows us is that the life science and biotech field is growing rapidly, and developers would do well to consider how that may benefit their own business moving forward. A growing industry that requires specific infrastructure to be able to fully act on its growth potential could serve as a prime target demographic for developers who operate in any of the growth regions in the country as listed by CBRE. By developing buildings for universities and/or for biotech/life science companies, developers can find a niche demographic to market, design, and build for.

Pittsburgh’s Regional Update (A Preview)

Posted on October 23, 2019March 9, 2020 | Leave a comment

Today’s groundbreaking for the new milllion-square-foot Amazon fulfillment center at Chapman Westport is an example of how the commercial real estate market has driven construction in Pittsburgh over the past decade.

The November/December edition of BreakingGround is in production now. For those who want a sneak preview of what’s inside, below is an excerpt from the Regional Market Outlook that deals with commercial real estate:

In the September Metro Mix publication by the Federal Reserve Bank of Cleveland, Pittsburgh’s employment situation was characterized as “steadily advancing.” Among the data cited by the Fed are an unemployment rate that fell 0.4 points to 3.8 percent from September 2018 to 2019, and total payroll employment of 1.123 million, a net gain of more than 10,000.

Metro Mix also took a look at the income and balance sheet of Pittsburgh residents. The real income per capita of a Pittsburgh resident was nearly $56,000, a 2.1 percent increase from 2017. This is above the income per capita for Pennsylvania and the U.S. Consumer debt in Pittsburgh is significantly below the Pennsylvania and U.S. levels as well. Debt per capita for the average Pittsburgh consumer was $26,968 after the first quarter of 2019, following one percent growth in 2018. Not surprisingly, the credit card delinquency rate for a Pittsburgh resident was only 6.6 percent, lower than the 7.5 percent U.S. average.

A strong economy is a good indicator for commercial real estate development. The resurgence of Pittsburgh’s economy over the past decade has been matched by a strong, if not booming, commercial real estate market. A number of factors suggest that commercial real estate will continue to be a positive driver of construction in 2020.

Pittsburgh’s industrial market is extremely robust as the third quarter ends. Normally a slower season, summer saw unusually high activity for leasing and acquisition. The latter is getting a boost from capital sources outside of Pittsburgh, which love the steady returns and strong fundamentals. Among the metrics that are tempting investors and developers are the low vacancy rates, especially for Class A warehouse, and the steady increase in rents. Occupancy levels for Class A reached 97 percent through the end of September and the overall industrial vacancy rate was 6.4 percent. Rents for Class A space rose to $5.70/square foot. Most impressive was the net positive absorption of 1.9 million square feet, which threatens to eclipse the highest annual total on record.

According to Newmark Knight Frank’s analysis of the industrial market, the high absorption, coupled with increased users in the market for space, will drive construction of build-to-suit opportunities in 2020. They specifically forecast increased activity for users of 200,000 square feet or more.

One of the factors driving industrial development in Pittsburgh is the growing demand for smaller warehouses to meet the demands for e-commerce fulfillment. Heretofore, fulfillment centers, like the one million square foot warehouse under construction for Amazon at Chapman Westport, were large and sited close to interstate transportation hubs. The growth of e-commerce volume is accelerating delivery times and pushing warehousing and fulfillment to smaller facilities located closer to denser population centers. This shift in logistics is making Pittsburgh more feasible for warehouse development than it was when the previous logistics models drove construction.

Pittsburgh’s office market held strong through three quarters, despite increases in space available for sublease. Through September 30, net absorption stood at 160,000 square feet, according to CBRE. The increases in absorption were mainly due to strong activity in the Central Business District (CBD) fringes – primarily the Strip Distict – and in the Airport Corridor, which saw positive absorption of 130,000 square feet. The occupancy level rose to 86.3 percent, with a total Class A direct vacancy rate of 12.5 percent.

Vacancy increased in Downtown proper due to large corporate consolidations, including BNY|Mellon, PNC and Bank of America. Falling vacancy rates in the Strip District and Oakland helped offset these holes in the market. According to CBRE, Oakland’s Class A direct vacancy rate fell to one percent. Even with more than 550,000 square feet of new space under construction, occupancy levels are expected to remain constant. Rents rose for the sixth consecutive quarter, hitting $27/square foot overall and topping $30/square foot in the CBD.

The office market is less supportive of new construction than industrial, primarily because of the available space and the high cost of construction in the most desirable locations. The continuing growth in employment in the emerging technology, healthcare, and research fields will create more demand for space and new construction. The market for tenant improvements should be more robust in 2020 and, depending upon how much of the proposed spec development proceeds, new construction in the Strip and Oakland could top two million square feet.

Not a lot of construction news. Volpatt Construction was selected as CM for $3.5 million Mellon Institute 1920 Lab Renovations. PJ Dick will build the $20 million natural gas power plant that will generate electricity for the airport’s microgrid. EIS Solar will design/build the 7,800-panel solar farm.

Developing Office Design for 5 Generations in the Workforce

Posted on October 16, 2019March 9, 2020 | Leave a comment

Currently there are five generations of Americans currently active in the workforce. This impacts commercial real estate in unexpected ways; specifically, office design. It is common for the onus of office design to be on employers, but in recent years, developers have seen their role evolve to include this as well.

Each generation stereotypically has certain design aspects associated with them: cubicles, private offices, open areas with standing desks, and more. The choices that developers make can influence what kinds of design choices employers are capable of making. If developers choose to have more or less open space, or to rely mostly on natural light, that will impact what options are available for the final office design. How many conference rooms can the company have, can there be a coworking area with desks, loose chairs, and/or couches, is there space to include a ping pong table or a lunch room? Employers cannot make these decisions if developers do not allow for it through their own designs.

The Developers’ Role in Office Design

Benjamin Paltiel writes on this topic for Bisnow and the NAIOP saying:

Tenants themselves are behind today’s most productive and progressive offices…more landlords and developers are taking it upon themselves to collect data to inform and deliver the office spaces their tenants want…In an ideal world, landlords, developers and tenants would share an equal passion and drive for crafting innovative workspaces.

This growing trend demonstrates that the role of developers is changing. While employers and tenants are currently taking the helm of designing office spaces, it is clear that the developers themselves are increasingly expected to play a part in this process.

Generational Impact on Office Design

The five generations currently in the workforce were brought up due to their perceived differences when it comes to preferred workspaces. If developers are going to have to consider potential office designs when building commercial workspaces, then will they have to decide on which generation’s style to build around? Is it possible to compromise and combine these styles in some way?

Paltiel continues:

With a workforce that spans five different generations – traditionalists, baby boomers, Generation X, millennials, and Generation Z – companies today cannot build offices that appeal to only one age group. Instead, they need to consider the spectrum of work styles that their employees of all ages may have and design an office that can keep everyone comfortable and productive.

This is certainly easier said than done, but it is very clear: offices cannot be constructed to fit just one group. Office designs must be inclusive for each generation. The challenge comes in determining which aspects of previous and current office designs will the various generations support and be productive in. Unfortunately, there is no easy answer for this.

Compromising Between Generations

Rivka Altman, a director of portfolio management at Invesco, discusses how prior assumptions about what each generation likes cannot actually be trusted. There are older workers who do not mind open coworking spaces, just as there are millennials who do not mind cubicles or private offices. This mindset is backed up by Shannon Woodcock, a managing director of workplace strategy at Savills.

Woodcock is adamant when she states that:

A lot of the things we say that younger employees want – more light, more access to open space – I don’t believe for one second that those are specific to younger people…Older employees need them just as badly, but they may not be voicing that need as much.

When deciding on the final office designs, employers must know their employees well enough to provide a workspace that all of them would be comfortable in. If developers do not have assistance from a soon-to-be tenant in this respect, then they must do their own research. They must know their target market, and what employees and cultures those companies tend to support.

Woodcock believes that developers (and employers) shouldn’t be fooled by age. While the conversation is about generations, age does not have as much of an impact on design preferences as people may think. Rather than age, the focus should be on “work style”. Keeping up with workplace trends will inform developers on what work styles will resonate the best with the types of companies that are typically interested in their commercial properties.

Going Forward

Predicting the culture and workplace preferences of tenants when you are developing a new property is certainly difficult. The most developers can do is research their target market, and understand the common cultural decisions that those companies tend to make. While every business is different, there are common threads, and these threads serve as a way to inform developers. Even differences in preferences can be helpful at times. Like many other aspects of business, diversification is beneficial.

The design choices that developers make based on consumer and industry research will impact the design choices that future tenants can make. Allowing for personalization that successfully captures the culture that these tenants are looking for is a sign of a well-designed, well-developed workspace. Every style mentioned here can resonate with certain companies, so as long as the research is completed, developers should be able to connect their workspaces with the companies that will thrive in them.

Demographic Changes That Will Impact Real Estate

Posted on October 16, 2019March 9, 2020 | Leave a comment

As the years progress, audiences change, and this includes target audiences. When you work in residential real estate, your entire region serves as a target audience, so the best way to measure changes in that audience is to look at changes in the demographics.

While every region has its own unique shifts, the United States as a whole has its own trends. These nationwide demographic changes will impact local residential real estate over time. Richard Fry, a researcher at the Pew Research Center, decided to investigate these nationwide trends to determine how residential real estate will be affected. Specifically, he projected what the state of the industry would be by the year 2065.

Current Demographic Changes

Through his research, Fry was able to find 5 demographic changes that will impact what housing units residents are willing to spend their money on, and why. In no particular order, here are his findings:

If you are looking at demographics decades into the future, then present birth rates will naturally have a significant impact. Currently, young Americans are not having children at the same rate as the generations that came before them.

In 1980, 43% of women 18 to 29 had at least one child. Today, that number has dropped to 30%.

Millennials are waiting to have children, and this directly impacts the types of housing units that will be in demand in upcoming years. This also affects where those units will be purchased or rented.
Currently there is a trend that shows that Americans and many millennials are moving away from the suburbs to live in the city. This is also impacted by millennials waiting to have children. This focus on work will decrease demand for suburban housing, and increase the traffic towards city apartments.

Demand could bolster the market’s already-frothy prices for downtown assets, and perhaps discourage some development in the suburbs.

When more millennials do begin to start families, it is possible that this trend reverses. For now, however, urban growth is worth the investment for the years leading up to that potential family formation.
Birth rates don’t just impact where people choose to live; they also impact household size. Around the country, household sizes are increasing. Not only are millennials not having children as easily, but with economic hardships increasing foreclosure rates, families find themselves living together under one roof. Students and graduates are continuing to live at home, and older parents are moving in with their adult children.

An increase in average household size is much of the reason why demand for new housing has been so sluggish, even as the wider economy has recovered.

With families coming together like this, demand for new homes naturally decreases. However, if you are in the homebuilding business, homes that can accommodate multiple generations will help facilitate these new family dynamics.
While studying current Americans can provide insight into future changes to residential real estate, there are also benefits to looking outside the United States. Currently there are over 350 million Americans in the US, but Fry predicts that the population could grow to 441 million by 2065. Fry attributes this growth to immigration.

Taking middling, reasonable assumptions about immigration – 1 million immigrants per year – the American population should grow to 441 million by 2065. Now let’s suppose we switch off immigration…By 2065, we would only have 338 million Americans. Without immigration, there’s very, very little population growth at all.

The highs and lows of real estate demand will be determined by immigration, and how it grows or declines over the years. The policies that influence immigration will then have an indirect influence on real estate demand. It also follows that areas that typically have a high percentage of immigrants will see increases in demand, as immigration into the country increases.
The final of these demographic changes connects everything together. Residential real estate will be impacted in multiple ways by racial and ethnic diversity moving forward. Currently the US population is made up of 60% non-Hispanic white residents. According to Fry, however, white Americans are not having children at the same rate as other races. This will have an impact on future household sizes.

Only 16% of the white population in the U.S lives in a multigenerational household, compared to 29% of the Asian American population, 27% of the Latino population and 26% of the black population.

When building residential housing in the future, it is necessary to consider the population and its racial/ethnic background, how that will impact household size, and where people with those household sizes tend to live (city vs. suburbs).

Going Forward

The real estate industry needs accurate information to understand who is willing to spend money on what housing units. Knowing where people choose to live, and what they need out of their living quarters will provide the necessary insights for developing the right housing units, and selling them successfully.

The Beat Goes On in The East End

Posted on October 8, 2019March 9, 2020 | Leave a comment

Walnut Capital brought plans before the city’s Planning Commission today for what it’s calling Bakery Square Refresh. The Refresh project involves the demolition of the small retail building on the outparcel on Penn Avenue and construction of a two-story, 12,400 square foot retail building that will connect to the original Nabisco bakery. The $5 million Refresh is being designed by Strada Architecture and PJ Dick is the contractor. According to Walnut’s CEO, Gregg Perelman, the new construction – which will be home to several restaurants – is to be ready next October when Phillips occupies its new space in Bakery Square Three. That means construction will start around the first of the year.

The 2-story Bakery Refresh will be adjacent to the Nabisco bakery building. A new green space will be created along Penn Avenue. Rendering by Strada Architecture LLC. Use courtesy Walnut Capital.

Around the corner from Bakery Square, Echo Realty is moving forward with its Shady Hill Center. The project involves 220 units of apartments, to be developed by Greystone Real Estate Partners, a 500-car parking garage, and the replacement of the Giant Eagle with a new 37,000 square foot store. Carl Walker Construction has been selected to build the parking garage.

Data on employment and unemployment was released on the national and regional level within the past week. The job creation data for Pittsburgh showed modest improvement, with 5,500 more jobs in August 2019 than one year before. Unemployment fell by 0.3 points to 3.9%. The good news inside the Pittsburgh metro data, which came from PA’s Department of Labor, was the net growth of employment. The workforce grew by 18,400 from August-to-August, while the number of unemployed fell by 1,000. Retiring Baby Boomers are putting great downward pressure on the workforce supply in Pittsburgh. That the number of people working grew by more than 1.5 percent suggests that the gains in employment are offsetting the demographics for now.

US job growth was better in September than in previous months, according to the Census Bureau’s report on October 4. There were 136,000 new jobs in September. Estimates for July and August were also revised upward by nearly 60,000 jobs. The headwinds on the economy are certainly growing, but US employers are still adding to payrolls.

WeWork and Pittsburgh’s Construction Economy

Posted on October 3, 2019March 9, 2020 | Leave a comment

The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.

The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.

There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)

What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.

The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.

That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.

(Left-right) Rich Yohe, Bernie Kobosky and Scott Poillock at the MBA’s golf outing.

In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.