The period between Thanksgiving and Christmas is typically the slowest time of the year for bidding. Every year there is usually a plum out there that will keep some estimators busy right through the holidays but it’s usually a slack time. During the next two weeks, however some very interesting projects are bidding that may give an indication about the market.
Next week bids are being taken on two apartment projects worth roughly $30 million each. Morgan Management is taking bids from Mistick Construction and MW Builders on theRochesterVillageproject, 228 units inPark Placein Cranberry Twp. At the other end of town, EQA Landmark has asked for prices on its 250-unit apartment project at Newbury inSouth Fayettefrom Dynamic, Mistick Construction and MW Builders. These are the first of what may be five apartment complexes to start in 2012. The upheaval in the housing market, the growth in employment in natural gas/energy and the availability in financing is driving a boom in multi-family construction nationally and we are about to experience it in western PA. Expect at least twice the number of multi-family and attached units in 2012 – perhaps 2,100 units – as in 2011 or 2010.
On the 15th JC Penney is bidding its new store at the Monroeville Mall, a 110,000 fit-out of part of the former Boscov’s space, which Rycon is preparing for the tenant right now. Bids will come from Rycon, Mosites Construction and Poerio from this area plus EMJ Corp., Woods Construction and Whiting-Turner from out of town. And on the 19th Dick’s will take bids from Rycon, Continental, TD Farrell and WDS Construction for their new $10 million store in Cranberry Twp. on Route 228.
That’s two new apartment complexes and two new retail stores plus the $90 million Mt. Lebanon High project on the 14th and the $60 million Squirrel Hill Tunnel rehabilitation on the 15th. Merry Christmas, someone!
Single family detached housing starts rose more than 16% compared to last year during the first half of 2010, according to the Pittsburgh Homebuilding Report. The pickup in new home permits in May and June is the first positive sign in almost three years, and it obviously was happening without aid from the tax credit. More than just the volume increase – which was fairly small – the better sign was seeing builders who had largely disappeared for a year or more get some new business.
During the January through June period 810 permits were issued for single-family detached units, up from 697 during the same period last year. Attached units declined more steeply, with 325 units started compared to 614 during the first half of 2009. The overall housing construction market was down 13.4%.
Tempering the optimistic side of the data is the surprising drop-off in attached housing. The numbers last year included the permits for a large market-rate Hope VI project so that may have skewed the 2009 numbers; however, the demographics really favor this kind of product so you might expect to see a recovery in villas and quad homes first.
Non-residential construction was down 13% compared to the same period last year, but contracting volume was up over 200% from the first quarter of 2010. Contracting during January-June was $1.13 billion, down from $1.3 billion in 2009. Most of the larger projects started were publicly funded so far this year. During the past 45 days or so there has been an improvement in the amount of private sector projects being bid but the market remains hypercompetitive and there are fewer opportunities for the larger firms in the region.
The improved global economic picture has helped manufacturers pull the trigger on some of the large industrial projects that have been pending. AK Steel has contracted its $140 million upgrade and USS Clairton Works is preparing to start roughly $450 of the $1 billion it has planned to invest in its coke batteries. Allegheny Ludlum selected an engineer for its mill equipment, which should signal the renewal of their plans for a new $1.2 billion plant in Brackenridge. Even with the industrial projects included the volume for 2010 should remain below $3 billion.
Moody’s Economy.com released its housing market forecast for 2010 and the results were glum for most of the nation, with only one of the 100 largest metropolitan markets forecasted to experience price appreciation.
Mark Zandi, chief economist for Moody’s Economy.com pointed to the sluggish employment picture and the stubbornly high foreclosure rate as factors that will keep the overall housing price down for another year in 2010. Zandi expects that another 2.4 million houses will have to clear foreclosure in 2010, and predicts that will be too much downward pressure to offset recovering markets. The good news is that Moody’s expects this year to be the last of the decline.
“It’s clear we’re closer to the end of this crash than the beginning,” says Zandi. Housing is more affordable, and construction is still low, so sales will eat up excess inventory. “We’re moving in the right direction, and that’s reason for optimism,” he says.
Pittsburgh’s appreciation is a reflection of the stability of the region, which also means that the market did not enjoy the unsupported price appreciation that occurred in other regions in the middle of the last decade. Like eight of the other ten best markets, Pittsburgh’s median price is still below $140,000.
According to Forbes, “For a housing market to be attractive it should have appreciating prices that show homeowners are making wise investments; an affordability rating that gives middle-class families with good credit entry into the market; and a relatively low number of foreclosures, which keeps prices stable and indicates there isn’t an excess of inventory.”
New house permits in metropolitan Pittsburgh jumped 41.2% in the fourth quarter of 2009, compared with the last quarter of 2008. This is the first indication we’ve seen in two years that the levels of new construction may be ready for a year-over-year increase. Permits for housing units started in October through December totaled 815, versus 577 during the same period in 2008.
Activity levels are still terribly low compared to the historical norms. Even with significantly higher activity in the fourth quarter the number of single-family detached homes started in 2009 was 1517, the lowest for any year since we began tracking activity in 1994. That volume represented a 24.4% decline compared to 2008 starts. The overall housing market fared better, however, with total units permitted (including attached units) declining 16.2% to 2,807.
The outlook for 2010 is brighter, but not sunny. The depressed level of activity in 2009 almost certainly represents the bottom of the market. Local builders have cut their activity and supply remains close to demand. The extension of the tax credit, and improving overall economy should provide enough additional demand to boost new construction comfortably above the 3,000-unit level in 2010. The top municipalities for new construction in 2009 were:
Municipality
#SFD
#SFA
Total
Single-Family Detached
North Huntingdon Township
81
12
93
Peters Township
67
2
69
Jefferson Hills
64
0
64
South Fayette Township
62
8
70
Adams Township
59
73
132
Moon Township
54
16
70
Richland Township
52
32
84
Cranberry Township
51
46
97
Pittsburgh
51
244
295
Ohio Township
46
27
73
Single-Family Attached
Pittsburgh
51
244
295
Town of McCandless
5
219
224
Adams Township
59
73
132
Ross Township
5
69
74
Cecil Township
32
51
83
Total Pittsburgh MSA 2009
1,517
1,290
2,807
Total Pittsburgh MSA 2008
2,006
1,342
3,348
% Change
-24.4%
-3.9%
-16.2%
By County
SFD
SFA
Total
Allegheny
660
873
1533
Beaver
109
18
127
Butler
185
168
353
Fayette
88
2
90
Washington
217
171
388
Westmoreland
258
58
316
Non-residential construction plunged predictably in 2009, with $2.4 billion contracted for the year, a decline of more than one billion dollars, and 31%, from 2008. Contracting slowed dramatically in mid-year, as did planning for new construction. Like housing, non-residential contracting showed some renewed life in the fourth quarter, and bidding activity has been livelier in early January than normal.
Financing remains a key to seeing a commercial construction recovery take shape. There are lots of indications that the global economy is recovering from the financial crisis, and our region seems to be heading in the direction of where the new economy’s jobs will be; however, the financing climate is still not where developers want it to be to make their risk/reward expectations make sense for new development.
Most of the national economic news at year-end is trending positive, and indicators for 2010 are for continued growth, although at a slower pace. The national economic picture is unfortunately brightening at the same time the regional market is entering the trough point of the recession.
Local architects and engineers were reporting very noticeable drop-offs in RFP’s and new commissions last spring and summer, and the reflection of that decline will be felt during the next three to six months. IKM partner Joel Bernard remarked on his firm’s status, which seems to be typical, “We may not have one project in construction documents right now,” he said. “All of our work is either in construction administration or preliminary stages of design.”
While the hole in the bid market seems temporary, the overwhelming sentiment on the front lines has turned decidedly negative. Layoffs have occurred at many contracting firms, just as they did at architectural/engineering offices all summer; and the pool of available labor is growing for the first time in nearly half a decade.
One source of objective data, the Pittsburgh Builders Exchange bid calendar, is showing that the negative sentiment may be oversold. Researching the number of projects bidding at year’s end showed 186 projects with bid dates in December. While that isn’t a project volume that will create a labor shortage it is 40% more work to bid than the 133 projects that bid in December 2008.
Whether or not the prevailing sentiment shifts toward recession or recovery, one reality is that the slowdown in contracting in the second half of 2009, and the prospect of a lighter-than-usual bid schedule in the winter/spring of 2010 makes for a tough start to the New Year, with backlogs lower than in a number of years. Those companies which were able to build backlog have done so in a more competitive environment, and likely at lower margins than desired.
A hallmark of the regional market at this stage of the business cycle is the intensity of competition for the projects that are available. A sampling of projects recently bid gives a good indication of how bid lists have lengthened.
• A $4.7 million first floor build-out at the WVU Biomedical Research Center attracted 14 bidders, including generals from Pittsburgh, Maryland and Washington DC.
• Heritage Valley Health Systems bid several projects in November and December. The hospital system historically bid their projects to two or three contractors, with two pre-qualified subcontractors for mechanical and electrical trades. The recent projects involve six invited contractors and almost a dozen subs.
• The Penn State Gary Schultz Child Care Center, a $7 million building, was bid by 13 contractors, including firms from Pittsburgh, Chambersburg and Harrisburg. A similar size project in early 2008 drew four bids from local contractors only.
This kind of market condition can be exciting for buyers of construction services, at least on bid day. For owners experienced with hyper-competitive bidding environments this kind of action also means much more work after the contracts are let, as contractors and subs will have no room for flexibility or interpreting intent and won’t be likely to pass up opportunities to regain reasonable margins. In the public arena, tighter bidding means that claims and change orders will be daily headaches.
Residential construction in 2010 is set to pick back up, but the activity levels will remain anemic by historical standards. Single-family detached homes should again break above the 2,000-unit level but that volume remains well below the 3,600-plus units started at the high water mark in 2003.
Housing permits declined 24% in Allegheny, Beaver, Butler, Fayette, Washington and Westmoreland counties.
Nonresidential contracting volume was likewise off in 2009, with approximately $2.6 billion in total value. Missing from the mix in 2009 was the number of large projects that had begun in the preceding few years. Had one of the steel mill projects proceeded, however, the total volume would have masked the decline in overall opportunities. Assuming that one or more does get underway in 2010, the increase year-over-year will not be reflective of what will be a tough year for commercial construction.
Contracting in the seven-county metropolitan statistical area pulled back in 2009 after a four-year growth run.
There were a variety of reports within the past week that seem to verify that the national economy has come off the mat and that the root causes of the recession are being remedied. Much potential exists for a second leg down for the stock markets, another fainancial market slide or implosion if the institutions have been hiding big losses and hoping for growth to cover them, but at least there is good national news.
Third quarter GDP was 3.5%, better than the 3.1% predicted. Cash-for-clunkers, ARRA accounted for much of the growth, however, so fourth quarter numbers should be tepid, maybe even negative. The Obama administration claims 3M jobs were created/saved, but unemployment has crested the 10% mark.
Housing market news is better. Total state existing-home sales, including single-family and condo, increased 11.4 percent to a seasonally adjusted annual rate of 5.3 million units in the third quarter from 4.76 million units in the second quarter, and are now 5.9 percent above the 5.01 million-unit pace in the third quarter of 2008.
Sales increased from the second quarter in 45 states and the District of Columbia; 28 states and D.C. saw double-digit gains. Year-over-year sales were higher in 32 states and D.C.
Financing for commercial development is showing life for the first time in more than a year. Several large insurance companies have alerted the brokerage community that their money is back in the market and are looking for deals. For developers the down side is the deals are not going to resemble anything like recent years, but most are willing to go 75% loan-to-value, a significant increase over the willingness to extend this spring. The estimates are that money coming back into play approaches $1 trillion
The most significant event of recent weeks was the Developers Diversified CMBS issue of $400 million, which sold out overnight with a reduced risk premium of 140 basis points on AAA bonds, compared to the 200 BP that was offered initially. The AA-rated portion of the bonds carried a yield of 5.75% and the A-rated portion was 6.25%. These aren’t substantially different from what was offered during the heyday of CMBS sales in 2006-2007. The assets backing the securities were retail properties which were government guaranteed under the TALF program. This isn’t a return to normalcy in the CMBS market but it clearly demonstrates demand for the products, and is at least the first issue in 18 months.
Pace of unemployment has slowed nationally, now around 200K jobs instead of 600-700K jobs in spring. Closer to home, October’s unemployment was flat in PA, with the actual number of people working rising slightly. In western PA the unemployment rate still rests more than 2% below the national rate
Finally, the most recent quarter’s numbers from the National Association of Realtors showed the prices rose in the Pittsburgh area, where the median price in the third quarter was $124,600, vs. $122,700 in the same quarter last year. Housing starts remain low in the region, which will support current housing prices by keeping inventory low.
None of this represents robust market conditions, but all of the data is consistent with what happens during the first quarters of economic recovery. Keep your fingers crossed for no more unexpected calamity.
The effects of the global recession have gripped the non-residential construction market in western PA as the fourth quarter of 2009 begins. Contracting during the first three quarters of the year was down 26.6% from last year. Non-residential construction during January-September was $1.98 billion, down from $2.7 billion during the same period in 2008. “The pace of bidding was about normal for late summer but the average size of the opportunity was much lower,” says Burd. “The pipeline of projects being proposed is improving, but the competitive pressure on contractors to build backlogs is showing in bids. The tight market will continue through at least the first half of 2010”
Reduced global demand has dampened the plans for almost all of the big projects slated to start in 2009, and profit pressures on corporations, combined with poorer results from the institutional sector has limited capital expenditures across the board.
Single family housing starts fell more than 32.3% compared to last year during the nine months of 2009, but that volume represents an improvement over mid-year levels. “While there was probably some goose to the market from the $8,000 tax credit, most of the improvement came in September, which would be too late for most buyers to start and close on a home in time,” said Jeff Burd, President of Tall Timber Group. “I expect that the decline will continue to narrow as the next six months proceeds, both because the October to April period last year was so slow and because demand is recovering.” Burd cited reports from the annual Builders Association of Metropolitan Pittsburgh (BAMP) Festival of Homes, held in late September, of higher than average traffic as reinforcement to anecdotal evidence of an uptick from individual realtors. “There is still a long way to go before we see a return to the normal pace of home construction, however,” cautioned Burd.
During the January through September period 1,090 permits were issued for single-family detached units, down from 1,609 last year. Attached units also declined, with 807 units started compared to 1,056 during 2008. The overall housing construction market was down 28.8%.
Tall Timber Group, based in Ross Township, is a research and consulting firm for businesses marketing in the construction industry. Founded in 2000 Tall Timber is also the publisher of BreakingGround magazine. The totals listed below represent the number of new housing units for which building permits were issued, excluding mobile homes and elderly care complexes. The top areas were:
Now that the logistics of the G-2o Summit are becoming known the feeling around town is a little like that after a big party. The celebration is over and the hangover is setting in. It’s important to bear in mind that the economic impact of the G-20 selection is more about the signal being selected sends and the attraction of business opportunities that will follow.
Unfortunately, the summit itself will not feel like a big benefit. The mainstream media, in its never-ending effort to focus on negative angles, has written of late about the deliterious effects on nearby restaurants and retailers, many of whom probably thought they would get a business boost from the delegates & hangers-on. The security measures, particularly in a post-9/11 world, are going to be amazingly stringent, and that has meant that almost all businesses near the downtown corridors will actually be closed. In part this is for convenience, but mostly it’s because transportation (even public transit) will be locked out of almost all the central business district.
Even more disconcerting is the fear of potential damage from the protestors. Anecdotes about foreign tourists taking a too-keen interest in some of the roof-tops in the Cultural District are seeping out, and the history of the protests from recent G-20’s isn’t heartening. They tend to be violent and destructive to property. With so many cultural gems located near or in the G-20 security lockdowns, it would be unfortunate if the past performance repeated.
These unfortunate realities aside, remember that the selection of Pittsburgh has been very beneficial. After the initial response (did they really say Pittsburgh?), the selection has caused thousands of media and business to research why Pittsburgh was chosen. This has lead to a raft of stories wourldwide about how cool, progressive, etc the region is, and has increased inquiries about business location here.
There is a legitimate concern about our ability to put our best foot forward when we have to abandon some of our showcase areas to security. One of my friends, attorney David Hickton, asked the question “will Pittsburgh end up looking like Rock Ridge?” (great Blazing Saddles reference). The answer is probably yes, but if we get lucky with the protestors, it’s far more likely that the aftermath will bring lots more interest in the city. This will mean more visitors for leasure and more businesses for the long haul.
For some help in dealing with construction during the the Sept. 23-25 lockdown period, the Master Builders’ Assoc. of Western PA has put together a great guide for planning. You can access it at http://www.mbawpa.org/MBA%20G-20%20Guide.pdf
It’s going to be a pain in the neck period when the world’s leaders are here, but for the big picture it will be better to be in the spotlight for a little while than to watch some other city suffer through it.
Single family housing starts fell more than 39% compared to last year during the first half of 2009. “The buyers’ response to tough market conditions has been strong and builders have responded by keeping new inventory off the street,” said Jeff Burd, President of Tall Timber Group. “It was pretty obvious from the activity levels month to month that much of the slowdown was early in the year, when the fear from last fall’s financial panic was still palpable; however, the spring permits don’t indicate much easing of the uncertainty.”
During the January through June period 697 permits were issued for single-family detached units, down 39.4% from the same period last year. Attached units also declined, with 614 units started compared to 641 during the first half of 2008. The overall housing construction market was down 26.8%.
“There really isn’t anything upbeat in this market, but the hopeful signs are that the decline has slowed significantly from the first to second quarter,” says Burd. “And, the one positive trend continues to be the solid demand for living in the city, as Pittsburgh proper lead the region in single-family permits, a first since we began covering the area in 1994.”
Non-residential construction was down almost 18% from last year, but contracting volume was up over 75% from the first quarter of 2009. Contracting during January-June was $1.3 billion, down from $1.58 billion in 2008. “The pace of bidding is better than you might expect for a recession,” says Burd. “The pipeline of projects being proposed is improving, with architects and engineers seeing some uptick in the number of proposal requests, however, the pressure on contractors to build backlogs is starting to show in bids.”
Reduced global demand has dampened the plans for almost all of the big projects slated to start in 2009, and Tall Timber has modified it forecast for non-residential construction for 2009 to $2.4 billion. “Unless the bigger economy begins to grow sooner than it appears it will, I’m not hearing anything to suggest that AK Steel or Allegheny Ludlum will begin until next year” noted Burd. The other large industrial project, USS Clairton Works, has already been shelved.
The totals listed below represent the number of new housing units for which building permits were issued, excluding mobile homes and elderly care complexes. The top areas were:
One of the few pleasant surprises of the New Year is the volume of bidding in January. Normally a slow month for bids and contracts, January was expected to be a continuation of the dead fourth quarter of 2008, especially as more and more developers put projects on ice. Instead a couple hundred projects went out, and work began on most of the projects that were awared at the end of 2008.
That surprise aside, non-residential construction in 2009 is going to be slower, both nationally and in the region. Here in western PA, however, the numbers won’t show the slowdown because of the unusually high volume of large proejcts again. Throughout the past decade median annual contracting volume was between $2 billion and $2.5 billion. During the height of Plan B, when PNC Park, Heinz Field and the convention center were all started, the volume reached $4 billion in 2000. For the past two years contracting volume was right at $3.5 billion, and the economic woes should be expected to reduce the volume in 2009 by a billion dollars, but the volume may actually grow by more than that, even potentially topping $5 billion.
The graphic below shows 15 projects that are either starting or that will start this year. While all of the biggest projects are listed, it’s likely that there are a number of others between $20 and $50 million that aren’t on this list.
A sampling of 15 of the largest projects expected to start in 2009 in the metropolitan Pittsburgh area
The total of these projects alone equals the volume for the last two years, around $3.5 billion. The disparity between the high dollar volume of big work (even though it’s a few projects the volume still requires the resources to complete $3.5 billion) and the rest of the market underscores how trying 2009 could be. With a little simple math it’s clear that even a $5 billion year will leave most of the market scrambling to compete for $1.5 billion in work.
