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An Outlook for Construction Costs in 2020

Posted on January 30, 2020 | Leave a comment

Anybody who works in the construction or real estate industries understands that construction costs are rarely (if ever) static. Going into 2020, construction costs are less volatile than they have been over the past decade, but certainly won’t be static. So how can the commercial real estate industry adjust its outlook for changing costs? How will construction costs drive the market value of new and existing commercial real estate? Will construction costs continue to rise or is there an end in sight?

Understanding these and many more questions will give us a reasonable outlook of construction costs when it comes to commercial real estate and other sectors in 2020 and beyond.

American Construction Outlook for 2020 and Beyond

Understanding the overall outlook for the construction industry is a key piece of understanding construction costs. The Dodge Data & Analytics report titled “2020 Dodge Construction Outlook” was put out in late 2019. This report attempts to give a comprehensive report on the construction industry within all sectors in North America. Here are some highlights of that report:

Total construction is expected to fall to $776 billion in 2020. This marks a 4 percent decrease year over year compared to 2019.
The recovery process that began after the Great Recession of 2007-09 is nearing its end. This is good and bad news, as the construction industry has finally returned to normality, yet it also means that construction will likely scale down over the next few years as the market steadies itself.
Dodge Data & Analytics estimates that commercial real estate value will dip approximately 6 percent in 2020. The hardest hit are likely to include hotels and commercial warehouses.
The trend of commercial real estate growth in the energy and tech industries (such as data centers and other high security, high value tech facilities) looks to continue and grow in the coming years.
Commercial real estate for multifamily units are expected to take a large hit as well, with estimated drops to be between 13 and 15 percent in 2020. (This take isn’t held across the board with prognosticators. Most expect volumes closer to 2019’s.)

Construction Costs Outlook in 2020 and Beyond

The above report does not paint a particularly rosy picture for the commercial real estate industry overall. But what about construction costs in particular? Let’s examine some key questions and answer them going into 2020.

Will Construction Costs Increase in 2020?

While there is not a consensus on this topic, many construction experts feel that construction costs will slow their growth 2020 for the first time in many years. Year over year construction cost increases have been in the 5-6 percent range for commercial real estate projects for the past decade. As part of the levelling out referenced above, construction costs may actually slow to around a 2-3 percent increase moving into 2020 and over the next few years. This is partially due to a slowing construction industry, a flattening of real estate values, and many other factors.

Of course, all of these are merely projections. The price or permitting, entitlement, construction commodities, and labor are always changing in complex and impossible to predict ways. While there is no way to accurately predict construction costs, many signs point towards 2020 being a relatively stable and cost-effective year.

Will the Price of Construction Materials go up in 2020?

The materials price index (MPI) fell approximately 12 percent between Q1 2018 and Q4 2019. This is just one way to measure the prices of construction materials over time. Cumming Insights posits that this downturn is due in large part to trade uncertainty between construction powerhouses U.S. and China. Steel prices have been steadily dropping in recent years as production has outpaced demand, and this trend is likely to continue in the foreseeable future.

However, the cost of many construction materials are still expected to rise according to some industry experts. While prices of steel, copper, and aluminum have been slowly falling, they will eventually flatten and recover. The costs of commodities such as lumber and gypsum will likely increase in 2020 and beyond. Lumber in particular took a sharp 10 percent cost decrease in a year’s time. That trend is expected to reverse and normalize this year.

Construction Labor Costs in 2020

There is a labor shortage in the construction industry. This and a number of other factors have led construction workers to enjoy an average pay increase of 3 percent year over year, well above the standard for all American workers. This shortage is due in part to a rapidly aging/retiring workforce with a lack of young workers to take their place. In fact, this lack of skilled employees is actually keeping labor costs for construction work manageable. If there were more skilled, experienced construction workers, that 3 percent number would likely be even higher.

Going Forward

Predicting the future is something that is both impossible and necessary to do for commercial real estate and construction industry veterans. All the detailed reporting in the world won’t do us any good if it is wrong. Yet understanding industry trends prepares us for the coming months and years of construction projects. All signs point to 2020 being relatively stable when it comes to construction costs. Labor will continue to rise while commodities will fluctuate at different rates. Construction costs will almost certainly increase year over year, just not to the same degree as we have seen in the past.

A Chill in the Pittsburgh Office Market

Posted on January 29, 2020 | Leave a comment

Sometime in October every year, there’s an afternoon when you feel the wind blowing colder. It’s not quantifiable but it’s a chill that you know means fall is serious about setting in.

This past week or so, there was a similar chill in the air about the Pittsburgh office market. This time of year is when all of the real estate service firms issue year-end reports and it looks like 2019 was a year when the metrics slipped into more troubling territory. The 2019 reports are hardly bad news. Net absorption was positive, ranging from around 100,000 square feet to almost 300,000 square feet, depending on which report you read. (That’s a matter of when the researcher times the construction and completion, which varies.) Positive absorption in the face of record office construction is a strong signal. Rents grew again. But there were a couple of yellow signals.

Occupancy declined again, this time getting to mid-double digits. There have been some big spaces coming onto the market over the past few years, especiialy in One Oxford and 525 William Penn Place, and some significant sublease spaces. The effect of that has been to create higher vacancy, especially in the Central Business District (CBD).

Grant Street Associates/Cushman & Wakefield has the direct vacancy rate for Class A CBD at 13.9%. Newmark Knight Frank has it at 18.3%. (NKF excludes owner-occupied buildings from the calculation since they aren’t on the market.) JLL puts direct vacancy at 14.6% in the CBD.

The data, along with the national reports like CoStar’s, has made some of the brokers, lenders, and developers nervous. There are still great economic stories coming from Pittsburgh but with flat job growth, you may see a chill in the speculative office market, especially after the next couple of major projects get underway.

Speaking of the next major spec office, Burns & Scalo is bidding packages for the second phase of District 15, now called Vision on Fifteenth, a 275,000 square foot building. Carl Walker Construction is taking bids on a 376-car garage for the project.

In other project news, Al. Neyer will start construction on the 100,000 square foot Astra facility for Krystal Biotech in Findlay Township. The developers of 926 Smallman Street, an 81,000 square foot, 7-story mixed use building, are going through City Planning. Dick Building Co. is the contractor.

How the Housing Shortage Impacts Commercial Real Estate

Posted on January 24, 2020March 9, 2020 | Leave a comment

It doesn’t take a real estate expert to see that housing prices have been accelerating in recent years. Ten plus years after the Great Recession of 2007-09, residential real estate prices have more than recovered in most areas across the country. In its place, a housing shortage has created a situation where many Americans struggle to afford their rent, let alone to own a home. In fact, a significant portion of the current generation of young Americans have more or less resigned themselves to the fact that home ownership is unrealistic.

What is less obvious is how this residential real estate trend has and will continue to impact commercial real estate. It is unlikely that new home construction will be able to keep up with housing demands. Will these developments help or hurt the health of the CRE industry?

The Current State of Housing in the US

Let’s first establish a few key facts. There are approximately 138 million housing units in the United States. About 80 million of these units are occupied by their owners and 43 million are occupied by renters. By most estimations, the US actually has a very healthy ratio of available housing units to individuals or families in need of residence. So what is the problem exactly?

The answer lies in the fact that key markets such as California and Austin are being crushed by demand with a limited supply. The problem is that the current supply of housing units does not align with demand when it comes to price or location. This issue is particularly bad for more affordable homes, which cost between $100k-$250k, depending on the market. This creates heightened competition for more affordable homes, which drives up prices and makes these housing units less affordable to buyers and renters.

Ironically, as young adults flee from traditional markets like NYC and San Francisco and turn to hot markets like Pittsburgh and Kansas City, they are bringing big city housing shortage problems with them. For example, Pittsburgh experienced a 16 percent drop in relative housing availability in 2019 vs. 2018.

How Residential and Commercial Real Estate Interact

Based on these trends, one might assume that the commercial real estate rental market would be booming in response. This is not entirely the case. Despite housing prices rising to near-emergency levels, rental rates in 2020 are expected to remain relatively flat. The latest year-over-year numbers put rental rate growth at approximately 1.4 percent nationwide. Again, this is somewhat misleading as some regions have experienced explosive rental hikes while others have actually seen rental rates diminish.

Another key factor in this equation is the decision making process of young renters. Millennials and the generations who are growing up behind them have shown a tendency to choose convenience and amenities over square footage and perceived value. This is due to a number of reasons, including their desire to use public transportation and a preference for urban living.

These trends have been favorable for commercial real estate rental units which are focused on offering convenience first and foremost. Well equipped rental units in urban or even “urban suburb” locations continue to see high occupancy rates in 2020. As young adults continue to struggle to afford their own homes, rental properties should remain a safe bet.

Commercial Real Estate Projections in the Coming Years

By all current metrics, our nation’s housing shortage looks to only worsen in the coming years. This is especially true in mid-major markets experiencing a tech boom including Pittsburgh. As for commercial real estate investors in the area, that means that there will be an opportunity to deliver high quality housing at premium prices for young adults who are willing to pay for high level amenities.

For example, young renters are more likely to pay a premium for rental units in so-called “smart buildings”. These types of commercial real estate units are constructed or retrofitted to accommodate desirable features like ultra high speed internet and even 5G when that is released to the public. This is in step with the advantage that CRE has over traditional residential real estate: it can adapt more quickly on a larger scale to new technologies.

The housing market may be in a strange place, but that offers an opportunity to savvy commercial real estate investors. Understanding what young renters want will allow larger rental investments to continue to be profitable for years to come.

Going Forward

It may be a running gag that millennials can’t afford to buy homes, but that reality is no joke. The wealth of our country might be held disproportionately by older generations, but younger working generations are the key to future CRE success. Where traditional thinking has valued square footage and price first and foremost, young adults today are shifting their focus towards amenities and convenience. This, coupled with the ongoing housing crisis, creates a scenario where well positioned rental properties can dominate the market.

Lower Federal Funds Rate Impacts Real Estate

Posted on January 23, 2020March 9, 2020 | Leave a comment

Like it or not, federal regulations play a huge role in commercial real estate investment, construction, sales, and everything in between. Perhaps no singular federal policy has more of a direct impact than the federal reserve cutting or raising the federal funds rate. Separate but related to the federal discount rate, the federal funds rate dictates interest charged on a number of loans. The fed has recently decided to once again cut the federal funds rate in late 2019/early 2020. The impact on real estate will certainly be felt, but this is nothing new.

With this in mind, today we define the federal funds rate, discuss the details of the latest rate cuts and a brief history of past cuts and hikes, and finally identify how these changes will likely impact the commercial real estate sector.

Understanding the Federal Funds Rate

According to investopedia.com: “The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.”

The federal funds rate can be changed as many as eight (8) times per year as decided by the Federal Reserve. The actual rate can be influenced by buying and selling government bonds or other investment securities. The federal funds rate is determined separately from the federal discount rate, but these two figures generally have a symbiotic relationship.

As part of the regulations surrounding the federal funds rate, banks and other financial institutions are required to meet reserve requirements that must include non-interest bearing accounts. This secures short term loans and provides assurances for financial institutions and loan recipients alile.

Details on the Latest Fed Funds Rate Cuts

Normally three straight fed funds rate cuts is not a great sign for the economy overall. The last time this many consecutive rate cuts took place was in 2008 amidst the housing crisis and Great Recession. The latest cuts move the effective rate from 1.75% to 1.5%.

Generally, cutting the federal funds rate is intended to spur economic growth. These cuts come at a time when more observers are predicting that a recession is looming in the next year or two. Yet not everything is doom and gloom. Opportunist investors can take advantage of low fed funds rates to secure loans, make investments, and much more. Individuals who are looking to refinance mortgages or open home equity loans are perhaps the biggest winners from these fed rate cuts.

Lower fed funds rates only impact those who are looking to open new loans or refinance existing loans. For this reason, pre-existing loans and mortgages will be unaffected by the cuts. This essentially means that those who are locked into unfavorable loan situations might want to jump on this opportunity to refinance.

How Federal Rate Cuts Impact Commercial Real Estate

There are several ways in which federal rate cuts might impact commercial real estate, including:

Interest rates can impact local property values

Commercial real estate does not exist in a vacuum.The estimated values of surrounding properties go a long way towards CRE valuations. Federal funds rate changes can impact the calculations used to determine property values. Therefore, a change in interest rate can materially impact the value of commercial real estate properties without any other changes.

Interest rates, cap rates, and the spread

Commercial real estate investment can sometimes rely on what is known as “the spread”. The spread is determined by finding the difference between the cap rate and the finance rate. As federal funds rates influence finance rates, this can make CRE investments more or less attractive over time.

Federal funds rates cuts have a trickle down effect

It would be convenient to say that fed rates have a 1-1 impact on commercial and other forms of real estate. In reality, the relationship is far more complicated. Consider the fact that rate cuts are tied closely to poor economic performance. This in and of itself has reduced the positive impact of past rate cuts. Current and future rate cuts seem like they should have a straightforward, positive impact on commercial real estate investment. This simply is not always the case. Rate cuts might boost property values, but also may reduce demand, be tied to inflation problems, and many other potential impacts which are too complex to properly describe (or understand) in a single article.

Going Forward

It is yet to be determined whether the recent trend of consecutive rate cuts will continue as 2020 progresses. Rates are already very low, and can be reasonably expected to stagnate or bounce back in the future. This may also be reactive based on overall economic performance. Metrics point to mild recession in the next few years. How this will impact the federal funds rate will certainly continue to be a major factor in the commercial real estate investment space.

Why the Next Recession Won’t be as Hard on the Real Estate Market

Posted on January 22, 2020March 9, 2020 | Leave a comment

The Great Recession of 2008 has its name for a reason. It has been measured to be the largest economic disaster in American history since the Great Depression of the 1920’s-30’s. The recession was so large that a ripple effect caused a global recession just a year later. While no industry was unaffected, the real estate market took a particularly hard hit. In fact, a collapse in the housing market and other real estate markets in 2007 was one of the falling dominos that led to the inevitable recession just a year later.

Despite all of this (or perhaps because of it), there is reason to believe that our next recession will not take nearly as significant a toll on the commercial real estate market. This is partially due to the fact that the next recession will likely not be as damaging to the overall economy. It is also thanks to administrative efforts to protect the real estate market from present and future turmoil. With this in mind, here is why the next recession likely won’t be as hard on the real estate market.

Why the 2008 Great Recession Crushed the Real Estate Market

There can be no question that any recession would be expected to have a negative impact on the real estate market. The 2008 great recession was particularly damaging to house costs, commercial real estate, and rental vacancy numbers specifically because it was partially caused by a looming housing crisis. After all, when 8.7 million jobs are lost and house prices drop by approximately 28 percent across the country, the value of real estate is going to take a hard hit.

While the housing crisis gets all the press, commercial real estate was heavily impacted by the 2008 Great Recession. It is important to understand that many of the same issues which plagued residential real estate such as lax policies from the Federal Reserve including offering so called “exotic mortgages” did touch the commercial real estate market, but not to the same degree.

The primary cause of the commercial real estate crash in 2008 was an overall recession. Less money for businesses led to lessened spending. Lessened spending led to fewer employees. Fewer employees led to fewer jobs. Fewer jobs led to less need for commercial real estate and/or developing commercial real estate projects. And the list goes on. Still, CRE is heavily tied into federal policy which has been adjusted to be more conservative in the years since 2008. More on this below.

Inevitability of the Next American Recession

It is only natural that the US will soon experience its next recession. There is no economy on earth which is immune to bull and bear markets — such is the way of any large economy. Unfortunately, many economic metrics are pointing towards the next recession coming sooner than later. Here are a few reasons why:

New York Federal Reserve recession probability model: The New York Federal Reserve is one of the most well respected authorities on predicting recessions. Their model has accurately predicted past recessions both in real time and retroactively. The accuracy and detail of this model shows that we are more likely to see a recession in 2020 than any year since 2009.

Inverted yield curve: You may have heard or read something about the inverted yield curve popping up for the first time since the great recession in 2019. Essentially, when short term yields are outperforming long term yields, that is a major red flag of a coming recession.

Unduly inflated economic numbers: The US is currently enjoying low unemployment rates. This is generally great news for CRE investors hoping that a recession is far away. Unfortunately, unemployment is not such a simple statistic. Underemployment numbers and part time employment numbers are on the rise. This is another staple of an upcoming recession.

The Next Recession Won’t be the Same as 2008 for Real Estate

Now that we have established that:

A recession will be upon us at some time in the relatively near future and
The last recession was devastating for the real estate market

Why exactly should we expect the next recession to be any different? The simplest answer is that the federal government and banking institutions have (mostly) learned their lessons. The ridiculous lending practices of the early to mid 2000’s have either been eradicated or constricted. The supplemental answer is that the 2008 was one of the most significant economic events in the past 50 years. It is extremely unlikely that the next recession will be as impactful overall. Whether we are talking about the housing market or commercial real estate, a repeat of 2008 is likely very far off.

Going Forward

The best laid plans of mice and men often go awry. Even with a looming recession, it is probably a good idea for commercial real estate veterans to go about their business as usual. The next recession will almost certainly not be the same cataclysmic event as the last one, and the real estate market is expected to remain much more stable this time around. Obviously, all recessions have an economic impact. History may not be repeating itself, but learning from our past mistakes is always wise.

84 Lumber Looks to Expand After Huge Cash Injection

Posted on January 21, 2020 | Leave a comment

84 Lumber was founded in 1956 by Joe, Norman, and Bob Hardy in the Southwestern PA town of Eighty Four. In 60 plus years of operation, the lumber company has added hundreds of locations across the country including New York, Massachusetts, Florida, and more. As part of this expansion effort, 84 Lumber has recently secured a $310 million loan which will replace a pre-existing $400 million dollar loan secured in 2016. Since that time, the company’s performance has exceeded expectations and its market competition, leading to the opportunity for a more favorable loan arrangement.

Today, we will review the details of 84 Lumber’s $310 million dollar cash injection, review the business history of 84 Lumber, and discuss the impact that this deal and ongoing 84 Lumber projects will continue to have on the local commercial real estate market.

84 Lumber Looking to Expand with $310 Million Loan

There are several key reasons why 84 Lumber’s loan restructuring is significant for the company:

84 Lumber is looking to improve their IT capabilities. Regardless of industry, information technology is a part of any large business. One of the primary drivers of this new $310 million loan is 84 Lumber’s desire to modernize their IT infrastructure to improve client relations and their internal systems.

84 Lumber wants to use funds to expand into new territories. While 84 Lumber has traditionally been a Western PA organization, it has already expanded across the country into several states. This new influx of capital will allow the company to potentially expand into new territories including Sacramento, CA and Northern Virginia.

The loan will allow for financial restructuring. According to recent reports, the final primary reason for this new loan is to refinance. “The proceeds will be used to refinance the $307.5 million outstanding Term Loan B and $400 million ABL Revolver. In addition to extending the maturities, the Term Loan B reduced pricing by 100 basis points to LIBOR plus 425 basis points. As a result of the refinancing, the company now has no debt maturities prior to 2024.”

A Brief History of 84 Lumber’s Business Expansion

To understand the significance of this new loan, we can also explore the history of 84 Lumber’s presence both locally and nationally.

84 Lumber is founded in 1956 by Joe Hardy alongside his two brothers Norman and Bob, and close friends Ed Ryan and Jack Kunkle. The initial business model was a “cash and carry” lumber yard where industry professionals and handymen could come buy affordable, high quality products. The business was modest but immediately successful.
In the 1960’s, the business experienced its first major expansion by growing their local business with new locations, bigger warehouses, and a larger inventory supply. The first years of 84 Lumber’s history involved fast yet sustainable growth.
The 1970’s saw 84 Lumber opening an additional 229 locations, expanding beyond the immediate Western Pennsylvania market for the first time.
The 80’s and 90’s were an era of revamping the 84 Lumber business model. Instead of exclusively catering to professionals, they remodeled many of their stores to make them friendlier for a broader demographic.
84 Lumber hit $1 billion in sales for the first time in 1993.
In 1997, 84 Lumber opened its 400th store.
Today, 84 Lumber is refocusing on its information technology sector to move the business into the next decade seamlessly. The company accrued $3.86 billion in sales in 2018, and continue to enjoy healthy growth.

Impact of 84 Lumber on Local Commercial Real Estate

The relationship between 84 Lumber and local commercial real estate is actually somewhat complex. On one hand, 84 Lumber contribute massively to the local economy by creating jobs, owning local properties, and generally injecting cash into the region. On an entirely different level, having the “nation’s leading privately held supplier of building materials, building supplies, manufactured components and industry-leading services for single- and multi-family residences and commercial buildings” in our backyard has a material impact on the CRE market as well.

Due to this unique circumstance, 84 Lumber is as entrenched as any local company when it comes to commercial real estate. While other organizations like PNC and UPMC may own and operate significantly more locations, 84 Lumber is a major player within the CRE industry itself. Pittsburgh commercial real estate can certainly look to 84 Lumber’s continued success and expansion with recent deals like this $310 million loan restructuring as a sign that our market will continue to hold strong.

Going Forward

84 Lumber’s steady growth and solid leadership is encouraging. With favorable loan agreements and new stores going up every year, the banks clearly agree. Having such a large commercial real estate building supply provider in Western PA offers a unique advantage to local construction crews. While the company continues to expand across the country and perhaps internationally, they retain a large presence in the Pittsburgh area and have no plans to relocate any time soon. 84 Lumber’s continued success can only be a positive sign for commercial real estate in our region.

Insurance Costs Will Jump in 2020 – For Construction Industry Too

Posted on January 20, 2020 | Leave a comment

First the good news: improvements in workplace safety have helped push losses and Workers Compensation claims lower, which is expected to keep the insurance bill at the same rates or lower in 2020. Insurance for environmental contractors is also expected to be slightly less expensive in 2020. For the rest of the insured market, not so much.

Natural disasters and unlimited liability exposure have pushed the property/casualty sector of the insurance industry into unprofitable territory. Insurance companies have done well with investments and at attracting capital in recent years. Some $800 billion in excess capital exists in the insurance industry, but the additional capital is not expected to translate into more capacity for property/casualty lines. This is in direct opposition to what is going on in the construction surety market, which has seen steady low loss ratios for a decade and plenty of capacity for higher bonding limits. Insurance industry experts see the industry conservatively deploying and investing its capital, rather than expanding the capacity for property/casualty insurance. In fact, several of the industry’s biggest insurers are debating an exit from property/casualty insurance.

The biggest culprit is catastrophic losses on natural disasters. Regardless of your politics and beliefs about the impact of climate change, the frequency and severity of catastrophic natural disasters has increased. Floods, tornadoes, hail storms, and wildfires have all caused much greater damage than in previous decades. Houston, for example, has seen two 500-year flood occurrences in the past three years.

Likewise, the frequency and severity of liability claims have increased, with insurers seeing little hope of tort reforms or limitations in the offing. Casualty claims and losses, even for companies with risk-mitigation strategies in place, have increased.

Insurers, not surprisingly, are responding to these unfavorable trends by employing more conservative underwriting standards and raising premiums. It’s easy to shake a fist at the insurance company but it’s important to realize that the premium charged an insured is a calculation of the relative risk of the activity as a whole, in addition to the judgment of the insured’s risk. In other words, if the activity – such as driving a car – has become more expensive to insure or has an increased risk in general, the insurer needs to collect more money to respond to claims. Those actuarial calculations are the foundation of the insurance business. Companies can shave insurance costs by being safer but when insurance conditions become more expensive, everyone pays.

According to USI’s Commercial Property and Casualty Outlook for 2020, insurers expect to raise premiums on most property policies between 10% and 20% for most non-catastrophic property coverage, and as much as 60% for insurance with catastrophic coverage. Auto liability insurance is forecast to increase by 10% to 25%. Excess liability will go up 10% to 25%, as will errors and omissions. The cost of public company officers and directors coverage is set to increase 25% to 50%.

Regional construction news: ALCOSAN’s $130 million North Plant Expansion will be advertised for bid at the end of January. Duquesne University selected Jendoco Construction for its $18 million St. Martin Hall renovation. Fluor has issued the second phase package of US Steel’s $900 million Edgar Thompson Works modernization. The package includes a 50,000 square foot building. Mascaro, Songer and Stevens are expected to bid. Mascaro was awarded the $12 million first phase of the work. The $10 million, 376-car parking garage for District 15 should be bid by Carl Walker Construction after January 27.

The Rise of “Urban” Suburbs

Posted on January 14, 2020March 9, 2020 | Leave a comment

We tend to think of urban areas and suburban areas as completely different entities. One is filled with skyscrapers and buslines and the other is filled with houses with picket fences and well maintained landscaping. In reality, the line between these two residential and commercial real estate areas is continuing to blur in 2020. This trend is holding true in mid major cities like Pittsburgh and large cities like New York and Boston alike. So called urban suburbs are extremely appealing to young renters/home buyers as well as businesses. This is because they mix affordability with convenience and amenities.

This trend is what has driven the surge in investment and migration to neighborhoods like East Liberty, Lawrenceville, and, 20 years ago, the South Side. And it’s what is driving the speculative investment in next-level urban suburbs like Sharpsburg, Millvale, Carrick, and parts of the North Side.

With this in mind, today we will discuss the rise of urban suburbs by defining urban and suburban areas, pin down what it means to be an “urban” suburb, and why younger Americans are pushing real estate trends in this direction.

Defining Urban and Suburban in 2020

Per the Census Bureau, “urbanized areas” are regions in or surrounding a city that have more than 50,000 people living in them. If these neighborhoods are within the limits of a city, they are thought of as urban, and if they are outside city limits, they are colloquially referred to as suburban. Urban clusters, on the other hand, are urban areas with fewer than 50,000 people. In a more general sense, we tend to think or urban areas as being more metropolitan with less space, more people, and greater access to amenities like public transportation and entertainment.

Suburbia exists somewhere between urban and rural living. One of the definitions of the word suburb reads: “the residential area on the outskirts of a city or large town”. While this has traditionally been true and still remains true in many cases, the residential aspect of this definition is changing. Commercial real estate in the suburbs is extremely active and lucrative as many individuals look to live, work, and play close to urban environments without the hassle of fighting against rush hour traffic.

What are “Urban” Suburbs?

Despite a great deal of focus being placed on the idea of a Great Inversion, where affluent Americans are favoring cities over suburbs, the majority of Americans today continue to live in suburbs. Although it is true that some suburbs are facing challenges, many that are referred to as “urban suburbs” are thriving. In lieu of an official government definition of what constitutes a suburb, let alone the different types of suburbs, urban suburbs have come to be defined by their characteristics, namely urban neighborhoods outside of the city that provide a mixture of access to urban centers, universities, a stable housing market, reputable public schools and transportation.

An example of an urban suburb is Mount Lebanon, an affluent neighborhood 7 miles south of Pittsburgh, with a median home value of $209,506, a reputable public school system that has won multiple National Blue Ribbon School awards, and a light rail system that provides easy public transportation to downtown Pittsburgh. Uptown Mount Lebanon has another key feature of urban suburbs: a booming business district with hair salons, cafes, shops, galleries, restaurants, and banks. Other national examples of larger suburbs with a more urban atmosphere include Grandview Heights, OH and Mountain View, CA.

Younger Americans Prioritize Convenience and Amenities

Urban suburbs are particularly attractive to younger American families who do not want to compromise on the convenience and amenities of urban living. They allow families to invest in their stable housing markets, reputable school districts, and enjoy access to business centers and easy transportation to metropolitan areas. Both renting and buying in these markets is attractive, as debt-ridden millennials who are parents may want easy transportation to their city jobs and favor renting in these areas for their school districts. For instance, almost 30% of residents in Mount Lebanon choose to rent, with the median rent coming to $861.

With the numerous websites and mobile apps geared towards renting and buying property, these desirable characteristics are easier to search for than ever. For instance, real-estate websites such as Zillow offer school ratings, commute times, walk scores, and transit scores under each property listing. With 81% of older millennials using mobile apps to find their homes, urban suburbs with high walk, transit, and school scores are coming out on top.

Going Forward

The rise of urban suburbs offer many takeaways. Suburban neighborhoods who are struggling to attract new home buyers can consider ways of increasing access to transportation to a nearby city. Trends show that urban suburbs offer many opportunities for both residential and commercial real-estate. Government agencies may benefit from defining suburbs and sub-types of suburban neighborhoods to better study trends. In the meantime, the rise of urban suburbs are a respite for those who are looking to rent or purchase property in a good school district but do not want to compromise on urban amenities and public transportation

Start the Week with Some Pittsburgh Construction News

Posted on January 13, 2020 | Leave a comment

The first packages for the $1.1 billion Terminal Modernization Program are hitting the streets. A $15-16 million package of site work and building work to enable the construction is coming out to bid. The work will allow for roadways, logistics, and mobilization around the existing airport infrastructure so that the multi-year project can proceed without interruption to the normal operations of Pittsburgh International Airport.

PJ Dick is taking bids on a couple of its $80-100 million projects, the WVU School of Business and Pitt’s Scaife Hall expansion. Rycon Construction will put CMU’s $36 million Fifth and Clyde Residence Hall out to bid next week.

Shannon Construction has been selected to do the $7 million TI for Siemens Mobility at the former Waterfront Macy’s. Sentinel Construction has started construction of the $3 million HDR Engineering TI at One Oxford. Timbers Building Co. has started work on the $15 million renovation of the Lemington Home for affordable housing. Jendoco started construction on the $9.5 million renovation of the Fifth/Neville Apartments. Sano-Rubin Construction is preparing to start construction on a $15 million medical marijuana facility for PharmaCann in Carnegie.

riazzi-substation-rendering — Rendering courtesy Duquesne Light Co.

In Oakland, two projects that might be below radar (although both have had public attention) are the new Duquesne Light Riazzi substation and the $7 million mixed-use development for Mike Wu at Craig and Winthrop. Burns & McDonnell is the turnkey engineer/CM for the Duquesne Light project, which is an 8,000 square foot (by four story) structure located on Boundary Street beneath the Schenley Park Bridge. No costs have been released but the project should be $5-10 million or more.

Commercial Real Estate and US Economic Trends Going into 2020

Posted on January 13, 2020March 9, 2020 | Leave a comment

As with most investor markets and economic issues, commercial real estate is an ever-changing reality. What might look like a safe bet today could lead to huge losses tomorrow. Government regulations, environmental factors, and a looming recession are just a few of the ways that the commercial real estate landscape can change at any moment. Yet seasoned real estate veterans understand that these changes are just a surface disruption of CRE wisdom which generally holds true over time.

With all of this in mind, here is a brief report on the current realities of commercial real estate in the US as well as some insights into the near future.

2019 Commercial Real Estate by the Numbers

The commercial real estate market is currently valued in the ballpark of $1.1 trillion. To put that in perspective, if a trillion dollars represented $10,000, a billion dollars would be $10. Needless to say, there are massive amounts of revenue being generated in the CRE market in 2019. Here are a few other statistics to give a clearer picture of the current state of CRE:

The commercial real estate industry experienced an estimated growth of 2.2 percent in 2019. This is down from an average of ~4 percent annual growth in the CRE industry over the past five years.
Commercial real estate growth has outpaced overall real estate growth, rental rate growth, and leasing growth in 2019.
Seasonalized annual construction values from Q2 2019 are down by about five (5) percent compared to similar estimates from 2018. Newly constructed commercial structures saw the largest value losses over this time period.
Commercial property valuations are on a steady rise beginning with the recovery period in 2009-2010. During this time period, prices have risen the most in the Western United States with the Midwest lagging behind.
Rental rates have flattened to a relatively low 1.4 percent year over year growth from 2018 to 2019. This trend is expected to continue with many market indicators pointing towards a stagnant apartment market overall.

The State of the US Economy Looking to 2020 and Beyond

Before we stare into the proverbial crystal ball, we should first state the obvious: nothing is guaranteed. That being said, here are some likely events in the US economy over the next several years.

A recession is all but unavoidable in the next few years

As of the writing of this article, the latest news is that doom and gloom predictions about the next US recession may have been exaggerated. Despite this sudden onset of optimism, the plain truth is that recessions are a part of modern free markets. The most optimistic, realistic view of the situation is that our next recession may not take place in 2020 but in the years to come. Whether the next economic downturn occurs in 2020, 2021, or beyond, it will almost certainly have a material impact on commercial real estate just as it did during the Great Recession of 2008.

Climate change will continue to be a major player for the economy and for CRE

Recent scientific studies have predicted that extreme weather events in the United States will rise by approximately 50% by the end of the 21st century. This continues the already observable trend of extreme weather patterns like more frequent and stronger tornadoes, hurricanes, floods, and other natural disasters. This will impact both the overall economy and commercial real estate industries for obvious reasons. Building codes are likely to be updated, insurance costs will rise, and other incidental expenses will almost certainly take a hit. Economists warn that climate change will likely cost the US economy 100’s of billions of dollars by the year 2090.

Young adults will continue to struggle financially

Last but not least, the population of adults who should be representing the largest buyers in the US economy will continue to be hit by crippling debt, healthcare costs, and stagnant wages. Barring an unlikely dramatic shift in the political and/or economic landscape, the US Debt Crisis will be a huge factor in the economy for the foreseeable future. This has already played a role in lagging rental rates, home ownership, and spending habits. It is difficult to predict how this situation will play out, but younger generations have proven that they are willing to cut costs, something that is not a great sign for economic health.

Going Forward

The commercial real estate sector has been reliably strong for nearly 10 years now. After a two year dip in 2008-09, investors have enjoyed solid returns and steady growth. While it is reasonable to expect another downturn at some point in the next few years, it is also reasonable to believe that the US economy will bounce back and investments will continue to pay dividends. It will continue to be important for investors to keep up with the latest CRE trends such as co-working, energy construction projects, infrastructure construction, and much more. The commercial real estate world’s evolution is ongoing, and the only certainty moving forward is change.