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A Big Third Quarter

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The government’s December 23 final estimate of GDP growth for the third quarter was a massive 5.0% surprise to the upside for the economy. The original estimate in October was 3.1%, which was later upped to 3.9% in November when the Commerce Dept. uncovered surprisingly higher healthcare, consumer and business spending. Using a more thorough survey methodology, Commerce research showed that those estimates were low as well.

The big jump in the third quarter can be attributed to higher business investment, which bodes well for construction and real estate. The biggest driver was the jump in consumer spending, which is a double-edged sword. Here’s what a closer look shows:

Consumer spending has risen somewhat because of better confidence in the future but most of the increase is probably related to the plunge in gasoline prices. The increase in consumer spending was 3.2% or slightly less than $100 billion in the quarter. Gas prices have dropped almost 90 cents during the quarter. The rule of thumb historically is that one penny in gas price decline yields a billion dollars in spending increase. That formula would explain most of the spending increase.

Consumers could also have used that increased disposable income to save more or pay down more debt. Neither of those things happened in the third quarter; in fact, the savings rate declined to 4.1%.

The last time that GDP growth was as strong as the past six months was in late 2003, just before the economy took off. That boom was fueled by consumers, especially consumers using their home equity as ATM’s for depreciating assets or non-assets like vacations. No one expects a repeat of that foolishness again, especially since banks can’t really do what they did in 2005-2006. At the same time, lenders need a place to use cash and Fannie/Freddie are looking at ways to get 97% loan-to-value deals to “qualified” buyers to stimulate home ownership. That’s a huge mistake and is exactly how the housing bubble started. Perhaps we could trust the GSE’s to maintain strict standards but I would rather not.

Better that the next few quarters cool off if that is what is in the cards. the rest of the world is in a bad economic state, which makes investing in U. S. bonds or real estate very attractive. That’s a good thing for our economy.

Winding Down the Bids for 2014

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There are a few large projects out to bid that will carry contractors over into 2015 but the market is shutting down for the holidays. Last week there were a few projects bidding that stood out as the backlog-builders for next year.

Mechanicsburg-based Lobar Inc. struck twice, getting low on a $7.8 million wastewater project in Masontown WV and the general trades piece of the $40 million Montour K-4. The 3 low bidders on Montour were:

1) Lobar – $28,973,000; 2) Burchick – $29,596,000; 3) Nello – $29,867,000

Bethel Park’s $6.6 million Fire Station came in under budget, with TOMLYN edging Yarborough Construction. Those results were:

1) TOMLYN – $6,613,000; 2) Yarborough – $6,644,000; 3) DiMarco – $6,709,000

The jury is still out on how the year will kick off in 2015. Right now the total contracting volume for 2014 looks like it will be better than I expected just 60 days ago. Fourth quarter volume will be above $700 million – a good omen for 2015. The total for 2014 should end up around $2.65 billion. There are a lot of $15-30 million opportunities hanging around ready to get to the streets. If these pop in the first quarter, contractors should be happier sooner rather than later.

The forecast for 2015 looks very positive. There are a few potential problems lurking but contracting volume should exceed $3 billion, possibly even $4 billion if the cracker gets going earlier in the year.

Thoughts on the Astorino/Cannon Merger

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This morning’s Post-Gazette story on CannonDesign’s acquisition of Astorino followed a few days of rumors of the deal and has of course spawned its share of speculation about the deal. Given Cannon’s reach and the fact that the firm has regularly – if not frequently – worked in the Pittsburgh market, it seems like Cannon could gain market share without buying Astorino. If you look at Cannon’s announcement of the deal, however, you get some insight about the motive.

I haven’t spoken to Lou Astorino yet and Cannon’s CEO Gary Miller is out of the office, so what follows is speculation. Cannon positions the acquisition as the merger of two like-minded firms serving similar clients. They point out that the two firms have worked together before and share similar philosophies. Once you get into the meat of the news you see that Cannon makes a point of touting the additional capabilities that Astorino Development’s design/build team brings. This construction management arm, that Lou P. Astorino leads, is the value that the Astorino side brings to the table. Astorino’s resume is impressive (how many companies can boast PNC, the Pirates and the Pope as clients?) but no more so than Cannon’s; and Cannon’s billings are roughly 14 times that of Astorino’s. But Cannon didn’t have that construction resume.

Delivery methods are evolving. It was Lou Astorino’s recognition of this fact that led to the launching of the construction management group. I believe it’s more than a gesture that Lou P. is going to lead the design/build operation from Pittsburgh. Whether it’s design-led design/build or just the opportunity to act as as CM-at-risk, Cannon now has capabilities to serve clients that are looking at streamlining the process with an alternative delivery method. In particular, healthcare clients – one of Cannon’s major client groups – are looking at ways to deliver expensive construction with less cost and more predictable outcomes. Highmark/AHN has used Astorino that way. Other large CM/design firms are pitching a modular approach to hospital construction. This puts Cannon in the mix with competitors that it couldn’t joust with before.

Jobs Report Surprises the Market

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Friday morning’s report on November job creation surprised analysts across all the metrics – although most economists seemed to be forecasting a surprise even as they predicted much lower numbers. The Census Bureau survey showed 321,000 new jobs in November and raised the previous estimate of job growth in October from 214,000 to 243,000 new jobs. That blew away all estimates and marked 10 straight months of 200,000 jobs created.

The bigger surprise was in the details. The unemployment rate remained at 5.8%. That may seem a surprise but it was because the labor participation rate remained the same and the U-6 unemployment – that’s the number for those who are part-time or temporary for economic reason – fell to 11.4%. That’s significant because the decline is caused by a shift to more permanent hiring by employers. Economists have speculated for several months that the tightening labor market and better economic prospects would force employers to grow permanent payrolls more rapidly. November marks a stronger response to that trend. If it becomes a new level of magnitude, the job market will be a real tail wind for the economy in 2015.

Some of that additional hiring is definitely showing up in Pittsburgh in the industrial sector. The recent announcements of new facilities by GE, Ensinger, FedEx and Amazon seem to be the start of a wave. Earlier this week, Universal Electric announced that it was expanding because of growth in its transportation market and was adding 81,000 sq. ft. and 58 employees. Mascaro Construction has begun moving dirt on the addition.

Clayco's Scott Caplan and Carl Belli from Continental at the NAIOP Pittsburgh bash.
Clayco’s Scott Caplan and Carl Belli from Continental at the NAIOP Pittsburgh bash.

More on USS Headquarters, Etc.

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The decision to locate its headquarters in the new Uptown development put USSteel on the front pages again Monday. What stayed below the surface of what was an upbeat announcement was that its 18-year lease at the 268,000 sq. ft. building represents a relatively downbeat outlook for the steel maker, which currently leases 420,000 sq. ft. at 600 Grant Street. It’s probably safe to assume there are plans for growth to occur but the length of the smaller lease implies a smaller commitment to Pittsburgh.

Other than that minor negative note, the win is big for the Pens and Uptown. The redevelopment of the former arena site gets a significant anchor and the heart of the site gains a catalyst that might spark development of the adjacent mixed-use block while the residential portion gets underway in 2015. That’s a lot of activity in a short period of time, especially after the length of the planning cycle.

Clayco's rendering of the new USSteel headquarters.
Clayco’s rendering of the new USSteel headquarters.

Clayco expects to start in third quarter 2015. Its in-house architectural office, Forum Studio, will handle the design of the building. Discussion of the cost of the project has been nonexistent for some reason but the building should run $50 million or more. Given that it’s essentially a single-tenant building, the construction with fit-out could run a bit higher than $200/sq. ft.

In other news:

While there has been no formal announcement made, the design/build team for another anticipated project has been selected. The team of Trumbull Corp./Polivka has been chosen to do the $50 million inter-modal transit facility near McKees Rocks.

Today’s economic news was a surprising GDP report from the Dept. of Commerce. The government’s final estimate of GDP growth for the third quarter was revised upward to 3.9%. After a 4.6% gain in the second quarter, the U. S. economy is much stronger than even optimists predicted. The best news from the report for construction was the big jump in business investment of 7.1%.

More Commercial Development News

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This morning NAIOP Pittsburgh’s meeting featured the Penguins development team for the 28-acre former arena site. Pens COO Travis Williams, JLL’s KC Pelusi and Craig Dunham, owner’s rep for the project, presented the details of the multi-year project, which expects to include 2.5 million sq. ft. of residential, office and retail development. The first infrastructure piece is bidding now. While it’s too early for this project to be signing any deals (at least so far), other commercial developers are reporting increased deal interest since the election.

Travis Williams, JC Pelusi and Craig Dunham.
Travis Williams, JC Pelusi and Craig Dunham.

At WesBanco’s Southpointe branch ribbon-cutting on Tuesday evening, Jim Scalo reported that construction would start on December 1 on the third building at Burns & Scalo’s Zenith Ridge development in Southpointe. Clayco is the construction manager for the 150,000 sq. ft. spec office. Clayco is about to get underway with an operations/distribution center for Walgreen’s in the RIDC Park West.

Interest in RIDC properties is higher. In addition to the deals in the Parkway West, users Paragon Foods and Burns Equipment should be building new facilities in Thorn Hill in spring.

Penn State Makes a Quick Decision

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PSU’s Board of Trustees turned around the selection of a design/build team for the East Residence Halls and new North Residence Hall in a couple days, awarding a contract to Clayco Construction on Nov. 14th. The winning team for the multi-year $171.3 million project includes DLA+ Architecture & Interior Design and Mackey Mitchell Architects.

PSU's $171.3 million residence hall program will add 330 beds & renovate more than 1,200 beds by 2019.
PSU’s $171.3 million residence hall program will add 330 beds & renovate more than 1,200 beds by 2019.

The residence hall project is one of the largest construction projects undertaken at Penn State. You can see more details on it at http://tinyurl.com/m67yyj2.

More Manufacturing Coming

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The civic leaders have been telling the public for more than 2 years that the real payoff from having multiple ethylene production facilities – ethane crackers – was in the downstream manufacturing that would arise. Today, GE announced what had been alluded to in an earlier blog post last week – a new plant in Pittsburgh.

The company acquired a site in Chapman Westport, along Rte. 576 in Findlay Twp. with the intention of building a 180,000 sq. ft. advanced manufacturing facility. GE will get proposals from three development teams, including Chapman Properties, Al Neyer & Clayco, to build the plant. The project will be a crunch, with work starting in March if GE gets its way. GE’s announcement was a little vague about the building’s purpose but I was told last week that the plant would manufacture resins, one of the key ingredients to the plastics recipe. (As a reminder, ethylene is the mother feedstock of plastics).

Although there has been no confirmation, Ensinger Plastics has reportedly chosen a site for a new facility, a plant of more than 250,000 sq. ft.

Perhaps Shell wasn’t the only company waiting for the dust to settle before sharing its plans with the region.

The Ellwood City Ledger earlier this week reported some specifics about the early work at the Shell site that buildingpittsburgh alluded to last week. The paper listed Trumbull Energy Services as having won a contract for earthwork. The successful contractor is actually a joint venture between Trumbull and Mascaro Construction is expected to land significant pieces of the site preparation.

Penn State Construction Roars

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Construction in Central PA is dominated by two institutions: the Commonwealth of PA and Penn State. While the state government has been hampered by a budget deficit for a half-decade, PSU is roaring back with hundreds of millions in new construction.

On the bid schedule are the $29 million new Data Center that Holder Construction has out for trade package bids. Jendoco Construction has the $8 million Michael Baker Building out to bid at the Beaver Campus, due Dec. 2. The $33 million Whitmore Lab Building renovation is being bid by Barton Malow and Kinsley Construction is taking bids on packages for the $13 million HFS Warehouse & Bakery. Details of the project are available at PSU Physical Plant website at http://tinyurl.com/k3enmog.

PSU is interviewing design/build teams Wednesday for one of the biggest projects ever undertaken on campus, the $173 million East Residence Halls renovations and new North Residence Hall. Teams consisting of Clayco/DLA Architecture/Mackey Mitchell Architects, Gilbane/Newman Architects/Bohlin Cywinski Jackson, and Whiting-Turner/Ewing Cole will propose today. The architectural selection process has begun for the $140 million new Chemical Engineering/Biomedical Engineering Building, a 188,000 sq. ft. new building that will essentially replace the Fenske Building.

Penn State's new $140 million Chemical/Biomedical Engineering Building
Penn State’s new $140 million Chemical/Biomedical Engineering Building

Reflections on a Week Out on the Town

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

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

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

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

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

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

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