Category: Regional Economy

National Economic Woes Begin to Dampen Local Construction

Posted on January 26, 2009 | Leave a comment

Metropolitan Pittsburgh’s good economy could not overcome the fear that gripped the consumer in October and November, sending housing starts here to the lowest levels in two decades. Permits for new construction virtually stopped from mid-October through the end of November. You could literally follow the panic that was gripping Wall Street and see people here put the brakes on. Even with significantly higher activity in December the number of single-family detached homes started was 397, the lowest for any quarter since we began tracking activity in 1994.

During the full year of 2008, permits were issued for 2006 single-family detached units, down 20.5% from 2007. The market for single-family attached and multi-family units was off similarly, with 1,342 units started compared to 1,640 started in 2007. The overall housing market was down 19.6% compared to 2007, and by more than 35% compared the cyclical high in 2004. I attribute the depth of the slowdown to the fact that most builders in the region are small and very well-connected to the market demand. Time and again, we see Pittsburgh’s builders react quickly when a market softens, which prevents the build-up of any significant oversupply of houses.

The other noteworthy development is the continued growth of new construction in the City of Pittsburgh, which experienced the second highest total of detached new units in the region, saw its overall new construction total increase by 24.6%, and issued permits for twice as many units of new housing as Cranberry and Adams Townships combined.

Non-residential construction remained at a high level in 2008, with $3.48 billion contracted for the year, less than a one percent decline from 2007. Contracting in the fourth quarter slowed dramatically, with volume being driven by three large projects. Setting aside UPMC East, Dick’s Headquarters and the Oakland VA jobs, there were less than $400 million contracted in the last three months. With more than $3 billion expected to be invested in the dozen biggest projects in 2009, this trend appears to be extending out for another few quarters, with less work for most of the market to pursue.

We are forecasting a modest increase in housing in 2009, with single-family growth of a couple hundred units, and an overall volume of 3,700 units for the metropolitan area. Because of the large investment in industrial projects like Allegheny Technologies Brackenridge plant, AK Steel and the USS Clairton Works, non-residential contracting should exceed $4 billion in 2009, but I expect the underlying commercial market to decline by more than 30%.

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:

The top Pittsburgh sub-markets for housing construction in 2008

Some Green News

Posted on December 10, 2008 | Leave a comment

December 9, 2008 was celebrated as Rebecca Flora Day in Pittsburgh. Rebecca has been an incredible positive force in the region, first working with South Side Local Development and especially for the past decade as Director of the Green Building Alliance. Her energy and dogged determination to make regional leaders understand that ‘green’ building wasn’t a fad but a sustainable economic reality, put western PA in the forefront of sustainable design and construction worldwide. Rebecca Flora Day recognized those efforts, which resulted in two of Pittsburgh’s buildings, the David Lawrence Convention Center and PNC Firstside Center, being the largest public and private LEED-certified buildings in the world at the time of construction.

Rebecca’s leadership put her in the role of US Green Building Council board chair during 2008, and unfortunately put her on a national stage, to which she will be heading full time in January. It is a loss for the region but great stuff to have one of Pittsburgh’s green pioneers working to head up education for USGBC. Congratulations and best wishes to Rebecca.

The GBA will conduct a national search for a new executive director. During the interim, Geoff Stillson will serve as director.

On the construction front, another innovative green project is moving forward, with the sleection of a design/build team. To recognize and leverage Pittsburgh’s leadership in sustainable design, a collaboration of public & private groups, collectively known as the Pittsburgh Green Initiative, has selected the team of Mascaro Construction, DLAstorino/Horizon Architects, CJL Engineering & Klavon Design Associates to help develop a “Living, Learning & Earning Center.”

Pittsburgh Green Initiative involves participation from CMU, Penn State, Pittsburgh Gateway, the URA, Reps. Doyle & Ferlo, Operating Engineers Local #95, and others to create a center, using one of the region’s abandoned industrial/institutional buildings, that will celebrate our green leadership & foster sustainability as a force in design, lifestyle & economic development. The team is just beginning analysis of sites, and will be designing and building next year.

Third Quarter Housing Starts Plunge on Recession Fears

Posted on October 7, 2008 | Leave a comment

The tidal wave of bad financial market news that began in July seems to have spilled over into western PA in the third quarter. Pittsburgh’s economy is as solid as it’s ever been, but the fear of the national recession seems to have put enough fear into the market to drag it down. Even though job creation is positive in western PA, it is understandable that potential home buyers would look forward six to twelve months with some uncertainty.

During the January through September period 1,609 permits were issued for single-family detached units, down 12.6% from the same period last year. The market for single-family attached and multi-family units was down further, with 1,056 units started compared to 1,270 during the first three-quarters of 2007. The overall housing market was down 14.3%. Activity was a mirror image to 2007 when housing permits increased over the second quarter. Permits granted in third quarter 2008 for detached housing totaled 458 units compared with 587 last year, and the overall totals were 873 compared to 1,217 in 2007. That represents a 22% and 29% decline respectively.

The one submarket that seems to be immune to the downturn is within the city of Pittsburgh. There has been two-and-a-half times the new construction in the city as in the next most active suburb.

Non-residential construction remained strong in the quarter, with more than $1 billion in contracts awarded. Contracting during January-September was $2.7 billion, a 13% increase over the first nine months of 2007. The difference between this year and 2007 is that the pipeline is clearly drying up. The fourth quarter should have another half-billion or more in new contracts, but a lot of that is already on the books. Bidding between Labor Day and early October is off significantly. This is usually the time when last-minute bids go out for construction before the weather breaks. The steep decline in the capital markets has pulled the rug out from under a strong market, and it’s looking like a lot of projects are being deferred until there is more certainty about the economy.

Energy and manufacturing projects are still advancing rapidly, and should fuel a couple of billion dollars worth of work in 2009, but those markets are served by relatively few firms. The mainstream commercial and institutional projects are increasingly being shelved. And some of the bigger institutional owners are paring back. West Penn Allegheny Health System has delayed the construction of a new ER at the Alle-Kiski facility in Natrona Heights, and UPMC has cut back capital budget spending, although the new $200 million Monroeville center appears to be moving ahead this quarter.

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:

Municipality	#SFD	#SFA	Total
Single-Family Detached
North Huntingdon Township	78	16	94
Adams Township	76	55	131
Pittsburgh	73	263	336
Peters Township	69	2	71
Moon Township	63	8	71
South Fayette Township	55	4	59
North Strabane Township	54	31	85
Franklin Park	52	15	67
Cranberry Township	46	45	91
Jefferson Hills	45	4	49

Single-Family Attached
Pittsburgh	73	263	336
Adams Township	76	55	131
Cranberry Township	46	45	91
Slippery Rock Township	9	40	49
Slippery Rock	4	40	44
South Park	10	40	50

Total Pittsburgh MSA 2007:3	1,841	1,270	3,111
Total Pittsburgh MSA 2008:3	1,609	1,056	2,665
% Change	-12.6%	-16.9%	-14.3%

By County	SFD	SFA	Total
Allegheny	730	615	1345
Beaver	91	31	122
Butler	213	218	431
Fayette	89	12	101
Washington	228	94	322
Westmoreland	258	86	344

Don’t Panic

Posted on October 1, 2008 | Leave a comment

September 29th marked at least the third ‘worst day in banking’ this year. With six or seven different ways for the average citizen to find out simultaneously that the House of Representatives turned down the so-called ‘bail-out’ and that Wall Street didn’t like that, it is easy to understand how fear could well up in such a short time. The worst thing any investor can do is to sell into a market panic, unless minimizing your portfolio is the goal.

Remaining calm when all around you is chaos is easier said than done, but there are a couple of things you can do to practice calming your nerves.

First and foremost, focus on the facts. The media is in extreme competition for your attention, and the current theory is that you’ll pay attention to extreme reporting. That means that every event is a ‘crisis,’ complete with its own title, and that the consequences are reported as earth-shattering every day. With all forms of media shouting doomsday headlines at you every minute of the day, it’s easy to forget that the US economy hasn’t even experienced contraction in GDP yet. Unemployment is at 5%, not the 25% of the Great Depression, or even 10% that we experienced in western PA in the early 1980’s. We are most assuredly in an economic slowdown nationally (probably a recession already), but it’s about time for one of those anyway, just like in 1989-1990 or 2001-2003, or any time we have five or six years of growth.

Focus on your investment objectives. Unless you are trading for short term cash growth (in which case-good luck), these tough days for the stock market will pass. If you have an account managed by a professional, your money is probably being used to buy more stock in undervalued companies that will grow that much more rapidly when recovery comes, whether that’s next quarter, next year or next decade.

Focus on the region. Construction and real estate fundamentals in western PA are better than normal. Vacany rates are declining, rents are increasing, and job creation is accelerating. We have massive investment in industrial construction that will produce manufacturing jobs. Legal and accounting firms here continue to grow as their businesses have grown beyond regional borders. Even our banks have steered clear of the poison that has affected other regional institutions. And we all know how strong the healthcare and technology sectors have become in the region.

There is daily evidence that businesses here will be cooling off their plans for construction projects. Doubtless contracting in 2009 will be slower that the past few years, unless some real clarity about the financial markets happens in the next few months. That’s OK. It won’t be fun to endure a slowdown, but the upside is that contraction is the natural response to an extended period of economic growth, and western PA has had the growth. Moreover, the next wave of growth, be it from more tech jobs, healthcare or energy, is already building to keep the downtown relatively short and shallow.

Industrial Construction Renaissance

Posted on September 18, 2008 | Leave a comment

Wednesday’s long awaited announcement from Allegheny Technologies that it had decided to put a new $1.2 billion rolling mill in Brackenridge adds another mega project to the list of industrial construction projects scheduled to get underway in the region during the next 12 months. ATI’s investment in northeastern Allegheny County matches the $1 billion that U. S. Steel is investing in upgrading their Clairton Coke Works, where preliminary work is underway. Another $1 billion project has begun the preliminary bidding cycle in western Washington County, Robinson Power’s Beech Hollow Coal-fired Power Plant.

You can undertand why Allegheny County Executive Dan Onorato fairly bristles at talk of the steel industry in the past tense. For a region with a “manufacturing past” $3 billion in construction is sure a lot of investment.

Add to that the rush to explore the Marcellus Shale formation for natural gas and you have quite a nice boom in the industrial segment of the economy in western PA. Already there are three different projects being planned for natural gas exploration companies, totaling around $50 million in new construction in Westmoreland and Allegheny County. Some of the existing energy companies in western PA (Atlas Energy, Consol) have already invested more than $100 million in the past couple of years. This may be all that’s out there but it says here that this is the tip of the iceberg.

Anecdotal evidence is all that we have right now to judge the staying power of this industrial renaissance. An interesting tidbit is that the national construction giant Barton Malow opened an office in Southpointe this summer for its industrial group, not the institutional group (which is building Children’s Hospital and UPMC Monroeville East with P. J. Dick).

One of the long-term benefits of all this investment is that it secures thousands of jobs that most of the region’s pundits thought were dying off. Both ATI & USS are creating better processes without eliminating jobs. The construction jobs alone will be in the thousands over the next three years, and the energy jobs may eventually be seen as the start of a new industrial boom in the region. I realize that sounds like a sunshine pump but the need for natural gas and alternative eletrical generation to reduce dependancy on oil imports is at least as great as the need to drill more oil domestically, and it’s a whole lot more certain. Some of the first land leases have been windfalls for the landowners, many of whom are farmers. There’s even been talk of a coal-to liquid gas facility near Midland, PA. That western Beaver County town is the prototypical post-industrial municipality in our region (even though there is still steel made there).

As one who regularly speaks about the folly of trying to attract “well paid” manufacturing jobs, I’m happy to have not seen this one coming. It is probably more realistic to expect a renewed industrial economy here to attract modest job increases, and provide mostly short-term benefits for the construction industry. It’s possible, though, that renewed industrial investment in a region that has industrial infrastructure could be a home run.