Category: News About People

2012 Isn’t Dead Yet

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It isn’t even Halloween yet but in terms of the contracting market there are but a few weeks left for projects to get on the streets and priced before everyone goes into holiday mode. While 2012 has been something of a disappointment for construction in Pittsburgh, there are a few pearls out to bid before Thanksgiving.

After earlier pre-qualification of contractors, WVU has issued its $38 million Advanced Engineering Building to Mascaro, Massaro, PJ Dick, Turner, Whiting-Turner and Walsh, with bids due Nov. 15. Handicapping this is impossible. Given how aggressive Turner and Walsh have been in pursuing work over the past year and how much Whiting-Turner seems to want to remain in this region, it’s hard to predict who might have an edge based on backlog or project fit.

Walsh and Turner, along with Clayco Construction from St. Louis are the finalists pursuing the design/build contract for the $60 million Quattro buildings being developed by Burns & Scalo Real Estate in Southpointe. The RFP for the 416,000 sq. ft., two-building development – which includes the new HQ for Ansys – is out for response by these three contractors.

The bid packages for Mercy Hospital’s new $80 million chiller plant are soon to go out to bid from Mosites Construction, with bids in early November. Construction on the project is expected to start before the end of this year.

One project that was not trending for construction this year but is going ahead is the LA Fitness and garage at the Don Allen site. Gleason Construction is taking bids on that project now. The deal for the development seems to have been on and off again more times than a bathroom light over the past couple years and with the LA Fitness/Urban Active merger, there was talk that the Urban Active facility in Bakery Square would nullify the LA Fitness. It seems that rumors of the project’s demise were premature.

The West Penn Monkey Wrench

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The news that West Penn Allegheny Health System had backed out of the Highmark merger on Sept. 27 created some big ripples throughout the business and healthcare community. The decision added more uncertainty to a picture that was already uncertain because of the pitched battle between UPMC & Highmark. Businesses starting to feel comfortable about the impact of the competition now question insurance rates and availability after next year; hospital and doctor availability; and the economic impact on their customers in general. Whatever the eventual outcome, the prospect of WPAHS going its separate way from Highmark – given the hospital’s financial position – adds another level of nervousness to an already uncertain business climate.

One of the related industries that could be impacted is construction. Highmark’s acquisition has already resulted in millions invested in hospital infrastructure and their plans for creating a world-class provider system was going to mean a billion dollar construction program – at minimum – over the next five years or more. Now, that capital program is a big question mark, or maybe a series of question marks.

The most obvious question mark is how does a system with little or no capital keep up with the high costs of maintenance and upgrading that a hospital demands. UPMC annually budgets $250 million or more for capital expenditures. WPAHS has not spent that much on facilities in aggregate over the past ten years. Without a source of capital, WPAHS will have little chance to improve that track record. Projects like the $20 million or so invested in re-opening the West Penn ER or the Forbes Regional modernization probably cannot be done without Highmark or another suitor.

The subject of a partner is probably the biggest question mark hanging over the whole subject, given WPAHS’s debt and operating deficits.

For construction-related businesses, the questions revolve around opportunities (see paragraphs above) and relationships. The firms that have been involved in the work at WPAHS and Jefferson have had ties to the former facilities and executives there but mostly had ties to either John Paul or Ken Melani. As often as not the professionals involved so far have had ties to both. Assuming WPAHS finds either a partner or some working capital what happens to the firms that are asked to work on projects at a WPAHS facility who also retain contracts with Highmark (or who want to keep those doors open)? Astorino has doubtless learned some painful lessons about the West Penn facility since taking on the design/construction mgr. role. Getting familiar with an institution like that takes time and costs money that can be recouped on later projects. Will Highmark view Astorino’s work with them as exclusive and therefore see an independent contract for future West Penn work as disloyal? Do specialty contractors like McKamish or Lighthouse Electric – who were among the first firms working on West Penn because of their extensive experience at the hospital – have to make ‘us or them’ kinds of decisions about responding to requests from WPAHS? What about the dozen or so general contractors who have bid and/or won work thus far at West Penn or Forbes Regional? Must they now decline opportunities in order to have a shot at a multi-million dollar Highmark medical mall?

All these questions are of course still on the table. The WPAHS decision may indeed be just a negotiating strategy designed to push Highmark back away from their apparent desire to see WPAHS restructure its billion dollar debt through bankruptcy. Thus far – and its only one week remember – none of the players serving the proposed capital work have been instructed to stop work. Jefferson’s work can go ahead regardless of the outcome of the WPAHS/Highmark spat so a few bigger hospital projects will advance. And the business case for the medical mall concept hasn’t evaporated so the Wexford project Highmark has been advancing – rumored to be as much as $100 million – may still make sense. For an industry trying to get traction for the next growth cycle, the timing of this latest uncertainty stinks.

 

The Roller Coaster Goes Back Up

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Such is the nature of this economy that the trend seems to change direction every few months. Since April the corporate and industrial users who were so cramped and needed space have been sitting on their collective wallets as fears about Europe, elections, slowed hiring, etc. made them uneasy about the state of their business 12-24 months out. The conventional wisdom became that the market was dead until after the election in November. For certain, the number of projects to bid diminished steeply.

Now, either because of better news or the growing realization that pinning your long-term business hopes to a single election was silly, there is more action in the market.  The July jobs numbers were a pleasant surprise; the European bank has expressed determination to solve the Eurozone debt crisis; corporate earnings season has been better than expected, with companies now raising guidance for the rest of the year (after lowering them in spring); and the House and Senate have pushed out the budget confrontation until next year, assuring that there will be no confidence-sapping battle this fall.

What any of this means to the future of the economy is uncertain but for now it seems to make owners feel better. That, at least seems to be moving real estate deals along.

Among the projects that are now moving: Horizon is taking bids on its next 150,000 sq. ft. building at Southpointe. Burns & Scalo, Millcraft, Elmhurst seem poised to make announcements of key tenants for their new office buildings. Morgan Management is taking bids on the $30 million Reserve at Southpointe apartment project from Dynamic, Franjo and MW Builders. The $36 million Laurel Highlands High School has gone out to bid in the public sector. Seton Hill has taken RFP’s for a contractor for its next major project.  URA is looking for a developer for the former Saks Fifth Avenue site and has awarded a contract for the store’s demolition.  The Animal Rescue League selected PJ Dick as contractor to build its new 40,000 square foot facility in the Homewood section of Pittsburgh

Some News in a Slow Market

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While the bid market has boiled down to almost entirely public work in June there are some interesting results and awards in the past week or so.

One of the tightest bids of the year opened last Thursday at West Liberty University. Nello Construction from Canonsburg was low on the Campbell Hall Science Building project by three-tenths of a percent, edging Landau by $63,000 on a $19,287,000 bid. Massaro Corp. finished roughly one percent behind in third.

Contracts were let for mechanical and electrical trades on the $71 million Cardinal Wuerl North Catholic High project in Cranberry Twp. The HVAC and plumbing were awarded to Renick Brothers from Slippery Rock. Lighthouse was selected for the electrical work and Interstate Fire Protection for the sprinklers. The official groundbreaking was held earlier this week and Mascaro Construction is readying the remaining bid packages.

General Electric selected E. E. Austin & Co from Erie as the construction mgr. for its $70 million new plant and locomotive engine facility upgrade in Grove City.

A corporate project of similar size in Akron, OH is attracting a lot of attention from contractors.  Diebold Corp. is planning an $80 million new headquarters and is soliciting construction mgt. proposals ahead of the design. The project has drawn responses from a dozen or more contractors from all over the country. Two local contractors, PJ Dick and Mascaro are among the group vying for the project.

Good Signs in a Mixed Signal Market?

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The pending election seems to be more and more of an anchor on the prospects for a more robust construction recovery in 2012. Anecdotes from peers and real estate brokers tell of business owners who need more space sitting on their wallets out of concern for how much different the business and  tax landscape may appear next year. Most businesses are small around here and the owners get to pull a fair amount of profit out of them. Right now the rhetoric from the administration makes owners worry that this might be the best (last) year they can expect to be taxed at lower capital gains rates for a while.

The word from the right is that Obama has put the economy on the verge of another recession. Not very accurate but definitely not very comforting to business. The word from the administration is that the excess (their words) profits made during the past couple years of recovery need to be redistributed to those without. Again, not accurate and discomforting.

Net result: let’s wait and see who’s standing in November. Not much of a business growth strategy but one that is gaining credence it appears.

In the midst of that uncertainty comes a couple of surprising signals. First, the leaders of the local residential realty firms are all crying about not having enough houses to sell for all the people that want them. That seems to be at odds with the accepted wisdom of an extended housing slump. I also spoke with Colliers International managing director Gregg Broujos about the recent ICSC RECON show in Las Vegas. The big retail show was packed. No official word on numbers yet but the estimates are near the 45,000 people that attended in the mid-200’s hey day. Confident retailers are positive historical indicator of construction.

Finally, Oxford Development announced plans for a new office tower today. The press conference may mostly be intended to drum up interest in the concept but Oxford has not historically been a company that made noise without something to back it up. Rumors abound that USSteel is again interested in downtown as a new HQ location or that one of the oil/gas companies could land as a lead tenant. DL Astorino and Mascaro Construction had been working on some concepts for repurposing the building at 441 Smithfield Street to create the office space but the costs and viability may not be sufficient for Oxford  to follow that path, although that scope of work hasn’t been officially ruled out. A new cast of characters would likely be involved in a new mid-rise tower should the developer go that route.

Oxford’s press conference on the 24th revealed Dennis Astorino’s conceptual design and their stated preference to develop new construction at the site rather than renovating the current 441 Smithfield property. One extra advantage of the new construction option is that the new tower would be sited directly opposite the Tower at PNC Plaza on Forbes Ave. that PJ Dick is preparing to start building. The juxtaposition might finally give someone (PNC?) enough motive to buy the Warner Center and do something with it to serve the thousands of workers who will inhabit the new buildings.

Although Oxford’s Steve Guy spoke at the press conference of the direction and schedule being dictated by their success in finding a tenant, Oxford historically hasn’t been a developer that used the press to float speculative ideas. Don’t be surprised if an announcement of a lead tenant follows this summer.

Local Talent

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In March I had the pleasure of being involved with the pre-selection process for a new downtown office tower that Burns & Scalo is proposing. On March 29 the developer held a media event to announce the finalists for the project’s design (which ultimately won’t be decided until they get a lead tenant) and the evening was a revelation for me about the talent of local architects.

First a disclaimer. I was approached to be a juror in February and initially declined, citing the obvious lack of qualifications. My friend Holly Childs persisted by assuring me that they wanted someone known in the industry who was not an architect but understood the business. And to counter balance my lack of qualifications the others selected as jurors were architect Elmer Burger from Point Park University and Tracy Myers, who is curator of the Heinz Architectural Center at the Carnegie Museum.

In mid-March the three jurors met at the Burns & Scalo suite at the Duquesne Club and reviewed eight small renderings (8″ X 11″) to recommend three finalists. It was tough getting down from five to three but the resulting choices were comfortable with all of us.

Two weeks later, when the media event was held, we got to see all the entries in full size form and it was much more impressive. What struck me was that the designs of all the architects were buildings that I wanted to see built. There were some that did not fit well along Ft. Pitt Blvd. but would have been spectacular in other sites. One in particular, a geometric structure with multiple blocks and terraces designed by Anne Chen and Gary Carlough of EDGE Studio, should be the next academic building built at Pitt (or better at WVU). The Design Alliance submitted this unusual looking stacked cube design that was probably unfeasible for a commercial office and looked out of context along the Mon but would be a tremendous corporate office building tied to a global brand or something.

Jim Scalo created the design challenge to create some excitement about a new downtown office and to show off the talents of local architects (some of whom may have had a large user in tow). The results accomplished the latter mission for certain. With any luck there will be a dozen or more opportunities for new 300,000 square foot plus offices in the next decade. Without doubt some of those will be designed by some high profile New York or Houston-based architect. Here’s hoping that at least a few of the owners/developers of those offices to come get a look at the work that these eight firms did before looking out of town.

It’s a Cracker!

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OK, now that we’ve had the time to take a deep breath we can look at last Wednesday’s announcement of Shell’s preferred site with a bit more perspective.

First things first. There is no downside to Shell picking the old Horseheads zinc site for their ethane cracker. Regardless of how events unfold from here the Western PA region is better off today than last Tuesday if only for the potential. That said however, it’s important to temper our regional enthusiasm with the knowledge that the decision to proceed with plant construction is still a year or more away and construction itself is at least two years out. The real beneficial impact of the plant – the development of the many downstream industries here – will be years further away.

The acute problem facing the natural gas industry hasn’t changed. Prices are still so low that extraction and processing is a losing proposition right now. It is fortunate for stakeholders in Western PA that the Marcellus Shale formation contains more profitable wet gases like ethane, propane and butane so the drillers will continue in the southwest corner of the state. We’re also lucky to have the oil-laden Utica formation easily accessible in Butler, Beaver and Lawrence counties so that upstream and midstream activities – like fractionation and distribution – will continue to expand.

For the gas industry to fully mature in our region the price will have to increase to its more normal levels, meaning that gas will be at $5-8/MmBtu. The most productive way for that to happen will be for gas to replace fossil fuels, increasing demand while decreasing the dependence on oil as a fuel or coal as an electricity generation source. That will take more investment or energy policy action than is going on right now.

Until something happens to push demand and natural gas prices higher the opening of the Shell cracker facility will remain on the horizon. Of course, it’s better that it’s on the horizon in Beaver Co. than elsewhere.

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America’s Next Crisis: A Housing Shortage?

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Twice in the past two weeks I’ve been exposed to the writing of some smart guys who have made a coherent argument that the housing market is about to break out into an agressive growth cycle. There are still some well-publicized (and quite daunting) headwinds for the business. The toughest of these are the foreclosure inventory and the still tighter than average mortgage market. But what separated the analysis of both of these is their reliance on the most basic of housing market fundamentals: demographics.

The first was Warren Buffet’s annual letter to his shareholders at Berkshire Hathaway. If you’ve never read on of these you should. Buffett feels the undersupply of the past four years has created an un-bubble that will have to burst when the pent up demand from household formations pops. What makes Buffett’s point of view interesting is that he ties the housing industry to about 3 million jobs, or about 2 points of the unemployment rate. You can read the letter (along with his letters back to 1977) at http://www.berkshirehathaway.com/letters/letters.html

The second was a recent article by Charles Sizemore, one of these hot shot investment advisors who write for Marketwatch and the like. His analysis is that regardless of the related economic issues, the crush of home buying from the Echo Boomers is going to create a wave of demand that can’t be met by the current supply chain. You can read the article at http://www.marketwatch.com/story/heres-the-catalyst-for-a-housing-rebound-2012-03-07?link=mw_home_kiosk

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The Office Building Surge

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Data from the Bureau of Labor Statistics shows job growth in metro Pittsburgh was roughly 25,000 in 2011. That growth, in concert with very little new construction in recent years has created generational low vacancy rates in the region and moved rents much higher over the past three years.

Estimates of office vacancy run between 8.6 percent and 11.2 percent, according to reports by CoStar, PA Commercial, CB-Richard Ellis and Jones Lang LaSalle at year’s end. According to Grubb & Ellis’ Office Trends Report for 2012 the office space available for sublease was also low. Estimated at just over 350,000 square feet, the office sublease inventory is expected to remain even with that of 2011, which is roughly half the ten-year average for space. Grubb & Ellis also tracked 406,000 square feet of office construction in 2011, only 15 percent of which was available for lease.

BreakingGround magazine’s research database is tracking over 3 million square feet in office projects being proposed within the past year. That total excludes the 800,000 square foot 4 PNC and 250,000 square foot Mylan Labs headquarters to be started this year, as well as the space being rumored as build-to-suit for corporate users like USSteel, Exxon Mobil, GNC and Guardian Security. And the developers include a roster of Pittsburgh firms who have delivered multiple offices into the market over the past decade, including Chaska Property Advisors, Spectra Development, Burns & Scalo Real Estate, Horizon Properties and the Elmhurst Group. The market awakening has revived the Oakland Portal project, with developer L. W. Molnar announcing plans for 300,000 square feet of office.

This litany of projects is speculative product, meaning that construction will be subject to success in pre-leasing and financing. The number of 100,000 square foot users conducting property searches currently indicates that more than a few will find anchor tenants in the coming year. Using historical ratios for planning to construction you would expect to see construction total one million square feet in 2012 in addition to the owner-occupied construction being planned. For all offices the new construction should be four times the volume of 2011.

Some of the specific projects are:

Burns & Scalo, two buildings at Southpointe II totaling 250,000 sq. ft. Horizon Properties, buildings at Southpointe II and Southpointe Town Center, 300,000 sq. ft. Keystone Property Group, two buildings at Keystone Summit in Marshall Twp. totaling 275,000 sq. ft. Elmhurst Group, Cranberry Crossings 90,000 sq. ft., Schenley Gardens in Oakland 110,000 sq. ft. & McClaren Woods 130,000 sq. ft. Chaska Properties, the Pittsburgh International Business Park in Moon Twp. totaling 350,000 sq. ft. In Cranberry, Creative Real Estate proposes 400,000 sq. ft. at the Summit at Cranberry Woods and Spectra Development is planning 1.1 million sq. ft. at the I-79/Route 228 interchange.

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UPMC, Highmark Keep Construction Going

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Last week’s announcement by the Business Times that Highmark had acquired land by Northway Church in Wexford – the worst kept ‘secret’ in the North Hills – capped a week of developments in the ongoing strong hospital market.  Wexford is but one of the three or four sub-markets that Highmark wants to put outpatient/emergency centers. They are allegedly searching for 25+ acres in Cranberry and are eyeing sites along the 19/79 corridor in the South. The resultant construction projects should be buildings in the $8-15 million range.

UPMC’s big news for the week was the narrowing of the field for the CM contract for the Center for Innovative Science by the Hillman Cancer Center. Four contracting teams or contractors were selected to respond to an RFP for the $294 million project by March 6, with a selection likely by early April. Those invited were Clark/Massaro, Mascaro/Gilbane, PJ Dick/McCarthy and Turner Construction.

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