Category: Regional Economy

The Roller Coaster Goes Back Up

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

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

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

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

Don’t Lose Sight of the Gas Play

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For months now the newspapers have caught onto the fact that the gas price slump had created a shift in exploration strategy for the Marcellus Shale play. While it is true that a big chunk of the industries assets have been shifted from northeastern PA to southwestern PA to take advantage of the higher priced ‘wet’ gas located there, the shift represents a temporary change in strategy. It is not, as has been suggested, a signal that the industry is not coming to the region or that it has bypassed PA in favor of OH and its Utica Shale.

There are a few concepts to remember when making strategic decisions about the opportunities gas is and will bring. First is that prices have rebounded to $3.20/MBtU for gas as of August 1. That’s not a favorable price for the long term for gas companies but it’s as high as the price was when the drilling was booming in the northeast.

Utica Shale represents another big gas play opportunity, especially since the reserves also include oil locked in that formation. The exploration is moving to OH because the shale formation is closer to the surface there than in PA but the depths are about the same north of Pittsburgh, so there is a sharp increase in activity in Beaver and Lawrence Counties.

The most important fact to bear in mind about the gas industry is that whatever is going on now is but a short play in the scheme of things. Whether there’s a boom or bust in exploration right now, the industry is in the early innings of its relocation here and plans to extract gas for many generations. If you need further evidence, keep an eye on the planning and construction of the mid-stream and downstream projects. Since late 2011, Caiman has been more than doubling the capacity of its Ft. Beeler plant in Moundsville WV, investing at least $250 million. Last month it announced it was investing another $800 million in infrastructure and processing projects in the area and that’s after it sold its original Marcellus Shale assets to Williams for $2.5 billion.

Williams has been accumulating midstream projects and assets, and is beginning to put large projects in process as well. The company has hired Exterra to build another processing facility in the Moundsville area, a multi-billion dollar investment.

While Shell was sniffing around the region to make a choice of a preferred site for their ethane cracker, the regional economic development people also let it be known that Shell’s wasn’t the only plant being considered. Almost no one picked up on that information but there are whispers that suggest that more plants are coming. Aither Chemical has announced a smaller cracker with a different technology in Charleston WV. More interesting is the rumor that another large player (meaning Chevron, BP, Exxon-Mobil) is planning a cracker in the region, likely in PA and possibly on a faster track than the Shell project.

And speaking of the Shell project, there are also inquiries being made more frequenlty about the availability of housing once the cracker in Monaca is under construction. Shell has estimated that it will need about 10,000 workers to build the plant before it is all said and done. That’s a full two-year supply of housing of all sorts for the entire region. With vacancy rates at apartments and hotels near 100%, Shell seems to be thinking about creative solutions to the problem by proactively securing hjousing for the workers. The terms that have been discussed are for 10-year leases, suggesting that the cracker plant is but one of several projects planned for the site.

None of this adds up to much work for the meat-and-potatoes contracting business right now but the trend reminds us that this industry isn’t going away and is talking about investing numbers that will approach or pass $100 billion – with a ‘b’ – before the industries infrastructure is in place. If that investment took ten years it would mean a construction volume that is triple what is built in a good year by the rest of the industry.

Below the Surface

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In recent months you’ve read here and in many places about uncertainty and mixed signals from the economy. Without question that phenomenon is true here in southwestern PA. The fundamentals of the construction markets are all pointing full speed ahead – rapidly rising home prices with multiple offers and low inventories for sale, single-digit commercial property vacancy rates with effectively no vacancy in the hottest markets, record low interest rates – yet the construction market is stuck in neutral. For many it feels like it is in reverse but the reality is that there is activity going on below the surface that is leading up to a big spike in activity, assuming confidence in the economy returns after the elections or whatever.

A few office projects are moving ahead (besides the Tower at PNC that is). Bill Hunt’s Elmhurst Group is underway on a 90,000 square foot office in Cranberry Crossroads. Elmhurst is also taking bids now on the first 48,000 square foot building of its Commons at Thorn Hill from Burchick, Neyer, Continental, Turner and Walsh Construction. Millcraft has selected Turner Construction as the construction mgr.  for its Gardens project, which should get underway by fall, assuming it can finalize the office leasing deals that have been in the works. Interest in the Gardens has been good, as with the office projects Oxford is planning in South Side and at 350 Fifth. That’s ‘below the surface’ stuff, however, rather than announced leases.

On the surface the bidding activity remains light. The WVU library is attracting a large group of bidders, as are the prequalification efforts for WVU’s $30 million Advanced Engineering and CPASS buildings, which will bid in the fall. Also moving quickly towards bidding in the fall is the first of Highmark/WPAHS ‘medical mall’ sites in Wexford, which will probably be the last of 2012’s big opportunities. Rycon Construction was the low general in last week’s opening for the $20 million Kiski Area Upper Elementary.

Recapping the First Quarter

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After an unusually active fourth quarter, non-residential contracting in metropolitan Pittsburgh took a breather in the first quarter. Contracting volume fell 13 percent compared to the same period in 2011, according to market research firm Tall Timber Group. Contracting during January to March was $440.7 million, down from $507.6 million in 2011. Following a fourth quarter in 2011 that saw $700 million in contracting, the demand for commercial and industrial space is still improving while vacancy rates continue to fall. It’s worth noting that the number of projects getting started was slightly higher than in first quarter 2011 and the trend of private spending driving the market continues.

 There is strength in several segments that are keys to improving markets. Office/industrial construction continues to flourish and these are indicators of stronger employment markets. Retail is also solid if unspectacular. The number of retail projects was up 22% compared to 2011 and the rumors of big box activity have begun to swirl around the more desirable locations.

 The unknown variable last year was financing and since the fall it appears that the pendulum has swung back towards deploying capital instead of conserving it. Conditions are still conservative but more like historical norms. We see the current volume and the accelerated schedules of some of the big projects – The Tower at 4 PNC, UPMC’s Center for Innovative Science – as confirmation of the regional business health and relative availability of financing.

 Permits for single family detached homes spiked steeply during January of 2011 in metropolitanPittsburghbecause of a carryover from the short-lived sprinkler mandate and the artificial increase is one of the reasons for a decline in single-family permits in 2012. The overall housing numbers are indicating that the housing market is getting a firmer footing in the first quarter of 2012, with an increase in total permits of 19.5 percent.

 During the January through March period 408 permits were issued for single-family detached units, down 17.6 percent from the same period last year. Permits for attached units and apartments more than doubled however, with 396 units started compared to 178 during the first quarter of 2010. The overall housing construction volume was 804 units. While that represents growth from 2011 it’s instructive to remember that the activity is still roughly half of that during 2004.

The first quarter’s housing starts mirror the growth patterns in the regional economy. For several years the most active housing sub-markets were primarily in the north and south along the I-79 corridor but some of the more active markets were also in high growth areas in bedroom communities like North Huntingdon and Hempfield in the east or Hampton and Richland in the north. A quick look at the municipalities with the highest number of starts in quarter one reveals that all are located along the I-79/I-376 corridors where natural gas and energy are booming. One sub-market with low activity that has been the most active for the past four years – the city of Pittsburgh – has seen brisk activity in the construction of residential units in the first quarter but almost all of it has been in adaptive re-use projects.

Housing activity in the six-county metro Pittsburgh area in 2012.

It’s a Cracker!

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

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

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

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

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

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The Gas Industry is Tapping the Brakes

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Since the first of the year have come the first indications that the exploration of the Marcellus Shale will not be transforming the region at breakneck speed. For more than a year the depressed price of gas has been troubling for the industry but the dip down to $2.50 MMbtu has prompted a change in strategy.

First is the shifting of resources from the northeastern corner of the state to the southwest to take advantage of the additional gases that can be gathered and sold from the wet gas that is found in the Marcellus Shale. That’s a plus for our region.

Second is that the high price of oil is an incentive for the gas companies to look at exploring the Utica formation because it contains oil as well as natural gas. That’s not as good for western PA since the Utica formation is more accessible in OH. The heightened interest in Utica will help with the activity in Butler, Beaver and Lawrence Counties as the Utica shale is closer to the surface too.

Drillers are also beginning to look at other formations that have natural gas deposits to see what the related oil/gas properties are. The Marcellus is going to be a big play for a long time but the speed of its development will be throttled back while gas remains cheap.

The slowdown in exploration may or may not be related to the dragging on of the announcement of the Shell and Aither cracker plant locations. What was to be an ‘end of the month’ announcement in January seems no closer to being made in mid-March and a statement made last week by Sheel CEO Peter Voser at an energy conference in Houston hints that Shell is in no hurry. Voser commented that the Dutch company’s final decision on the investment was “quite a few years away.” A shell spokesperson clarified later that Voser meant that the planning would take a few years but that a decision was imminent. No definition was made of ‘imminent.’

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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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An Innovative Approach to Fixing Infrastructure

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During the research for the January/February edition of BreakingGround I was repeatedly struck (and frustrated) by the seemingly insoluble problem of paying to repair and expand our highways, bridges, locks/dams, etc.  Our elected officials seem much more concerned about getting re-elected and run scared from the tough calls. 

One local municipality has decided to buck the trend and take the solution into their own hands. Cranberry Twp. has been struggling with correcting serious problems that resulted from the extended growth of the area along Route 228 and Freedom Road.  Coming into this fiscal year the leadership of the township decided that their obligation to their residents meant budgeting construction and an increase in revenues to pay for the work.  That meant a tax increase.

Here’s what township manager Jerry Andree says about their choice:

“…our community, and its elected leaders, did confront those tough decisions for our community for 2012 and raised local taxes and dedicated that new revenue to maintaining our local road infrastructure.  Our community waited for our state government, through two Governors of different political parties, to address the decreasing state revenue dedicated to local roads and the unfunded mandates that drive up the costs of road maintenance. We heard nothing but more study committee results repeating the same warning that our infrastructure is falling apart and we must do something, and then nothing.  Another amazing fact, we received overwhelming positive feedback from our public.  State and Federal officials perhaps give little credit to the ability of the taxpayers to figure out what is happening.  We find that our residents are very well informed, engaged and understand the importance of building and maintaining a community that they are proud to call home. This includes their financial obligations associated with a high quality of life and the supporting infrastructure, from the sanitary sewers, to the parks, to the library, to the roads, they are all connected and people understand that.  The key is to listen and learn from the entire spectrum of residents and the answers are there, the challenge is listening is too often restricted to the fringe groups on either side of an issue.”

That sounds like an attitude that should be cloned. And it may be the only solution to the problem of a decaying infrastructure: trust the residents.

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Non-residential Construction Jumps 50 Percent in 2011

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Non-residential construction jumped 50 percent in 2011. The non-residential construction market was aided by the start of the Allegheny Ludlum Brackenridge Mill and a resilient regional economy in 2011. Because of the ATI project contracting was expected to rise considerably over the volume of 2010. But a variety of positive factors pushed construction higher than expected. 

Non-residential contracting totaled $3.73 billion in 2011, up sharply from $2.5 billion in 2010. It’s worth noting that volume in 2010 was inflated by the USSteel Clairton Works project, which accounted for roughly 20 percent of the annual total. Mainstream commercial activity increased by approximately half billion dollars, with the number of projects increasing significantly as well.

 The activity in the fourth quarter of 2011 can be a real boost going into this year, especially since architects and engineers remained busy going into January. Hospital construction, new office and apartment construction and a whole spectrum of projects related to the expansion of natural gas in the region should push construction to nearly $4 billion in 2012. 

New housing construction remained stuck in low gear. The total number of homes started in 2011 was 2,853, up 2.7 percent from 2010, which the lowest for any year since we began tracking activity in 1994. Permits for detached homes fell 14.1 percent to 1,656, but a 40 percent increase in attached housing – to 1,197 units – offset that decline.

 We were surprised by the decline in traditional single family homes. Our forecast was for a ten percent increase but the hangover from the rush to beat the sprinkler mandate was steeper than expected. Going into 2012, however, we are seeing the first legitimate signs of a recovery in a relative boom in apartment construction. Our forecast is for attached and multi-family to virtually double in 2012, with improved credit conditions and pent-up demand pushing single family detached volume back to the 2,000-unit neighborhood. The forecast is for overall housing permits in 2012 will reach 4,000 units for the first time since 2007.

 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      
Pittsburgh

122

377

499
PetersTownship

84

0

84
AdamsTownship

77

62

139
SouthFayetteTownship

71

35

106
CranberryTownship

66

123

189
PineTownship

62

19

81
Jefferson Hills

61

3

64
NorthHuntingdonTownship

56

4

60
MoonTownship

47

9

56
NorthFayetteTownship

42

50

92
       
Single-Family Attached      
Pittsburgh

122

377

499
CranberryTownship

66

123

189
CollierTownship

15

65

80
AdamsTownship

77

62

139
Plum

36

62

98
       
Total Pittsburgh MSA 2011

1,656

1,197

2,853
Total Pittsburgh MSA 2010

1,927

851

2,778
% Change

-14.1%

40.7%

2.7%
       
By County

SFD

SFA

Total
Allegheny

778

784

1562
Beaver

124

35

159
Butler

229

231

460
Fayette

83

6

89
Washington

227

103

330
Westmoreland

215

35

250

 

 

End of Year News

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For estimators there were an annoying handful of projects bidding between the holidays this year. None were very exciting but all were for repeat clients who were asking for extraordinary service. For a few firms there were some holiday good tidings in the form of juicy contracts.

Jendoco Construction was chosen as the contractor for CMU’s $60 million plus Nano-Bio-Energy Center, which will start in 2013. Of more immediate concern was the awarding of contracts for Mt. Lebanon’s $88 million High School project. Nello Construction won the general piece at $49.1 million. The other high profile bid before the holidays was the $50 million Squirrel Hill Tunnel rehab. Those came in as follows: Walsh Construction $49.5 million, Lane Construction $$50.99 million, Mosites Construction $51.7 million. The Squirrel Hill project underscores the divergence in competitive conditions between the heavy/highway market and the building side. No market is really fat right now but many building contractors are able to be selective now. The tunnel project will be multi-year and carries some significant risks. There were a total of 6 bids on the job with a better than 20% variance from top to bottom. The 5% gap between first and third tells alot about how tight the infrastructure market is going to be. Read more about that in the Jan/Feb BreakingGround.

The fourth quarter ended with much more bidding and contracting than usual. Given the better macroeconomic climate, it’s a good bet that the region has put recessionary times behind. The first quarter will tell alot about that.