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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.

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.

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 Construction Growth Anemic, Commercial Healthy in 3rd Quarter

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Construction activity for both residential and non-residential buildings improved during the first nine months. Housing activity was up 12% over the first three quarters of 2010 and non-residential construction was up 18%. While the percentage of volume growth seems robust, the increases appear stronger because of last year’s depressed levels.

 Every measure of a housing market shows that thePittsburghmarket is doing well, especially relative to the rest of the country. But the steady price appreciation and decent sales figures are aided by the fact that new home construction is about half what it was just five years ago.

During the January through September period 1,264 permits were issued for single-family detached units, up from 1,232 last year. Permits for attached units did spike however, with 891 units started compared to 691 during 2010.  The overall housing construction market saw 2,155 units started compared to 1,955 last year.

 Contracts for non-residential construction totaled $2.1 billion (excluding the $1.2 billion Allegheny Ludlum plant) compared to $1.78 billion during the same period in 2010. Commercial contracting is showing some renewed strength. Office vacancy rates are at their lowest levels in two generations. Manufacturing and industrial construction is up sharply, especially for structures related to the natural gas exploration and its supply chain. With strong demand in education and healthcare, especially with the significant investment Highmark will make in West Penn Allegheny facilities, most major categories in non-residential construction should be improving through the fourth quarter of 2011 and into 2012.

 The three potential roadblocks for a decent recovery over the next twelve months would be some sort of global or national government action – like a repeat of the debt ceiling debacle – that sparked fear and chilled progress, continued difficulty in financing projects instead of continued improvement and some sort of legislative action that made the current plans of UPMC and Highmark uncertain. Barring that there is too much demand coming from the gas industry and from the constrained supply to hold back recovery next year.

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:

Source: Pittsburgh Homebuilding Report

Pittsburgh Office Vacancies Decline

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The National Association of realtors and CBRE Econometric Advisors joint report on the state of national office occupancy released its analysis of the national and regional markets earlier this week, and Pittsburgh emerged as one of the top five markets

Higher unemployment over the past 18 months has been the primary culprit in the steadily rising vacancy rate, which is now resting at 16.9% as a national average. The vacancy rate continues to exert pressure on rents, which the research found had fallen $2 on average.

The news is not unexpected, and while negative, there is solace in the fact that the vacancy increases are coming almost entirely from the dimished demand for space instead of overbuilding. With the exception of a few markets, office construction was not much ahead of demand as the recession deepened through 2009, and financing was virtually unavailable to build new.

Locally, the news was brighter. The Pittsburgh market vacancy rate declined compared to fourth quarter 2009 and was the fifth lowest in the nation at 11.5%. A low concentration of national financial institutions and the hot energy sector, along with UPMC’s expansion downtown, and very little new construction are keeping vacancy rates low. Because of the character of the offices regionally, the effective rate (meaning the amount of marketable contiguous space) of vacancy is even lower. In several key submarkets – Cranberry, Oakland, Southpointe – there is almost no vacant office space, and what is vacant is still under construction and leasing quickly.

While this is good news for the region, the downside is that with financial markets still stalled, and with little presence of national developers, a growing number of office end-users are finding it difficult to shop for space. There are several medium sized build-to-suit opportunities that could be lost because the developers may not want to accept borrowing conditions as they currently exist. It’s not the worst problem to have but it’s a problem nonetheless.