The National Association of realtors and CBRE Econometric Advisors joint report on the state of national office occupancy released its analysis of the national and regional markets earlier this week, and Pittsburgh emerged as one of the top five markets
Higher unemployment over the past 18 months has been the primary culprit in the steadily rising vacancy rate, which is now resting at 16.9% as a national average. The vacancy rate continues to exert pressure on rents, which the research found had fallen $2 on average.
The news is not unexpected, and while negative, there is solace in the fact that the vacancy increases are coming almost entirely from the dimished demand for space instead of overbuilding. With the exception of a few markets, office construction was not much ahead of demand as the recession deepened through 2009, and financing was virtually unavailable to build new.
Locally, the news was brighter. The Pittsburgh market vacancy rate declined compared to fourth quarter 2009 and was the fifth lowest in the nation at 11.5%. A low concentration of national financial institutions and the hot energy sector, along with UPMC’s expansion downtown, and very little new construction are keeping vacancy rates low. Because of the character of the offices regionally, the effective rate (meaning the amount of marketable contiguous space) of vacancy is even lower. In several key submarkets – Cranberry, Oakland, Southpointe – there is almost no vacant office space, and what is vacant is still under construction and leasing quickly.
While this is good news for the region, the downside is that with financial markets still stalled, and with little presence of national developers, a growing number of office end-users are finding it difficult to shop for space. There are several medium sized build-to-suit opportunities that could be lost because the developers may not want to accept borrowing conditions as they currently exist. It’s not the worst problem to have but it’s a problem nonetheless.
On March 5 the state’s Department of General Services (DGS) issued revised Request for Proposals for the first two of the remaining four state correctional institute expansion projects that were held up from contracting last summer and fall. Best value design/build proposals will be taken for the $14.5 million, 200-bed expansion of the SCI-Forest in Jenks Township, outside Marienville and the new 1000-bed, $181.5 million unit at the SCI-Benner (formerly known as Rockview) just east of State College.
Technical proposals were due back for Forest on April 6, with cost proposals due May 11. For the Benner facility the technical proposals are due April 13, with costs due May 25.
In response to judicial decisions regarding overcrowding, the Department of Corrections is utilizing the DGS best value procurement system, adapting it to a design/build delivery system. Design/build is most efficiently delivered under a single contract and DGS is satisfying the requirements of the Separations Act by mandating that the successful construction manager/design builder take separate bids from HVAC, plumbing and electrical contractors.
Several hurdles still exist for the prison projects. One main problem is budget. While the SCI-Forest project has likely been given a maximum cost that exceeds the actual cost (similar “butterfly” units bid last year at about $11 million each), the SCI-Benner maximum cost of $181.5 million was 20% below the level of the median original bids last summer. Because the ground rules have changed, requiring design/build proposal teams to bond that their proposals are below the maximum cost before bidding, the possibility exists that few or no teams will risk that surety unless some significant reductions in scope are apparent in the early reviews of the plans.
Additionally, the delivery system of the project is abnormal for PA public bidding and could potentially be challenged, even though the process was thoroughly vetted by DGS, the Governor’s office and the state’s attorney general’s office. Project labor agreements have been made optional, which makes labor an opponent; and, the lack of separate contracts held by the owner (the Separations Act will be satisfied by having the design/build team take separate HVAC, lumbing and electrical bids) could give the mechanical and electrical contracting associations a reason to protest or challenge legally.
Whatever obstacles, if any, arise will need to be ironed out on this round of bids so that the two remmaining prison projects can proceed without encumberance.
Proposals for the 2,000-bed, $400 million expansion of SCI-Graterford in Montgomery County should be taken later this spring. Site selection for the $200 million SCI-Fayette expansion is being finalized and design/build proposals will be requested later in 2010.
Moody’s Economy.com released its housing market forecast for 2010 and the results were glum for most of the nation, with only one of the 100 largest metropolitan markets forecasted to experience price appreciation.
Mark Zandi, chief economist for Moody’s Economy.com pointed to the sluggish employment picture and the stubbornly high foreclosure rate as factors that will keep the overall housing price down for another year in 2010. Zandi expects that another 2.4 million houses will have to clear foreclosure in 2010, and predicts that will be too much downward pressure to offset recovering markets. The good news is that Moody’s expects this year to be the last of the decline.
“It’s clear we’re closer to the end of this crash than the beginning,” says Zandi. Housing is more affordable, and construction is still low, so sales will eat up excess inventory. “We’re moving in the right direction, and that’s reason for optimism,” he says.
Pittsburgh’s appreciation is a reflection of the stability of the region, which also means that the market did not enjoy the unsupported price appreciation that occurred in other regions in the middle of the last decade. Like eight of the other ten best markets, Pittsburgh’s median price is still below $140,000.
According to Forbes, “For a housing market to be attractive it should have appreciating prices that show homeowners are making wise investments; an affordability rating that gives middle-class families with good credit entry into the market; and a relatively low number of foreclosures, which keeps prices stable and indicates there isn’t an excess of inventory.”
New house permits in metropolitan Pittsburgh jumped 41.2% in the fourth quarter of 2009, compared with the last quarter of 2008. This is the first indication we’ve seen in two years that the levels of new construction may be ready for a year-over-year increase. Permits for housing units started in October through December totaled 815, versus 577 during the same period in 2008.
Activity levels are still terribly low compared to the historical norms. Even with significantly higher activity in the fourth quarter the number of single-family detached homes started in 2009 was 1517, the lowest for any year since we began tracking activity in 1994. That volume represented a 24.4% decline compared to 2008 starts. The overall housing market fared better, however, with total units permitted (including attached units) declining 16.2% to 2,807.
The outlook for 2010 is brighter, but not sunny. The depressed level of activity in 2009 almost certainly represents the bottom of the market. Local builders have cut their activity and supply remains close to demand. The extension of the tax credit, and improving overall economy should provide enough additional demand to boost new construction comfortably above the 3,000-unit level in 2010. The top municipalities for new construction in 2009 were:
Municipality
#SFD
#SFA
Total
Single-Family Detached
North Huntingdon Township
81
12
93
Peters Township
67
2
69
Jefferson Hills
64
0
64
South Fayette Township
62
8
70
Adams Township
59
73
132
Moon Township
54
16
70
Richland Township
52
32
84
Cranberry Township
51
46
97
Pittsburgh
51
244
295
Ohio Township
46
27
73
Single-Family Attached
Pittsburgh
51
244
295
Town of McCandless
5
219
224
Adams Township
59
73
132
Ross Township
5
69
74
Cecil Township
32
51
83
Total Pittsburgh MSA 2009
1,517
1,290
2,807
Total Pittsburgh MSA 2008
2,006
1,342
3,348
% Change
-24.4%
-3.9%
-16.2%
By County
SFD
SFA
Total
Allegheny
660
873
1533
Beaver
109
18
127
Butler
185
168
353
Fayette
88
2
90
Washington
217
171
388
Westmoreland
258
58
316
Non-residential construction plunged predictably in 2009, with $2.4 billion contracted for the year, a decline of more than one billion dollars, and 31%, from 2008. Contracting slowed dramatically in mid-year, as did planning for new construction. Like housing, non-residential contracting showed some renewed life in the fourth quarter, and bidding activity has been livelier in early January than normal.
Financing remains a key to seeing a commercial construction recovery take shape. There are lots of indications that the global economy is recovering from the financial crisis, and our region seems to be heading in the direction of where the new economy’s jobs will be; however, the financing climate is still not where developers want it to be to make their risk/reward expectations make sense for new development.
Since moving to the region in 2006, Google has grown its operations to over 100 people in Pittsburgh, a capacity that required it move to space in the newly constructed Bakery Square in East Liberty. One of the original tenants in the Collaborative Innovation Center on Carnegie Mellon’s campus, Google was looking for more than double its original lease and found 44,000 square feet in the Walnut Capital development, which has redone the old Nabisco bakery on Penn Avenue.
Said Andrew Moore, Google’s site director in Pittsburgh, “The city of Pittsburgh is a world center for computer science and so it makes perfect sense for Google to have the increased commitment represented by this move. We are so excited about the feel, location and history of Bakery Square — just the right kind of place for this growing bunch of creative software engineers to be building some of the next generation of Google products.”
“We are seeing our vision of the Collaborative Innovation Center come to fruition — to serve as a landing zone where businesses can flourish and grow in the region. One of the consequences of our success is that Google Pittsburgh continues to grow and is now moving to Bakery Square, where it can continue its expansion…” said CMU president Jared Cohon. “This is another example of how university-industry partnerships develop innovations that spur economic growth.”
Just before the holidays there was a furious one-week process completed to select a design and construction team for the project’s $4 million tenant improvement in the spring. Google interviewed a small group of contractors and architects, selecting A. Martini & Co. as contractor and Strada Architecture LLC to do the design.
Most of the national economic news at year-end is trending positive, and indicators for 2010 are for continued growth, although at a slower pace. The national economic picture is unfortunately brightening at the same time the regional market is entering the trough point of the recession.
Local architects and engineers were reporting very noticeable drop-offs in RFP’s and new commissions last spring and summer, and the reflection of that decline will be felt during the next three to six months. IKM partner Joel Bernard remarked on his firm’s status, which seems to be typical, “We may not have one project in construction documents right now,” he said. “All of our work is either in construction administration or preliminary stages of design.”
While the hole in the bid market seems temporary, the overwhelming sentiment on the front lines has turned decidedly negative. Layoffs have occurred at many contracting firms, just as they did at architectural/engineering offices all summer; and the pool of available labor is growing for the first time in nearly half a decade.
One source of objective data, the Pittsburgh Builders Exchange bid calendar, is showing that the negative sentiment may be oversold. Researching the number of projects bidding at year’s end showed 186 projects with bid dates in December. While that isn’t a project volume that will create a labor shortage it is 40% more work to bid than the 133 projects that bid in December 2008.
Whether or not the prevailing sentiment shifts toward recession or recovery, one reality is that the slowdown in contracting in the second half of 2009, and the prospect of a lighter-than-usual bid schedule in the winter/spring of 2010 makes for a tough start to the New Year, with backlogs lower than in a number of years. Those companies which were able to build backlog have done so in a more competitive environment, and likely at lower margins than desired.
A hallmark of the regional market at this stage of the business cycle is the intensity of competition for the projects that are available. A sampling of projects recently bid gives a good indication of how bid lists have lengthened.
• A $4.7 million first floor build-out at the WVU Biomedical Research Center attracted 14 bidders, including generals from Pittsburgh, Maryland and Washington DC.
• Heritage Valley Health Systems bid several projects in November and December. The hospital system historically bid their projects to two or three contractors, with two pre-qualified subcontractors for mechanical and electrical trades. The recent projects involve six invited contractors and almost a dozen subs.
• The Penn State Gary Schultz Child Care Center, a $7 million building, was bid by 13 contractors, including firms from Pittsburgh, Chambersburg and Harrisburg. A similar size project in early 2008 drew four bids from local contractors only.
This kind of market condition can be exciting for buyers of construction services, at least on bid day. For owners experienced with hyper-competitive bidding environments this kind of action also means much more work after the contracts are let, as contractors and subs will have no room for flexibility or interpreting intent and won’t be likely to pass up opportunities to regain reasonable margins. In the public arena, tighter bidding means that claims and change orders will be daily headaches.
Residential construction in 2010 is set to pick back up, but the activity levels will remain anemic by historical standards. Single-family detached homes should again break above the 2,000-unit level but that volume remains well below the 3,600-plus units started at the high water mark in 2003.
Housing permits declined 24% in Allegheny, Beaver, Butler, Fayette, Washington and Westmoreland counties.
Nonresidential contracting volume was likewise off in 2009, with approximately $2.6 billion in total value. Missing from the mix in 2009 was the number of large projects that had begun in the preceding few years. Had one of the steel mill projects proceeded, however, the total volume would have masked the decline in overall opportunities. Assuming that one or more does get underway in 2010, the increase year-over-year will not be reflective of what will be a tough year for commercial construction.
Contracting in the seven-county metropolitan statistical area pulled back in 2009 after a four-year growth run.
There were a variety of reports within the past week that seem to verify that the national economy has come off the mat and that the root causes of the recession are being remedied. Much potential exists for a second leg down for the stock markets, another fainancial market slide or implosion if the institutions have been hiding big losses and hoping for growth to cover them, but at least there is good national news.
Third quarter GDP was 3.5%, better than the 3.1% predicted. Cash-for-clunkers, ARRA accounted for much of the growth, however, so fourth quarter numbers should be tepid, maybe even negative. The Obama administration claims 3M jobs were created/saved, but unemployment has crested the 10% mark.
Housing market news is better. Total state existing-home sales, including single-family and condo, increased 11.4 percent to a seasonally adjusted annual rate of 5.3 million units in the third quarter from 4.76 million units in the second quarter, and are now 5.9 percent above the 5.01 million-unit pace in the third quarter of 2008.
Sales increased from the second quarter in 45 states and the District of Columbia; 28 states and D.C. saw double-digit gains. Year-over-year sales were higher in 32 states and D.C.
Financing for commercial development is showing life for the first time in more than a year. Several large insurance companies have alerted the brokerage community that their money is back in the market and are looking for deals. For developers the down side is the deals are not going to resemble anything like recent years, but most are willing to go 75% loan-to-value, a significant increase over the willingness to extend this spring. The estimates are that money coming back into play approaches $1 trillion
The most significant event of recent weeks was the Developers Diversified CMBS issue of $400 million, which sold out overnight with a reduced risk premium of 140 basis points on AAA bonds, compared to the 200 BP that was offered initially. The AA-rated portion of the bonds carried a yield of 5.75% and the A-rated portion was 6.25%. These aren’t substantially different from what was offered during the heyday of CMBS sales in 2006-2007. The assets backing the securities were retail properties which were government guaranteed under the TALF program. This isn’t a return to normalcy in the CMBS market but it clearly demonstrates demand for the products, and is at least the first issue in 18 months.
Pace of unemployment has slowed nationally, now around 200K jobs instead of 600-700K jobs in spring. Closer to home, October’s unemployment was flat in PA, with the actual number of people working rising slightly. In western PA the unemployment rate still rests more than 2% below the national rate
Finally, the most recent quarter’s numbers from the National Association of Realtors showed the prices rose in the Pittsburgh area, where the median price in the third quarter was $124,600, vs. $122,700 in the same quarter last year. Housing starts remain low in the region, which will support current housing prices by keeping inventory low.
None of this represents robust market conditions, but all of the data is consistent with what happens during the first quarters of economic recovery. Keep your fingers crossed for no more unexpected calamity.
The effects of the global recession have gripped the non-residential construction market in western PA as the fourth quarter of 2009 begins. Contracting during the first three quarters of the year was down 26.6% from last year. Non-residential construction during January-September was $1.98 billion, down from $2.7 billion during the same period in 2008. “The pace of bidding was about normal for late summer but the average size of the opportunity was much lower,” says Burd. “The pipeline of projects being proposed is improving, but the competitive pressure on contractors to build backlogs is showing in bids. The tight market will continue through at least the first half of 2010”
Reduced global demand has dampened the plans for almost all of the big projects slated to start in 2009, and profit pressures on corporations, combined with poorer results from the institutional sector has limited capital expenditures across the board.
Single family housing starts fell more than 32.3% compared to last year during the nine months of 2009, but that volume represents an improvement over mid-year levels. “While there was probably some goose to the market from the $8,000 tax credit, most of the improvement came in September, which would be too late for most buyers to start and close on a home in time,” said Jeff Burd, President of Tall Timber Group. “I expect that the decline will continue to narrow as the next six months proceeds, both because the October to April period last year was so slow and because demand is recovering.” Burd cited reports from the annual Builders Association of Metropolitan Pittsburgh (BAMP) Festival of Homes, held in late September, of higher than average traffic as reinforcement to anecdotal evidence of an uptick from individual realtors. “There is still a long way to go before we see a return to the normal pace of home construction, however,” cautioned Burd.
During the January through September period 1,090 permits were issued for single-family detached units, down from 1,609 last year. Attached units also declined, with 807 units started compared to 1,056 during 2008. The overall housing construction market was down 28.8%.
Tall Timber Group, based in Ross Township, is a research and consulting firm for businesses marketing in the construction industry. Founded in 2000 Tall Timber is also the publisher of BreakingGround magazine. 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:
There was a great seminar Aug. 27 held by the Master Builders’ Association and NAIOP Pittsburgh on the proposed amendments to the Mechanics Lien Law. The seminar was presented by Dick Donley of Chaska Properties and Mike Klein from Blumling & Gusky LP, and moderated by the bill’s sponsor, Rep. Mike Turzai (R-Allegheny).
Turzai is introducing HB1960 next week to update the Mechanics Lien Law. Amendments to the laws in 2007 established a process for contractors/subcontractors to file a lien for monies due them against the real property where they performed work. The legislation introduced by Turzai maintains the basic concepts of the current law but incorporates a new provision for “notice of commencement” by owners, and “notice of furnishing” by the sub or supplier. This option allows the owner to file a notice of commencement with a local prothonotary; this notice would require that all subcontractors file a notice of furnishing with an owner within 30 days of either the filing of the notice of commencement, or within 30 days of first performing work on the owner’s property. The notice of furnishing protects the subcontractor’s rights to lien. Failure to file a notice of furnishing would void the right to lien by the subcontractor, sub-subcontractor or supplier.
Owners will not be required to file a notice of commencement under the proposed legislation, and subcontractors will not need to file a notice of furnishing on projects for which the owner did not file.
The purpose of the “notice of commencement” process is to allow the owner to know exactly who provided services or products for a project, and thus protect themselves from liens which might be filed by subcontractors whom the owner was not aware of. This process would allow an owner to insure that the contractor paid all subs on a project before they receive final payment. The modifications would not diminish the lien rights of subcontractors or suppliers, but is designed to ensure that owners are not forced to pay twice for a subcontractor whose work in progress has already been paid to the general contractor.
Donley expressed concerns about the owner’s liability for defaults that he was not aware of. Klein echoed the sentiments, and provided some insight into the need for the amendment. Klein noted that prior to the amendment in 2007 a mechanics lien filing was a once or twice a year thing, but that now liens are filed by the dozens each month. All parties stressed that no revision seeking to reduce the right to file liens was being proposed but that the need for the changes came from the hurried process of amending the law in 2006, a process that didn’t include owners and developers at the drafting table.
Donley proposed another interesting twist that may find its way into the legislation in coming sessions. One of the law’s provisions is that there is a 6 month window after completion during which a lien can be filed. While that window of time is open developers can’t convert their construction loans to permanent financing. With an amended law that requires all subs to file a notice of furnishing, owners can be certain that everyone is paid, and get waivers of liens from all subs and suppliers who have been paid. Donley’s point is that the 6-month expiration would become moot once all subs who filed were paid, and waived the lien because of payment. His assertion is that the statutory limit could expire once the payments could be verified.
Perhaps the most persuasive argument came from Mike Klein’s comment that doing real estate business in Ohio was a breeze compared to PA, because their legislation included these provisions. When a lawyer tells you how much less time it takes, everyone should listen!
Now that the logistics of the G-2o Summit are becoming known the feeling around town is a little like that after a big party. The celebration is over and the hangover is setting in. It’s important to bear in mind that the economic impact of the G-20 selection is more about the signal being selected sends and the attraction of business opportunities that will follow.
Unfortunately, the summit itself will not feel like a big benefit. The mainstream media, in its never-ending effort to focus on negative angles, has written of late about the deliterious effects on nearby restaurants and retailers, many of whom probably thought they would get a business boost from the delegates & hangers-on. The security measures, particularly in a post-9/11 world, are going to be amazingly stringent, and that has meant that almost all businesses near the downtown corridors will actually be closed. In part this is for convenience, but mostly it’s because transportation (even public transit) will be locked out of almost all the central business district.
Even more disconcerting is the fear of potential damage from the protestors. Anecdotes about foreign tourists taking a too-keen interest in some of the roof-tops in the Cultural District are seeping out, and the history of the protests from recent G-20’s isn’t heartening. They tend to be violent and destructive to property. With so many cultural gems located near or in the G-20 security lockdowns, it would be unfortunate if the past performance repeated.
These unfortunate realities aside, remember that the selection of Pittsburgh has been very beneficial. After the initial response (did they really say Pittsburgh?), the selection has caused thousands of media and business to research why Pittsburgh was chosen. This has lead to a raft of stories wourldwide about how cool, progressive, etc the region is, and has increased inquiries about business location here.
There is a legitimate concern about our ability to put our best foot forward when we have to abandon some of our showcase areas to security. One of my friends, attorney David Hickton, asked the question “will Pittsburgh end up looking like Rock Ridge?” (great Blazing Saddles reference). The answer is probably yes, but if we get lucky with the protestors, it’s far more likely that the aftermath will bring lots more interest in the city. This will mean more visitors for leasure and more businesses for the long haul.
For some help in dealing with construction during the the Sept. 23-25 lockdown period, the Master Builders’ Assoc. of Western PA has put together a great guide for planning. You can access it at http://www.mbawpa.org/MBA%20G-20%20Guide.pdf
It’s going to be a pain in the neck period when the world’s leaders are here, but for the big picture it will be better to be in the spotlight for a little while than to watch some other city suffer through it.
