Category: Regional Economy

Wrapping Up the Week with RACP

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Last week’s announcement of the first round submissions for Redevelopment Assistance Capital Program (RACP) grants included applications for assistance on a number of the region’s high-profile projects, including the ALMONO development, $100 million Union Trust renovation and Oxford’s 350 Fifth Avenue office tower. There were also some surprises.

While the zoo has been quietly doing some smaller expansion projects over the past year, the RACP submission included a grant to help with the Pittsburgh Zoo’s $30 million expansion program. Another project that had been advancing under the radar is Robert Morris’s new convocation center.

There were also several hospital projects on the submission list, which is fairly unusual and an indication of how the healthcare industry hopes to fund some of its capital needs that lead to job creation. Both UPMC and AHN had projects in the RACP pipeline. The former applied for funds for a $5 million OR-14 at Children’s Hospital. AHN applied for $9.1 million for a NICU at West Penn Hospital.

RACP grants will be made later this year. Most of the big project grants will go towards construction that will occur in 2016 or later.

Among the projects getting under construction, Mascaro has started on Chevron’s 120,000 sq. ft. TI at 700 Cherrington, which is space that will house its reduced shale workforce for now. Marco Contractors was awarded the new CVS store in Greensburg. Franjo was selected as the contractor for $6 million Bobby Rahal parking garage in Shadyside. PJ Dick’s small projects group started work on the Whole Foods shell and the 125-car garage at the Siena development in Upper St. Clair. Hillcrest Academy has narrowed the field for its $1.8 million classroom addition to Rycon & Bear Construction. Rycon was the low contractor on the $2 million CMU INI facility.

The bump in new work hasn’t shown up in slack bidding just yet. In northern WV, where work has been brisk, bids came in on top of each other for the new residences at Fairmont State. Massaro was low at $28,803,000 with Nello second at $29,597,000 and Yarborough and Manheim tied at $29,946,000.

The Gas Tax

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Gov. Wolf surprised no one on Feb. 11 when he announced plans to create a severance tax of five percent on the natural gas extracted in Pennsylvania. Wolf campaigned on this tax – this exact level of levy — and has wasted no time following through. Unlike his predecessor, who was hamstrung by his ‘no tax’ pledge to Grover Nordquist – Gov. Wolf can make good on his promise without having to put it into effect. The severance tax will have to become legislation, meaning that something specific will have to get through the Republican-controlled legislature. As of the announcement, there were few specifics of the proposed law released.

The lack of specificity tempered the remarks of anyone who responded. The shale gas industry responded negatively. There were implied threats of further slowdown in drilling and development of the resource in Pennsylvania. Comparisons to the extraction taxes of other states brought reminders that places with higher taxes – like Texas – have virtually no corporate taxes. The comparison to West Virginia prompted the reminder that drilling and processing in West Virginia lagged the activity in PA by quite a bit. But again, it was hard to lodge too much of a complaint against the proposal without knowing what was in the proposal.

One tidbit that the governor did mention was that local government would still participate in the impact fees, which will still be charge to some degree. My belief is that the loss of impact fees to local government is the biggest negative in Gov. Wolf’s proposal. The gas industry will figure a way to profitably get at the largest gas deposit in North America. Local municipalities and counties bear the brunt of whatever impact drilling has. The use of those impact fees has brought new roads and infrastructure to places that the state has barely invested in over the years.

Washington County Chamber of Commerce President Jeff Kotula may have spoken for all local government yesterday when he expressed concern about the share of impact fees that would find their way from Southwestern PA to Southeastern PA, where there is no drilling but a lot of votes.

Don’t Bury the Apartment Market Yet

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One thing I noticed when the year-end party circuit was in swing was that lenders have about had it with apartments, at least in Pittsburgh. After tow or three years of cautiously making loans to one developer after another, the Pittsburgh banking community seems ready to throw dirt on the apartment boom.

They may indeed be correct. After all, the combined total of apartment starts for 2013-2014 is four times what the average number of units started was for the previous 13 years. I’ve gotten several calls in the last three months from appraisers trying to estimate absorption and looking for starts information. I understand the mentality, especially in Pittsburgh, that looks for the ride to end. Here’s where I think the problem may be in that thinking.

First, there really isn’t any time in the working careers of Pittsburgh lenders and appraisers that is a comparable market reference – at least if the career was here. Population, particularly in the urban core, has been declining for much of the past 30 years so there hasn’t been an apartment driver like in the south or in major landlocked cities like New York or DC.

More important are the supply/demand dynamics. There is net migration into Pittsburgh and there are between 8,000 and 18,000 new jobs being created in the region annually – depending on whose estimate you’re using. Each new job essentially  creates a new household (if you compare Pittsburgh existing households and total employment, the numbers are almost identical). So take the 8,000 job number and do this math: there will need to be 8,000 new dwelling units created for those workers. Single-family homes are stuck at about 2,000/year with no increase expected in the next year or so. Even with 3,838 units started in 2013, there would still be a shortfall of more than 2,000 units.

Currently, some 3,500 units of apartments are in the pre-construction pipeline. Even with most of the 2,500 units from 2014 still to be delivered, that means there won’t be enough apartments to match up to job creation/household formation again in 2015 or 2016, unless the employment picture goes backward significantly – something no one foresees. And none of this takes into account the facts that suggest that the Millennials are starting to emerge from sharing apartments or their parents’ basements.

I imagine that the lenders are going to drag the apartment development down somewhat but I expect that developers will just find another source of funding seeking higher yields than the Treasury or their local bank is giving. With an impressive recent history of rental growth, apartments should still be a hot ticket in 2015.

Apartment development will probably push the envelope a few more years in fact, at least until the growth in rents and birth rate creates the next boom in home ownership.

The Data Doesn’t Lie

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Even with the surprisingly strong fourth quarter for contracting, most involved in the construction industry will find 2014 a bit disappointing when the dust settles (especially when the financials are reported). That will be less because of the performance of the market than the underachieved potential.

The last quarter of 2013 showed real economic promise. National GDP was up 3.7% and job creation in Pittsburgh was estimated at 18,000 jobs for the year. That potential for loosening the market just didn’t kick in during 2014. Or at least it didn’t feel that way. The numbers mostly back up that disappointment, although they tell a mixed story.

Non-residential structures totaled $2.77 billion in 2014. That’s a mere $5 million below the $2.82 billion of 2013 but given the outlook coming into 2014, flat was disappointing. The residential market may appear way off the 2013 levels, falling over 24% year-over-year. But much of that decline is due to a 30% drop in multi-family starts to 2,572 units. That’s actually a pretty healthy year in Pittsburgh but the 2013 total of 3,838 dwarfs that number. It’s worth noting that the 2013 total was a 239% increase over 2012 and 2,572 units tops every other year going back to 1995 by at least 15%. More about the apartment market in a future post.

Total Pittsburgh MSA 2014 1,971 2,902 4,873
Total Pittsburgh MSA 2013 2,164 3,838 6,002
% Change -8.9% -24.4% -18.8%

There were over $900 million in non-residential starts in the 4th quarter of 2014. That’s a good start for backlogs. While the bid market isn’t racing out of the chute in the first 2 weeks of the year, more than $250 million has already been awarded or started already in 2015.

Last week NAIOP Pittsburgh presented PNC’s Gus Faucher talking about the economic outlook for 2015. Faucher was very upbeat, mostly because of the improved job market, lower gas prices and the lack of any economic headwinds from consumer or government de-leveraging. PNC is predicting GDP growth above 3%, even with the global economy tanking.  It’s worth pointing out that PNC’s Kurt Rankin was the one economist willing to say that he thought surprises in 2014 would be to the upside and he turned out to be very accurate in guessing what those upside numbers would be.

Business wasn’t as bad in 2014 as it felt. One of the tougher tasks of business is separating emotion from reality and that cuts both ways of course. My forecast for 2015 is that it will be a breakout year. That doesn’t mean gangbusters necessarily. I think too much Pittsburgh business is tied up in global business for the Pittsburgh economy to not be impacted a little by the world’s problems. But I do think that 2015 will be the year that we see the long-term optimism about Pittsburgh and its maturing technology and energy industries translate into bricks and mortar.

Confused? You’re Not Alone

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I tend to meet with a lot of business owners in December and January to talk about the coming year. At the present time, confusion seems to be the prevailing wisdom about the market’s direction.

The fundamentals are very supportive of a breakout year in 2015. Space is tight in commercial property; industrial and manufacturing are expanding rapidly because of the natural gas exploration and its related businesses; employers are creating a lot of jobs in Pittsburgh; interest and investment in the region are very high. Add to that macroeconomic recipe the fact that construction has been stagnant for 5 years and you would expect a boom to begin. Somehow, no one seems to keen on that happening in 2015, including your correspondent.

Look for a better year in 2015, especially if your market is commercial construction, but don’t expect to fill up your belly in the first half of the year. By mid-year we’ll discover what a new governor might be thinking (especially about the gas industry) and what a Republican-controlled Congress will be doing or not doing. After that, all bets are off.

As the year turned, a couple of big projects that were out were resolved. The Cambridge Healthcare Solutions development team – which includes Mascaro Construction – was selected to build the $75 million VA Butler Outpatient Center. Johnson Controls selected a team that includes PJ Dick and IDC Architects for its $100 million office/research center in York, PA.

Bids were opened Jan. 8 on the Parran/Crabtree Hall project at the University of Pittsburgh in Oakland. The 3 low bidders on the prime contracts (from base bid #1) were:

General #1: Volpatt – $10,499,000; Gen #2: Burchick – $10,771,000; Gen #3: Massaro – $10,760,000

HVAC #1: McKamish $6,725,000; HVAC #2: Ruthrauff/Sauer – $6,798,000; HVAC #3: Tomko – $6,,887,000

Plumbing #1: Tomko – $1,857,000; Plmb #2: McKamish – $1,882,000; Plmb #3: SSM Industries – $1,937,000

Electrical #1: Farfield – $4,388,000; Elec #2: Lighthouse – $4,824,000; Elec #3: Westmoreland – $4,897,000

Reflections on a Week Out on the Town

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This is the time of year for “annual” events and this week has already been full of them. A few observations:

I admit to being a fan of the Allegheny Conference’s work and their announcement of the goals of their next three-year strategic plan hasn’t changed that view. The top goal addresses a problem I’m hearing about with shocking frequency – not enough good (meaning appropriately skilled) workers to hire. If this is a problem for construction today, it will be a crisis when work picks up next year. Attracting qualified people from IT to iron workers is a “must win” for Pittsburgh to remain on the current growth path.

The buzz at Thursday night’s Night at the Fights, put on each year by NAIOP Pittsburgh to benefit Habitat for Humanity, was amazingly upbeat. A lot of commercial real estate brokers there and while they are a positive bunch, in public brokers usually talk poor. It seems there are just too many deals and users right now to suppress the optimism. The talk was of a Walgreen’s operations center, Ensinger Plastics, mysterious 250,000 sq. ft. users ready to sign and, of course, the Shell cracker.

The team from Continental Office enjoying NAIOP Pittsburgh Night at the Fights.
The team from Continental Office enjoying NAIOP Pittsburgh Night at the Fights.

Shell’s Ate Visser told the Post-Gazette this morning that the company was exercising its option to by the site from Horsehead Corp. (http://tinyurl.com/mr46xkb). That’s a big deal in and of itself but the crowd last night seemed to be looking for more. If I assimilate what I heard from dozens of people who seem to be in the know about Shell’s plans (all of whom can’t actually be in the know, of course), I would say that our collective impatience will be satisfied next week. Commercial real estate people have been known to spin self-fulfilling prophecies before. We won’t have to wait long to find out on this one.

The other heartening takeaway from two nights of rubbing elbows with regional leaders and real estate execs is that it’s clear that more investors and industries are looking at Pittsburgh than we even know at this point. At the risk of sounding like a sunshine pump, it’s hard to imagine the region being better positioned.

It feels like the polar opposite of 1983. Back then, we couldn’t imagine that the steel industry was really gone for good. Now it seems unreasonable to think that another industry might come back and replace the ones that left 30 years ago. If there is an industrial train pulling into the station right now, there will need to be a monumental coalition of government, foundations, labor and business owners to move the dial on infrastructure, pensions, immigration, etc. Solutions will need to rise above politics or Pittsburgh’s growth will be stunted.

Real Estate Remains Bubbly

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Last night’s annual meeting of the Allegheny Conference on Community Development was focused on the agenda for the Conference’s three-year strategic plan for 2015-2017. The number one priority is one that is on the minds of a growing number of business owners – attracting enough talent. Growing the region’s population is the general way to describe the Conference’s mission for the coming years.

Assuming there is success in that mission, one of the correlative problems to tackle will be having sufficient housing and amenities. That means increasing opportunities for commercial real estate – offices where people work, stores where people shop and homes where they live. Building permits for October show that the will to develop apartments remains strong. After a slow first nine months, permits for apartments in October reached almost 600 units. A similar number is expected in November/December, bringing the total for the year to roughly 2,500 units. The activity in commercial development that would bring the people here is also building.

Reports of deals in the works for industrial and office users include as many as ten or more projects of at least 100,000 sq. ft., including a few over 250,000 sq. ft. Now, there can be redundancy in these but even with a couple of duplicates in the list, there is clearly an uptick in commercial users. And that activity is, of course, without any direct influence from a green light at the Shell cracker.

The rumors of a pre-election announcement or one coming yesterday from Shell have proven to be simply rumors but the activity below the surface seems too urgent for some imminent word. If I’m still writing this by Thanksgiving, feel free to remind me what urgent actually means.

Disappointing Results – Brightening Forecast?

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Budgeting for owners/developers and bidding at the subcontractor level has ramped up in recent weeks. Among the general contractors, as many as ten major projects are being budgeted right now for a variety of owners. Construction is getting underway on several large projects that have been in development for a year or more. These developments raise optimism for 2015 and hopes that the fourth quarter will be a boost going into the coming year.

Among those ramping up, Massaro Corp. is doing the demolition and abatement at the former Allegheny Health Dept. site to start the 389-unit Ambling Apartments in Oakland. Mosites is doing the prep work for the $22 million Cohon Center expansion at CMU. Also at CMU, Mascaro is supposed to start work on the $18.5 million Hamburg Hall addition. Mascaro was awarded the Union Trust Building and is awaiting the green light for the $32 million Heinz Field South Plaza expansion in January. Up north of Zelienople, the Jackson Twp. supervisors have approved the 350,000 sq. ft. FedEx Ground distribution center, to be built by Jackson Taylor Contractors.

Setting optimism aside in favor of reality (or at least results) the construction activity through the first 3 quarters of 2014 remains disappointing. The Pittsburgh Homebuilding Report for Jan-Sept shows residential construction down 30% from last year, mostly due to a drop in apartment construction. In part this is a reflection of the unusually high activity levels in 2013, but housing construction in general is softer. Another 1,200 apartment units are expected to get underway in 2014 but the market will still fall short of 2013.

pgh housing 2014-3

Non-residential construction is off 15.4% from the first nine months of 2013, according to Tall Timber Group’s research. Contracting through Sept. 30 totaled $1.92 billion compared to $2.27 billion during the same period in 2013.

 

Something Has to Give

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After doing some preliminary work on construction volume in metro Pittsburgh thru the first three quarters – with an estimate for September – I am expecting that less than $2 billion will have started during the first nine months. Only in 2010 was the volume so low through three quarters, at least since the 2001-2003 slowdown. Architects and engineers continue to be busy but the amount of work getting through the pipeline is still a trickle.

Last Wednesday, CBRE presented its annual real estate symposium at the Westin. The global real estate firm was upbeat about the economy in general and commercial real estate in particular. Local managing partner Jeffrey Ackerman characterized the Pittsburgh market as “booming.” Given the data on high occupancy and absorption of space, his assessment is correct. What isn’t booming is the new construction that should result from such incredibly tight supply and demand fundamentals.

The last time the construction market felt like this was during the summer of 2004. Following the Plan B boom of stadiums and the school construction boom of the late 1990’s, there was an implosion of construction when the 2001 recession hit. That slowdown lasted over three years, breaking in the fourth quarter of 2004. Like then, the fourth quarter of this year will be an indicator for the coming year.

By November, we’ll have elections won and lost. Any owner waiting for signals will have them by then. Look for the opportunities to build backlog before Christmas to get an inkling about whether the pipeline is going to break loose in 2015 or not.

Hola Pittsburgh and a Workforce Solution

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Yesterday’s Allegheny Conference Regional Investors’ Council meeting offered a few things beyond the usual regional cheerleading. More important to the construction industry were two programs that may help with workforce issues.

First there was an interesting video and short speech about the Hola Pittsburgh initiative. This is a effort aimed at attracting the professionals and workers leaving Puerto Rico because of the poor economy. The figures the Conference gave were about 50,000 people emigrating every year. Pittsburgh may not seem the most likely place for Puerto Ricans to land but there is a connection because of career of Roberto Clemente of all things. If successful, Hola Pittsburgh would have the unintended benefit of making the region seem more like home to Hispanic workers in all industries. And construction is an industry that has been attractive to Hispanic workers in other major cities.

The second initiative is the Service to Opportunity effort, which connects returning veterans to jobs. The thrust of the initiative is to match valuable skills learned in combat and service to the civilian opportunities, especially in energy and construction.

Construction is facing a serious workforce shortage as Baby Boomers retire with no backfill of labor ready to move in. Trades have been increasing recruiting but this segment of the population – veterans – comes equipped with transferable skills and excellent attitude. Both these regional initiatives have potential to draw people to our industry.

Not much construction news this week. UPMC selected Alexander Building Construction as CM for its $20 million Altoona Hospital job. Another big piece of the Route 219 extension in Somerset has been put out by PennDOT. The $80 million Garrett Bridges project is due October 23.