Category: National information

CMU Converting to Wind Power Could Set a Precedent in the Area

CMU Converting to Wind Power Could Set a Precedent in the Area

CMU Converting to Wind Power Could Set a Precedent in the Area

In September of 2019, Carnegie Mellon University announced a deal with Engie Resources for wind power from a 306 megawatt wind farm in Illinois. The deal is to last through 2024, and would power its Pittsburgh campus. This was a bold move towards sustainability and viability of variable renewable energy (VRE), and sets a precedent for other businesses and universities in the area. The move could potentially signal a paradigm shift towards institutional use of environmentally conscious infrastructure for new construction and renovations alike.

With all of this in mind, today we will discuss wind power 101, how other regions and countries have successfully implemented wind power, and ultimately how the recent CMU wind power deal could impact the local CRE landscape.

Wind Power: the Basics

Wind power is a type of variable renewable energy (VRE). The National Renewable Energy Laboratory (NREL) does not identify technical barriers to a grid running solely on VRE, but instead, many of the challenges come from capacity factors. A capacity factor is based on how much power a plant produces in comparison to its overall potential, and it is often based on how often a plan is running or generating power. A conservative estimate for the capacity factor for VREs, namely wind and solar, is around 50 percent.

When there is wind, there is power. On the other hand, nuclear power plants usually have over 90 percent capacity factor. In the long term, however, the resources being utilized will dwindle, which is why many businesses, cities, and states are moving towards either a mix of “clean” energy or, in the case of Carnegie Mellon University, 100 percent wind power.

Examples of Wind Power Around the World

Examples of Wind Power Around the World

As of March 2020, 60 percent of Germany’s energy came from renewable sources, the majority of which came from wind turbines. China and the US lead all countries with total wind power usage, clocking in at 221 GW and 96.4 GW respectively. Interestingly, Germany (the third highest wind power producer in the world) sets a far more productive example of using wind power the right way. Meanwhile, China’s ambitious wind farms have been reported to go largely unused.

This concept of wasted alternative energy hits home in the US. While many Americans support alternative energy over traditional fossil fuels, recent polls have also shown that Americans also fear alternative fuels are less efficient and costlier than the current energy infrastructure. Germany is also a great parallel for Western PA as a region in that Germany has traditionally depended on coal economically and for their energy needs.

German infrastructure has been updated over the past 10 years to adopt more alternative energy sources including wind power that made energy production more efficient, cost effective, and beneficial to the economy overall. Other countries including India, Spain, and the UK have all adopted wind power with mostly positive results.

Implications of CMU Using Wind Power in Pittsburgh

Implications of CMU Using Wind Power in Pittsburgh

That background information leads us to the simple question: will CMU’s converting to wind power have a material impact on commercial real estate in the Pittsburgh area? Unfortunately, as with many issues concerning alternative fuels and climate change the answer is less than clear. Here are a few factors and considerations that will likely come into play when it comes to wind power adoption in Pittsburgh.

  1. Will there be sufficient alternative fuel infrastructure? Businesses and other organizations with the intention of switching to an alternative fuel such as wind power is one thing. Having the available resources and/or infrastructure to make that change is another. The US might produce the second most wind power on earth, but it is primarily located in the Great Plains states.
  2. Governmental and public support. Again, converting to wind power is a very significant choice that requires available supply and infrastructure. The US currently gets slightly more than 7% of its energy needs from wind power. While this number is expected to rise, the future remains murky.
  3. Cost viability of wind power in Pittsburgh. The success of the wind power program at CMU may influence public opinion but investment in wind power in the near future will still depend upon return on investment. As CMU’s contract will run through 2024, we expect to see more detailed numbers over the next 4 or so years.

Implications of CMU Using Wind Power in Pittsburgh

Going Forward

Alternative energy sources become less “alternative” by the day. Some countries, including Sweden and Iceland, have committed to cutting fossil fuels from their energy creation entirely. Such a transition is harder to sell in places, like Western PA, where natural gas and coal are still significant economic drivers. There are ideological and political shifts which will determine the future of alternative power sources including wind energy. American institutions like CMU committing to 100% alternative power generation will certainly have an impact on public perception of such programs.

Understanding Triple Net Lease (NNN) Agreements

Understanding the intricacies of different commercial real estate lease agreements allows investors, property managers, and lessees to come to an arrangement that is mutually beneficial. One common “special” type of lease arrangement for commercial real estate is known as a triple net lease or a NNN lease. These types of lease arrangements are typically utilized in situations where a single tenant rents out an entire space. While NNN leases are almost always for commercial real estate agreements, they apply to other real estate ventures as well.

With all of this in mind, today we will define triple net leases in detail, explain how they differ from standard leases, single net leases, and double net leases, and finally discuss why NNN leases can benefit both investors and tenants for medium to long term commercial real estate agreements.

What is a Triple Net Lease (NNN) Agreement?

As mentioned in the introduction, a triple net lease may also be called a NNN lease or a net-net-net lease. In a triple net lease agreement, “tenant(s) agree to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.” In other words, the landowner will not be responsible for many, if any, maintenance expenses on the property during the term of the lease.

For a multitude of reasons, NNN leases are less common for short term leases. It is more common for triple net leases to range from 10 to 15 years with stipulations for rate increases over the term of the loan as appropriate. As we will discuss in greater detail below, the primary benefits of NNN leases are lower risk for investors/property owners and lower rates for lessees.

Single vs. Double vs. Triple Net Lease Agreements

Net leases are not necessarily an all or nothing proposition. Instead, there are also single and double net leases that are sometimes used to balance risk vs. cash flow. Here are the similarities and differences between single net leases, double net leases, and triple net leases:

Single net leases are less common than triple net leases, particularly for commercial real estate. According to investopedia.com, single net leases are when: “the landlord transfers a minimal amount of risk to the tenant, who pays the property taxes. This means any other expense—such as insurance, maintenance and repairs, and utilities—are the landlord’s responsibility. The landlord is also responsible for any maintenance and/or repairs that must be done during the course of the lease within the property.”

Double net leases are much more common for commercial real estate agreements. In double net leases, tenants are responsible for insurance premiums and property tax on top of their rent owed. Maintenance costs remain with the landowner.

Triple net leases put the biggest responsibility on the tenants, essentially making the tenants responsible for any ongoing fees and costs related to the property. These include all three of the costs discussed above: insurance premiums, property tax, and maintenance costs.

Gross vs. Net Leases for Commercial Real Estate

Of course, not all commercial real estate agreements are considered “net”. There are also gross leases in CRE in which the property owner maintains fully financial liability for the property during the course of the lease. All commercial real estate leases are considered either gross or net, with single, double, and triple net lease agreements being the differentiator for the degree of responsibility that will reside with the tenant(s).

Benefits of NNN Agreements for Commercial Real Estate Properties

This leads us to our last question: why are NNN leases preferable to other commercial real estate leases? The answer is that they aren’t preferable in all situations. All types of leases from gross to triple net lease arrangements have their share of benefits and risks. Here is a high-level checklist of the benefits of triple net leases:

  • NNN leases carry the lowest risk for investors. The primary benefit of a triple net lease from the perspective of the investor/property owner is the low risk. If insurance premiums go up or if a major repair is required, with a NNN lease, that onus falls on the tenant.
  • Triple net leases are more affordable for tenants. On the flip side, the selling point for NNN leases to tenants is their affordability. Lessened risk for the commercial real estate investor also means lower rental rates.
  • Triple net cap rates are easier to calculate. While this is all relative, calculating NNN cap rates is more reliable than calculating gross cap rates. This is tied into the concept of risk and a more reliable return on investment.

In Summary

Double and triple net leases are likely to remain an appealing option for commercial real estate investors and tenants for many years to come. In the right circumstances, NNN leases are mutually beneficial with their ability to reduce risk for investors and reduce total costs for tenants. Yet they are not appropriate for all CRE lease agreements. As with many decision-making processes, understanding all options available before entering into a commercial real estate lease agreement is a great way to make the best possible choice.

More About COVID-19 and Construction

Now that that Coronavirus (COVID-19) has become a political football, it’s worth noting two things: 1) it’s clearly going to have an economic impact, maybe a significant one; 2) we know very little about it.

The second point makes the first point more uncertain.

That point was driven home to me yesterday at the quarterly meeting of the Federal Reserve Bank’s Business Advisory Committee in Pittsburgh. The Fed representatives were very interested in what impact COVID-19 was having on businesses thus far. Representatives from US Steel, Calgon Carbon, and CBRE shared information that shed some light. Again, the most important information shared was that there is little information to share. Because the virus was first detected in China, the reliability of the information is suspect to a degree. Some other places that have begun to experience outbreaks, like Iran, have proven to be less reliable still. Here are some of the things that came out of the discussion:

  • The virus is most dangerous to the elderly and person with compromised systems.
  • Of the 80,000 cases identified, 18,000 have already recovered to full health.
  • Disruptions to the supply chain from China and Asia have already occurred
  • US corporations have begun to implement travel bans. This will accelerate as cases of COVID-19 multiply in the U.S.
  • US corporations have begun to make contingency plans for employees to work from home or stay home.

The latter point is the most relevant for the construction industry in Pittsburgh. Even if nobody from Western PA becomes infected with COVID-19, many construction projects will experience delays in decision-making by owners that simply have higher priorities than capital project approvals. What we’ve learned from the small sample size of the supply chain thus far is that building products will be impacted, especially since U.S. manufacturers trimmed inventories at the end of 2019. Equipment and building products have as many as 20% of the subcomponent supply chain made in China. Japanese and other Asian manufacturers are about 40% reliant upon China for components. Construction projects will be impacted, including those in Pittsburgh.

What is really unknown at this point is the penetration of the virus into the U.S. Americans mostly avoided the SARS virus a decade ago but COVID-19 seems more difficult to contain. A pandemic that last a few months, even if it proves to be less deadly, is going to drain economic activity, which will slow the construction market.

Panic about COVID-19 seems unjustified. Concern about the effect on the economy does not. Read more in the first portion of JLL’s Economic Insights

In construction news, Allegheny County Airport Authority awarded the first major bid packages for the airport’s Terminal Modernization Program. Independence Excavating was awarded a $20.9 million contract for the early access site general construction. Mosites Construction was awarded a $20.7 million contract for upgrades to the PA Turnpike Allegheny Tunnel. Rycon Construction was awarded the $4.9 million AGH Genomic Lab. Rycon will also be building the $38 million, 220-unit 23rd & Railroad Apartments for SteelStreet Capital. PSU approved a contract with Turner Construction for the $112 million Liberal Arts Building at University Park. Jendoco Construction was awarded the $5.7 million Forker Lab Building at PSU-Shenango. University of Pittsburgh selected Turner for the $5 million Brain Institute Lab fitout at BST3. A.M. Higley was awarded a contract for the $9 million Convention Center Green Roof Phase 2. Uhl Construction was awarded the $5 million expansion/renovation to Lithia Motors South Hills Subaru. AHN selected Volpatt Construction for the $3.5 million Allegheny Valley Hospital 2D renovation. Swartz Builders is building a 140,000 square foot fabrication shop for Hranec Sheet Metal in German Township, Fayette County.

Pitt took proposals from Mascaro, Massaro, PJ Dick, Rycon & Volpatt on $3 million Langley Hall renovation. PJ Dick, Massaro & Turner were among the CMs proposing on PWC’s 70,000 square foot tenant improvements at One Oxford Center.

Insurance Costs Will Jump in 2020 – For Construction Industry Too

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.

Fannie Mae and Freddie Mac Now Retaining Profits

Fannie Mae and Freddie Mac Now Retaining Profits

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

Bailing Out Fannie Mae and Freddie Mac

Bailing Out Fannie Mae and Freddie Mac

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

 

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

 

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

 

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

Freeing Fannie Mae and Freddie Mac from Government Control

Freeing Fannie Mae and Freddie Mac from Government Control

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

 

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

 

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

 

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

 

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

Fannie Mae and Freddie Mac together received $191.5 billion in aid

Going Forward

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

 

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

 

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

Demographic Changes That Will Impact Real Estate

Demographic Changes That Will Impact Real Estate

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

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

Current Demographic Changes

Current Demographic Changes
Click to enlarge image

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

 

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

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

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

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

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

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

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

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

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

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

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

Look at changes in the demographics

Going Forward

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

An Interesting Take on Growing the Workforce

The shortage of skilled workers in construction has been a problem for several years and the impact on construction costs has reached the point where commercial real estate development is being slowed, according to NAIOP. There is a CoStar post about the issue that is very interesting in that it puts contractor groups on opposing sides of what you would think would be a unifying issue.20190422_174002

At issue is the Department of Labor rule, which resulted from an executive order in 2017 that expands apprenticeship programs to allow trade groups and employers to establish separate training from industry certifiers. The revised National Apprenticeship Act exempts construction from its rules for now, but developers are pressing for the rules to be expanded to include construction, and the nation’s largest contractors group is supporting them. Associated General Contractors of America (AGC) has been advocating for growing the construction workforce, including pressing for supportive legislation. AGC supports the revised rules, even though the rules allow apprentices to be paid minimum wage.

The last point is what has developers hoping that the rule change is extended to construction. It’s also what has union-affiliated contractor groups in opposition to the expansion of the rules. Union apprentices are typically paid two or three times minimum wage while working their way to journey-level. Opponents of extending the rules to construction also worry that independent apprenticeship programs won’t adhere to industry standards for certifications and will lead to poor work or unsafe conditions. The arguments are summarized in this excerpt:

Proponents of expanding construction apprenticeships argue the initiative will address the dearth of these kinds of workers and help close the job gap, adding to the workforce pool for contractors and reducing their costs as well as those of developers. The lack of construction workers such as pipe layers, sheet metal workers, carpenters, concrete workers and pipe fitters/welders, as well as logistics employees, has hurt the commercial real estate business.

That’s driving up development costs and hampering the expansion and profitability of warehouse and distribution centers, according to NAIOP, the national trade organization for the industry, which issued a report on the issue earlier this year.

But there is a debate on apprenticeship expansion, with opponents charging it would create a separate, and inadequate, certification system from existing programs, with poorly trained workers who could endanger themselves, others and do substandard work.

As the labor department proposal is written now, it excludes construction, an industry that has for decades had apprenticeship programs in place for trades such as plumbers and electricians. Those programs are registered with the labor department and are funded by unions and employers, as part of collective bargaining agreements.

History has shown that government making rules to solve temporary market conditions rarely solves the problem, and usually creates unintended negative consequences. If you are developing a commercial project right now, the costs of construction – and the schedule – are becoming unfavorable. The pro forma rents aren’t going up as fast as construction costs. Investors will have to accept less of a return or the project won’t pencil out. That’s not a great thing but that is an inevitable consequence of economic prosperity that lasts as long as the current expansion. In truth, wage gains have been held off for much longer than in any previous business cycle; and the magnitude of wage growth is much lower than the typical 4-5% that accompanies a recovery. During the recovery stage of this business cycle, wages barely grew and only moved above 2% since early 2018. Business cycles run from imbalance to imbalance, from lean conditions to fat. It’s not fun to be the development that builds during fat times but, then again, it’s also not fun to try to lease up during lean times. It’s the nature of business cycles. At some point, things will slow down and costs will fall back. New development will follow.

Note: In the Sept. 26 BreakingNews email blast, PJ Dick was omitted from the list of contractors proposing on the $15 million Flats on Forward in error. The list of contractors should have read PJ Dick, A. Martini & Co, Mosites and Rycon.

US Construction Up Again

The Census Bureau reported on February construction activity April 2 and the data showed a reversal of the recent trend in private/public spending. February’s construction totals reached a record $1.273 trillion (seasonally-adjusted), an increase of 3.1% over February 2017.  The AGC’s Ken Simonson noted that the increase was the result of a 5.5% jump in private-nonresidential spending. Spending declined in 12 of the 13 public construction categories, including the largest – highways and streets – which saw a drop of 0.1% from January and 5.1% from last year.
total us construction spending

The $80 million Peters Twp. High School has been released for bidding, due May 10. Bids are out on early packages at the AHN Wexford Hospital being managed by Massaro/Gilbane. CMU took proposals last week from Jendoco, Mascaro, Mosites, PJ Dick, and Rycon on its $45 million Health & Wellness Center – a renovation of Skibo Hall. Pitt selected A. Martini & Co. for its $3.2 million Thaw Hall renovation. The Steelers tabbed Mascaro Construction to build the $2.5 million expansion of Bud Light Pub 33 at Heinz Field. Turner Construction was awarded the 20,000 sq. ft.  build-out of Cozen O’Connor’s space in One Oxford Centre. Franjo was awarded the contract for the new Aldi’s in Greensburg. Nexus Construction has started work on the first of The Healing Center’s medical marijuana dispensaries in Monroeville and Washington. PA Turnpike Commission awarded Trumbull Corp. the $37.8 million contract for Section 55C1-2 of the Southern Beltway.

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. 

 

 

Housing Market May Have Found the Bottom

One of the more perverse (and comforting) realities about doing economic forecasting is that you can get a reputation for wisdom by merely being wrong less than your audience. So emboldened I am going to go out on a limb and predict that the national decline in housing values has hit bottom, or at least the trend has. By that I mean that the indicators of housing sales have reversed themselves within the past 90 days, and that housing values should begin to firm and move upward by the early part of 2009.

 There’s alot of reasons that should sound like a damn fool forecast, not the least of which is the almost certainty of recession symptons (if not the official recession) in 2009. Higher unemployment, stagnant wages and potentially higher prices for necessities don’t make for good buying conditions; however, remember that the seeds of the decline were sown when the economy was flying at its highest in 2006.

Here’s what has finally pushed me to the side of the recovery signal: Pending home sales in August spiked over 9% compared to July. Now there’s no assurance in that, and in fact, the data probably includes alot of bad anecdotal news, like “vulture buying” and price capitulation in overbuilt markets. But the diamond in the rough of the August data was that the increase marked the third straight incidence of an increase following an earlier increase/pullback. That probably sounds confusing. What that shows is that the increase in pending home sales bounced back, tested the bottom and bounced back higher again. That happened in April over February, June over April, and now August over June. If this was a stock chart you’d be calling it a buy signal.

PHSI chart shows pending sales since 2005
PHSI chart shows pending sales since 2005

What’s also good in the August data is that the biggest gains regionally were in places previous in the worst shape: Naples FL, Las Vegas, Central California.

Regardless of the discounting that may be involved, the removal of housing from the inventory is the first step in reducing supply before prices can start to rebound. The realistic prediction is that recessionary forces will probably keep demand from growing for the next 6-18 months, but a decline in supply will firm housing prices ahead of renewed demand, whenever that may occur. And don’t forget that it’s the decline in home values that exposed the weakness of the lending standards and started this whole financial crisis 15 months ago.

Month Pending Home Sales Index
Aug-05 124.4
Aug-06 111.9
Jul-07 92.8
Aug-07 85.8
Sep-07 87.8
Oct-07 89.8
Nov-07 86.9
Dec-07 85.9
Jan-08 86.2
Feb-08 83.8
Mar-08 83
Apr-08 88.9
May-08 84.5
Jun-08 89.4
Jul-08 86.5
Aug-08 93.4
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