Some Optimism From Leasing/Finance Executives

The equipment leasing and finance industry is a $628 billion industry that can be an interesting barometer on activity. The industry’s association released its November 2011 Monthly Confidence Index on Friday and confidence in the equipment finance market is 57.4, up from the October index of 50.7, indicating an increase in optimism about business activity from leasing and finance execs, despite ongoing concerns about the global economic situation.

 When asked to assess their business conditions over the next four months, 18.9% of executives responding said they believe business conditions will improve over the next four months, up from 9.8% in October.  75.7% of respondents believe business conditions will remain the same over the next four months, a decrease from 80.5% in October.  2.0% of executives believe business conditions will worsen, a decrease from 9.8% in October. Some of the other highlights of the survey are:

  •  24.3% of survey respondents believe demand for leases and loans to fund capital expenditures will increase over the next four months, an increase from 17.1% in October.  70.3% believe demand will “remain the same” during the same four-month time period, up from 68.3% the previous month.  5.4% believe demand will decline, down from 14.6% who believed so in October.
  •  27.0% of executives expect more access to capital to fund equipment acquisitions over the next four months, up from 12.2% in October.  73.0% of survey respondents indicate they expect the “same” access to capital to fund business, a decrease from 87.8% the previous month.  No survey respondents expect “less” access to capital, unchanged from October.
  •  When asked, 16.2% of the executives reported they expect to hire more employees over the next four months, up from 14.6% in October.  75.7% expect no change in headcount over the next four months, a decrease from 78% last month, while 8.1% expect fewer employees, an increase from 7.3% in October. 
  •  In November, 32.4% of respondents indicate they believe their company will increase spending on business development activities during the next six months, up from 26.8% in October.  67.6% believe there will be “no change” in business development spending, down from 68.3% last month, and no one believes there will be a decrease in spending, down from 4.9% one who believed so last month. 



Retail sales & other news

For observers looking for signs of economic direction the data continues to fly in the face of consumer sentiment and media tone. The Commerce Dept. announced October’s retail sales volume and the data shows an increase of over 7% compared to October 2010. That’s a steeper growth path than the 2005-2007 trend and the overall spending is 3.5% higher than the volume at the peak of the last business cycle in Nov. 2007. A 7% increase in the segment that makes up 70% of the U. S. economy is significant anytime but especially if it’s during a period of time when consumer sentiment is falling (like this summer).

Monthly retail sales (Source: Reed Construction Data)
On a different note, Pittsburgh’s Bill Hunt – CEO of the Elmhurst Group – has been named the chair of NAIOP’s national board. Hunt has been active with NAIOP national for the last few years and his appointment as the national board’s executive gives the Pittsburgh an even higher profile. 

The $60 million job

Business people in this region are pretty conservative by nature (that’s why so many of them last so long), so it it’s taking a little while to have the feeling of recovery sink in. But the action in the market right now is pretty encouraging, especially if you’re a general contractor working in the $60 million sweet spot.

 There haven’t been many big jobs out that have been more than $50 million since the recession started but there will be a handful of them decided between Thanksgiving and Christmas.

The long-awaited $90 millionMt.LebanonHigh School project is back out for re-bid, due Dec. 7. The job came in $15 million over budget when it originally bid as a single prime construction contract. The school board ultimately went for the siren song of separate prime packages (there are seven now) and the promise of lower bids because that cuts out the markup from the generals. That is an unfortunate assumption that will be reinforced when the new bids open because of the significant scope changes that were part of the redesign since the first bid. This is a district with a checkered history in terms of their construction programs, architects, CM’s, claims, lawsuits and contractors going out of business while working there. Multiple contract jobs just don’t go smoothly. It’s hard to imagine this one will but there haven’t been many $90 million jobs (although there are a few $60 million jobs) so there should be no shortage of bidders.

 CMU will interview the construction management finalists before Thanksgiving for its $65 millionNano-Bio-EnergyTechnologyCenter. Jendoco, Mosites/Gilbane joint venture and Turner were selected for the interviews. The construction manager will work through the deisgn phase of the job next year and construction will start in early 2013.

 Awaiting the results of interviews are the finalists – Mascaro, PJ Dick, Massaro and Mosites – for the $60 millionCardinalWuerlNorthCatholicHigh School. This project is still in the design development phase and fundraising success will determine when construction will start.

 Also in the early stages of development is the VA Outpatient Clinic that is being offered for developer/design/build proposals. The $60 million project will be built on one of four parcels northwest ofButlerPA.Developers Oxford Development,Cambridge, Burton Katzman, Zenith Systems, Cedarwood Properties and Gilbane Development have put together teams to pursue the project. The VA will take first proposals Dec. 14.

 The general piece of the Mt. Lebanon project should be right in the $60 million range and if so, that makes four $60 million opportunities at the same time. Some contractors will get a nice stocking stuffer to start the New Year off on the right foot.

Housing Construction Growth Anemic, Commercial Healthy in 3rd Quarter

Construction activity for both residential and non-residential buildings improved during the first nine months. Housing activity was up 12% over the first three quarters of 2010 and non-residential construction was up 18%. While the percentage of volume growth seems robust, the increases appear stronger because of last year’s depressed levels.

 Every measure of a housing market shows that thePittsburghmarket is doing well, especially relative to the rest of the country. But the steady price appreciation and decent sales figures are aided by the fact that new home construction is about half what it was just five years ago.

During the January through September period 1,264 permits were issued for single-family detached units, up from 1,232 last year. Permits for attached units did spike however, with 891 units started compared to 691 during 2010.  The overall housing construction market saw 2,155 units started compared to 1,955 last year.

 Contracts for non-residential construction totaled $2.1 billion (excluding the $1.2 billion Allegheny Ludlum plant) compared to $1.78 billion during the same period in 2010. Commercial contracting is showing some renewed strength. Office vacancy rates are at their lowest levels in two generations. Manufacturing and industrial construction is up sharply, especially for structures related to the natural gas exploration and its supply chain. With strong demand in education and healthcare, especially with the significant investment Highmark will make in West Penn Allegheny facilities, most major categories in non-residential construction should be improving through the fourth quarter of 2011 and into 2012.

 The three potential roadblocks for a decent recovery over the next twelve months would be some sort of global or national government action – like a repeat of the debt ceiling debacle – that sparked fear and chilled progress, continued difficulty in financing projects instead of continued improvement and some sort of legislative action that made the current plans of UPMC and Highmark uncertain. Barring that there is too much demand coming from the gas industry and from the constrained supply to hold back recovery next year.

The totals listed below represent the number of new housing units for which building permits were issued, excluding mobile homes and elderly care complexes.  The top areas were:

Source: Pittsburgh Homebuilding Report

Pittsburgh Housing is Healing, Commercial Contracting Declining

Single family detached housing starts rose more than 16% compared to last year during the first half of 2010, according to the Pittsburgh Homebuilding Report. The pickup in new home permits in May and June is the first positive sign in almost three years, and it obviously was happening without aid from the tax credit. More than just the volume increase – which was fairly small – the better sign was seeing builders who had largely disappeared for a year or more get some new business.

During the January through June period 810 permits were issued for single-family detached units, up from 697 during the same period last year. Attached units declined more steeply, with 325 units started compared to 614 during the first half of 2009.  The overall housing construction market was down 13.4%.  

Tempering the optimistic side of the data is the surprising drop-off in attached housing. The numbers last year included the permits for a large market-rate Hope VI project so that may have skewed the 2009 numbers; however, the demographics really favor this kind of product so you might expect to see a recovery in villas and quad homes first.

Non-residential construction was down 13% compared to the same period last year, but contracting volume was up over 200% from the first quarter of 2010.  Contracting during January-June was $1.13 billion, down from $1.3 billion in 2009.  Most of the larger projects started were publicly funded so far this year. During the past 45 days or so there has been an improvement in the amount of private sector projects being bid but the market remains hypercompetitive and there are fewer opportunities for the larger firms in the region.

 The improved global economic picture has helped manufacturers pull the trigger on some of the large industrial projects that have been pending. AK Steel has contracted its $140 million upgrade and USS Clairton Works is preparing to start roughly $450 of the $1 billion it has planned to invest in its coke batteries. Allegheny Ludlum selected an engineer for its mill equipment, which should signal the renewal of their plans for a new $1.2 billion plant in Brackenridge. Even with the industrial projects included the volume for 2010 should remain below $3 billion.

The top municipalities for new permits:

Municipality #SFD #SFA Total
Single-Family Detached      
Jefferson Hills 41 8 49
Peters Township 38 0 38
South Fayette Township 37 7 44
Adams Township 36 24 60
Cranberry Township 36 22 58
Moon Township 34 6 40
North Huntingdon Township 29 4 33
Franklin Park 27 4 31
Pittsburgh 26 37 63
Robinson Township 26 0 26
Single-Family Attached      
Pittsburgh 26 37 63
Chippewa Township 3 28 31
Adams Township 36 24 31
Ohio Township 24 23 47
Cranberry Township 36 22 58
Total Pittsburgh MSA 2010:2 810 325 1,135
Total Pittsburgh MSA 2009:2 697 614 1,311
% Change 16.2% -47.1% -13.4%
By County SFD SFA Total
Allegheny 385 175 560
Beaver 61 40 101
Butler 117 58 175
Fayette 21 0 21
Washington 112 30 142
Westmoreland 114 22 136

Hill International Acquires dck Construction Mgt. Division

It’s not a big deal but Hill International (NYSE:HIL) announced July 7 that it has acquired the Construction Management Division of dck worldwide, LLC. Terms of the transaction were not disclosed.

The Construction Management Division of dck worldwide, with approximately 90 employees, provides program management, agency construction management and construction inspection services primarily on transportation and building projects in Pennsylvania, Ohio and Florida. This group primarily provided non-contracting services. dck’s construction groups, which will still perform construction management contracts will remain unaffected by this transaction.  No formal announcement was made by dck as to the assignments of the CM Division employees in their Jefferson Hills offices.

On the regional level dck has been more active in the past year, competing for the kinds of projects that the former Dick Corp. would have built in the institutional and commercial sectors.  The company is currently bidding on a $10 million ambulatory center for Canonsburg Hospital, a $200 million youth detention center in Baltimore, the $100 million second phase of the FBI building in Clarksburg and the $15 million Uniontown-Brownsville maintenance facility for the Turnpike Commission.

Acquisition News

Monday, June 28 saw the announcement of two acquisitions for regional construction industry firms L. Robert Kimball and Traco.

Philadelphia-base CDI Corp. (NYSE: CDI) acquired L. Robert Kimball & Associates to add architectural and engineering infrastructure services to its Engineering Solutions group. CDI Engineering Solutions provides engineering to the aerospace, government services, infrastructure, life sciences and process/industrial markets. The acquisition is expected to be accretive to CDI’s earnings in the third quarter of 2010.

Jeff Kimball will remain in his role as president of L. R. Kimball and will also serve as new senior vice president of CDI Engineering Solutions. L. Robert Kimball & Associates will continue to do business separately and will remain headquartered in Ebensburg PA.

Alcoa Inc. announced that it has agreed to acquire commercial window and door maker Traco Inc. of Cranberry Twp. The deal provides the aluminum maker with opportunities to increase its product line in the building and construction industry.

“Traco’s strong brand and product lines are well-known throughout the commercial building market, and we look forward to helping the brand continue to flourish,” said Glen Morrison, president of Alcoa Building and Construction Systems, in a statement.

Morrison will oversee Traco operations when it becomes part of Alcoa’s building and construction business. Alcoa will continue to market products under the Traco name, a spokesman said.

Alcoa, which has its corporate center on Pittsburgh’s North Shore, anticipates it will be completed by Sept. 30, pending regulatory reviews.

A Busy Friday for Bid Results

It’s been more than a year since the bid market has been anything but brutal and May 14 wasn’t any different but there were at least some exciting results.

This morning ALCOSAN opened bids for its $25 million maintenance facility and received nine bids from general contractors, including all of the big guns in Pittsburgh. The low three were PJ Dick, Mascaro and Rycon, with PJ finishing low at $17.3 million.

Also on the 14th came the letters from Slippery Rock University announcing the successful contractors on its $27 million new Student Center. This project has been the center of much controversy over the past few months because SRU used a modified version of the state’s best value process to select contractors for general, mechanical and electrical trades, none of whom were the low proposer the first go-round. As a result of legal protests the project went out for another best-value round in March and the same general, Mascaro Construction was selected. With protests being filed again (and rejected) during the bid period this time it is not a forgone conclusion that the project will now proceed, but the results certainly capped off an interesting day at Mascaro.

Housing Starts Spike, Commercial Contracting Continues Decline in 1st Quarter

Permits for single family detached homes spiked steeply during the first quarter of 2010 in metropolitan Pittsburgh, mirroring the pattern that is developing nationally. “It’s tempting to look at this increase in volume as the first signs of a turnaround, but we have to remember that the activity level is still about half what has been normal for the past 15-20 years,” warns Jeff Burd, president of Tall Timber Group, who conducted the research.
During the January through March period 376 permits were issued for single-family detached units, up 48% from the same period last year. Attached unit permits declined almost as steeply, with 138 units started compared to 241 during the first quarter of 2009. The overall housing construction market was up 3.8%, however, the first increase in almost two years.
Residential market conditions are improving and there are some multi-family projects in the pipeline for the first time in several years, probably in response to the rental demands from Marcellus Shale firms and the availability of financing for these projects ahead of other segments of the market. Tall Timber Group forecasts that the multi-family and attached sector will catch up to 2009 levels by the third quarter, and sees single-family detached volume as improving year-over-year at a more subdued level than the first quarter, forecasting a 30% increase for the full year.
Non-residential construction was down almost 27% from last year, but contracting volume was higher than expected given the slowdown in design commissions during the spring/summer of 2009. Contracting during January-March was $371 million, down from $471.5 million in 2009. As expected, publicly funded construction made up the bulk of the volume, and competitive pressures continue to bring pricing down on bids.
Tall Timber still forecasts around $3 billion in construction for 2010, although roughly one-third of that will come from upgrades at two steelmaking facilities, the AK Steel plant in Butler and the USS Clairton Coke Works. Pure commercial development remains depressed by lower demand and continued difficulty in obtaining favorable financing. “March did bring some good signs that the ‘new economy’ sectors – especially energy and healthcare – were beginning to generate higher space demand; and while financing conditions are still tough it has become clear that the dry powder of cash is starting to look at real estate again,” says Burd.

Tough Markets Breed Controversy

The recession has been less severe in western PA but it is real. One of the byproducts of tighter conditions is increased competition & therefore more angles played & corners cut. Bids have been coming in well below budget on most projects for a year, although architects/developers have now moderated those budgets down to meet the expected market. Still, when the low contractor is 10-15% below the mean (or often the second low bid) that usually means that he has an angle or corner the architect/developer hasn’t considered.

This can be a more creative solution to the problem of building the job but often it means doing a better job of finding the holes in the documents to be exploited later, or counting on the conditions to create enough confusion or slow response to RFI’s that delays (and claims) will follow. Neither of these are good things for the owner.

Add to that now the gulf that is growing between the revised AIA 201 contract documents (a historical standard for construction contracts) updated in 2007. The revision was the first not endorsed by the Associated General Contractors of America because there are several revisions that attempt to shift the risk of uncertainty in documents to the contractors without compensation & that put the onus for interpreting design intent on the contractor not the designer.

Locally that has led to some interesting documentation on project plans & specs. In the case of the $80M Bethel Park HS there were notes on the addenda drawings to the effect that the drawings were to be considered a convenience for bidding & that the architect wasn’t responsible for the accuracy of those drawings. There was also an interesting mechanical spec section that stated that the specs were intended to outloine the best system available but the contractor was to figure out if something else was better. In the case of Montour’s $45M project the bidders were asked to sign a document that certified that they understood the documents to be an accurate representation of the architect’s intent, which would effectively close the door on future “re-interpretations” of the intent.

(Montour bid March 30 and came in just under budget. Yarborough Development was low at $23.948M on the general. The other bids were Burchick at $25.189M & Mascaro at $25.198. None of them verified the accuracy of the documents as was requested in the documents. See the complete results at the Pgh Builders Exchange

These changes in documents are an understandable attempt by archtiects to deal with a trend that has resulted from their dealing with tighter competitive conditions for some time. Tighter fee structures and unrealistic expectations from the clients have resulted in less and less complete plans over the years. Contractors have exploited those incompletions to create change orders (mostly a reaction to their own competitive pressures) so this change in language to shift the risk of the owner’s expectations to the contracting side of the table is meant to reverse the trend. Contractors don’t have a professional liability or the training to interpret owner’s intent into a design, however, and this strategy isnt likely to hold up when challenged in court.

The Montour project will be an interesting test. Roughly half the bidders chose not to verify the accurate intent of the documents statement, including several of the low bidders. If the district accepts the bids as is there will be no incentive for similar disclaimers to be included. If the district decides to reject the bids that did not consent to the disclaimer there will have to be a re-bid of a job that has already bid twice over two years, and that was in under budget. The politics of that will be interesting.

School board members are volunteers, often with a single issue ax to grind. Rejecting these bids will cause a hailstorm from taxpayers & the rejected bidders will probably sue. That would test the risk-shifting pretty quickly. Stay tuned to the local news….