Category: Real estate news

The Chevron Project etc.

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Yesterday’s announcement that Chevron had closed on the rumored Roy Johns Montour Run Road site and the KMart brought public attention to a project that has been tracking towards construction for three-quarters of a year. The requirements that had been bandied about in the real estate community were for a campus of 250,000 sq. ft. all the way up to one million sq. ft. That would put the project ultimately at about the same size as the Westinghouse corporate campus, which cost about $300 million all in (of course that took a few phases & a few years). The Chevron project has been going through design at HOK’s Houston office & the RFP for construction mgt. services is to be released imminently to 6 contractors or teams of contractors. I would expect Turner, PJ Dick, Mascaro, Massaro, perhaps Gilbane, Walsh & some national players teaming with some of the local generals.

The public bid market has picked up surprisingly for May. Considering that there was very little in the way of meaty projects out in the late winter this may be the shot for 2013. Most of those projects are outside the city, including the site package for the $80 million Ag Sciences Building at WVU.

Among the projects awarded recently (although not all are inked) Mascaro was selected to build a new $5 million residence hall at Pitt Bradford and the $70 million Village Green Apartments. MBM Contracting was chosen for a $1.2 million clinical project at Weirton Hospital & $15 million expansion at Excela Healthcare in Westmoreland Co. The latter project won’t start until later this year. Nello was selected to do the expansion & renovation at Memorial Park Church in McCandless.

One of the big projects announced at Southpointe II last year is breaking loose. The Ansys Corp. HQ and the accompanying spec office building that Burns & Scalo is developing is going through the design/build process with Clayco Construction from St. Louis. Bids for the early packages are out right now. Site work is expected to start in June with steel arriving in Sept. – assuming all is in budget.

Something New Brewing at Iron City

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It will be much later in the decade before we know if the redevelopment of the old Iron City Brewery will have gone ahead as presented earlier this week, but at least there is now a clear idea of where the program is going.

The master plan done by DLA + Architecture is pretty ambitious, with over 500,000 sq. ft. of commercial space plus the potential for more residential in that space. There will also be a 930-car garage. What struck me was that it seems to have a similar approach to blending new and old as the way Bakery Square has developed. I’m sure many Pittsburghers will feel that the city can’t absorb another $100 million urban commercial development but those that feel that way are locked in the old paradigm.

The breakdown of space planned for the Iron City Brewing project
The breakdown of space planned for the Iron City Brewing project

Looking at Dennis Astorino’s rendering of the completed development you certainly get a sense of place like at Bakery Square or South Side Works, but the location makes me believe the project has a good chance. For one thing, Bakery Square seems to have two things really working well for it: (1) It’s becoming a relief valve for the overcrowded Oakland market. Several of its major tenants are extensions of CMU or Pitt research and East Liberty is surprisingly close; and (2) the retail component is serving the neighboring communities way more than the employees of Bakery Square. For example, Urban Active has 10,000+ members, even though the total employment at Bakery Sq. is around 1,000.

3-D rendering of the Iron City Brewing redevelopment. Rendering by DLA+ Architecture.
3-D rendering of the Iron City Brewing redevelopment from the viewpoint of Polish Hill. Rendering by DLA+ Architecture.

Iron City Brewing’s location is almost equidistant between the Strip District, Oakland and the booming part of Lawrenceville. It’s also just a few blocks from the revitalized Bloomfield main drag. Oh, and there’s a new hospital just up the hill. Given the growth and redevelopment of Lawrenceville, relatively little has been added in the way of lifestyle amenities.

More commercial and lifestyle development will be successful in the Lawrenceville/Bloomfield sub-market. If the Cargnoni’s have the financial strength and will to aggressively go ahead (and there’s nothing to suggest otherwise), I like the chances for the Iron City project.

Southpointe & Industrial in Higher Gear

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On Friday, Sept. 14 Ansys signed a lease with Burns & Scalo Real Estate that effectively sold out the Southpointe II phase of the giant office/industrial park along I-79 in northern Washington Co. Ansys will be the tenant for a 186,000 sq. ft. build-to-suit headquarters. That lease triggered the marketing & planning for a second 230,000 sq. ft. office at the adjacent lot Burns & Scalo is developing. Those parcels were the last that were for sale in Southpointe II.

Burns & Scalo has been meeting with contractors with the intention of delivering the project as a true design/build job. The $60 million development should be the largest suburban office project in 2013.

The Ansys deal is hardly the only progress in the park, however. Horizon Properties is well along with the exterior and structure for a 150,000 sq. ft. office, the J. Barry Center that has attracted a lot of tenant interest already. Horizon also has taken bids on the first 2 of it Southpointe Town Center retail buildings, totaling 130,000 sq. ft. The Town Center has room for another 150,000 sq. ft. office and 60,000 sq. ft. more retail.

In addition, Fletcher Industries has started construction on a 20,000 sq. ft. new building and Crossgates is getting underway on a 45,000 sq. ft. office.

There is also large scale residential coming back into the mix at Southpointe. GMH Capital Partners should be taking bids this fall on a high-end 360-unit apartment project. And work should be getting under shortly on the Reserve, a 300-unit apartment complex being developed by Morgan Management just off of Southpointe proper.

If you’re counting that’s roughly $100 million in construction started or starting within 3-6 months.

The region’s industrial market also continues to perk. Steelmaker Arcelor Mittal announced a $50 million investment to modernize and reopen the Monessen plant it bought from Koppers. Diesel engine manufacturer GE Transportation continues to bid early packages of the modernization phase of its $72 million Grove City plant expansion.  GE took bids Friday on 2 packages after awarding early demolition and concrete packages to PJ Dick and Mascaro Construction.

Earlier this week, First Energy announced a $30 million project to build containment facilities for spent fuel at its Shippingport nuclear plant.

Housing Continues to Rebound

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Three metrics that reflect the health of the housing market continue to be increasingly positive in metropolitan Pittsburgh over the past six months.  The volume and average price of home sales, as well as the amount of new construction are all trending towards a robust recovery in home construction through July.

Both RealStats and West Penn Multi-List reported another month of double digit increases in home sales, the six month of double digit growth, which pretty well confirms a trend of accelerated home sales. Prices for homes also jumped by a double digit rate again. This data supports the anecdotal evidence of growing multiple-offer sales on existing homes. Because of lingering mortgage qualification problems, however, the shortage of homes to sell (which is what is driving the pricing action) isn’t triggering a new construction boom. Even though new construction could be a relief valve for the supply, the financing conditions aren’t allowing demand to surge like it should after being pent up for so long. Lenders are indicating that conditions are starting to change but they also warn that some of their discretion has been blunted by the federal regulations that followed the mortgage crisis.

Even with a tougher borrowing climate dampening demand, new construction is still up.  New construction in July was up 27%, with new single-family detached units up 70.4% over July 2011. For the first half of 2012, the housing market in metro Pittsburgh was up 12% year-over-year, so July’s results are indicating an acceleration of the trend. More than any year since 2007, the fall selling season will be an important indicator of the 2013 market.

Aside from the short term trends, there are a few factors that should be followed to understand how a housing recovery will unfold. One significant limiting factor will continue to be financing. As banks have firmed up balance sheets and become more competitive in lending, the Fed and Congress have added or strengthened regulation. This will dampen demand to some degree for several years. Also hindering a recovery is a shortage of lots. Several thousand buildable lots exist in the metropolitan area but the inventory could be wiped out with one ‘normal’ year of 5,000 new construction units. The dynamics of residential development aren’t making that shortage go away any time soon either.

On the plus side is the natural gas industry’s coming demand. In 2012 it’s impossible to judge how many permanent jobs and homes will result from the maturation of the industry and its downstream industries, but there are indications that the heavy hitters in the business are afraid of a housing shortage as early as 2015. As part of their due diligence for a decision to build an ethane cracker, Shell is studying the housing options in and around Monaca. There are reports that Shell is investigating the availability of rental housing and viability of new rental construction so that they can budget the housing of construction workers into their plans. At least one option being pursued is the offer of a flat – but generous – rental rate per person for an extended lease. If that option is indeed true and viable it could spur thousands of units in new construction. Remember that Shell estimates it will take 10,000 workers to build the plant and its related facilities.

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.

Spring Thaw for the Market

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After the heightened activity between Thanksgiving and New Year’s it’s understandable that the bidding market would take a breather during January and February but the extended slower period was beginning to make contractors and suppliers a bit edgy (and aggressive). The market has begun to bloom a bit over the past two weeks.

The cracker plant win has had literally nothing to do with the better conditions but the uptick in activity did seem to coincide with the announcement. But I do mean coincide. In the gas sector the activity is accelerating in midstream facility construction. This morning’s article about the proposed Appalachian Superior compressor station near the Mills Mall underlines the uptick. That station would be the first in Allegheny County but at least 5 others are being planned within a 25 mile drive north of the site. Keystone Midstream has applications in for 4 plants in southern Butler County and Mountain Gathering is working on 2 others. Work has started on 2 more stations in western Washington County by MarkWest Development. Several of these are smaller – involving 5 compressor units – but even those will involve $10 million projects.

The buzz about office building construction is growing as well. Highmark’s purchase or option activity in the north is now ‘on the radar’ for most business development pros. With 4 buildings of at least 125,000 sq. ft. announced at Southpointe by Horizon or Burns & Scalo you might think that a temporary glut is looming but reports about Horizon’s first project are that the leasing is brisk and the building may already be more than 50 percent leased (even without a completed design). Rumors abound of multiple deals in Cranberry and multiple 100,000 sq. ft. plus users looking. Connecting the dots between users and development deals shouldn’t be too hard but a number of the users will be surprises. And prospects for downtown continue to blossom, including the possibility that a large natural gas or energy player is looking hard at a high visibility location.

Hospital construction is getting downright exciting. The team continues to expand/change at Highmark/West Penn Allegheny, with new execs, new professionals and changing roles for the original players in the new version of WPAHS. Former West Penn Hospital facility manager Bill Marshall has joined the Highmark team and Oxford Development has been retained to assist Highmark with their development. The next big announcement in this sector should be UPMC’s choice for the CM at the CIS project in Shadyside. The hospital interviewed its four finalists – Turner. Massaro/Clark, PJ Dick/McCarthy and Mascaro/Gilbane –  this week and it’s a hard race to handicap. Mascaro is already working on the exterior of the former Ford Motor building at Baum & Morewood so you might like their chances but I doubt anyone – including Mascaro – is counting the project out yet.

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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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Mechanics Lien Law Takes an Expected Turn

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On January 6, the Superior Court of PA overturned a March 2010 decision, which denied the Bricklayers of Western PA Combined Benefits Fund to lien Scott’s Development for unpaid benefit contributions made by a subcontractor. On two projects William Pustelak Masonry worked for Scott’s Development inEriebut did not make complete pension contributions for the union laborers employed on the jobs. Pustelak subsequently closed its doors and the Bricklayers, along with the Laborers filed a lien on Scott’s property to collect.

 A trial court found that the Bricklayers, while entitled to pursue the contributions, did not have standing as a contractor or subcontractor and therefore could not use the Mechanics Lien to collect.

 Superior Court accepted the Bricklayers Trustees’ argument that their collective bargaining agreement with Pustelak was an implied contract to provide labor for the projects and since labor was performed successfully, the Benefits Fund should be given the same rights as a subcontractor. In his majority opinion Justice Allen wrote:

“We conclude that under the applicable rules of statutory construction, the definition of “subcontractor” in the Mechanics’ Lien Law is entitled to a liberal interpretation. Contrary to the trial court, we conclude that a traditional subcontractor agreement is not a mandatory prerequisite to confer “subcontractor” status…. We further conclude that under the specific facts presented in this case, the unions are subcontractors and given the unique legal relationship that exists between the trustee and the union, the trustee has standing to assert a mechanics’ lien claim on behalf of the union.”

 The decision has surprised most observers of construction and law in Pennsylvania. Of special concern at the moment is that the amounts involved in the case are relatively minor, roughly $40,000 and the developer may be more inclined to settle the case than appeal it to the PA Supreme Court. That Court is also not obligated to hear the case. For owners, this decision means that a significant amount more due diligence will be needed or more extensive bonding used on projects to avoid liens from obligees for subcontractors that aren’t currently even required to inform the owner of their involvement.

Thus, an owner can enter into a contract with a general contractor and not only be hit with a lien from a sub that he/she isn’t aware is on the project (this is especially true of sub-subcontractors) but also from a pension fund for that sub. While there are several ways to avoid being caught off guard – none of which are free of cost or time – the logistics of verifying the status of current pension payments are more complicated by far than verifying that a supplier or secondary sub was paid.

Because the reporting of delinquent pension contributions lags by at least 60 days (and generally lags 90 days in practice) it will be impossible for owners to know at the time of payment that all union contractors are current with their benefits. In fact, it is difficult enough for owners to even ascertain which of their contractor’s subcontractors are signatory with a labor craft.

To protect himself an owner will need to require affidavits from subcontractors on the job that all benefit payments are current. It’s likely that even in good faith some of those affidavits will be inaccurate and there will doubtless be occasions when the truth is interpreted loosely. Regardless of the intent and the ultimate legal protection an owner gets from such affidavits, the purpose of contracting is to facilitate construction, not provide an owner with solid legal protection. The Bricklayers decision adds another layer of risk to an already risky proposition. For a project owner/developer, being right isn’t nearly as comforting as being completed and free of entanglements.

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

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

Pittsburgh Housing Market Ranks #1 with Forbes, Moody’s

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Moody’s Economy.com released its housing market forecast for 2010 and the results were glum for most of the nation, with only one of the 100 largest metropolitan markets forecasted to experience price appreciation.

Mark Zandi, chief economist for Moody’s Economy.com pointed to the sluggish employment picture and the stubbornly high foreclosure rate as factors that will keep the overall housing price down for another year in 2010. Zandi expects that another 2.4 million houses will have to clear foreclosure in 2010, and predicts that will be too much downward pressure to offset recovering markets. The good news is that Moody’s expects this year to be the last of the decline.

“It’s clear we’re closer to the end of this crash than the beginning,” says Zandi. Housing is more affordable, and construction is still low, so sales will eat up excess inventory. “We’re moving in the right direction, and that’s reason for optimism,” he says.

Pittsburgh’s appreciation is a reflection of the stability of the region, which also means that the market did not enjoy the unsupported price appreciation that occurred in other regions in the middle of the last decade. Like eight of the other ten best markets, Pittsburgh’s median price is still below $140,000.

On February 19 the online magazine Forbes.com released its list of the ten best markets to buy a house and ranked Pittsburgh number one. Using the Housing Opportunity Index, a metric created by the National Association of Home Builders and Wells Fargo, the magazine said Pittsburgh’s appreciating prices, affordability rating and low number of foreclosures, which help keep prices stable, all factored into the city’s ranking.

 According to Forbes, “For a housing market to be attractive it should have appreciating prices that show homeowners are making wise investments; an affordability rating that gives middle-class families with good credit entry into the market; and a relatively low number of foreclosures, which keeps prices stable and indicates there isn’t an excess of inventory.”