Friday’s jobs report was slightly below the estimates from analysts but still registered more than 200,000 new jobs for the ninth straight month and job growth in private sector for 56 consecutive months. The BLS data showed 214,000 new jobs across all sectors and unemployment declining to 5.8%. This data is on the heels of ADP’s report earlier this week of private payroll employment growth of 230,000 jobs in October.
Among economists there is a sentiment that the employment picture has hit a tipping point of momentum that will increase in 2015. There is another tipping point that is upon us as well; that is wage growth.
Throughout the job growth cycle of the past few years, wages have remained stuck behind the rate of inflation. This stagnation has a limiting effect on the spending and saving that consumers do. Since consumer spending has picked up to pre-recessionary levels, I’m left to conclude that savings has not followed, which is not a good thing.
As employment growth pushes unemployment towards the 5.5% threshold, a likely prospect in early 2015, demand for new workers will put irresistible pressure upward on wages. We are seeing this in construction already and the market needs to adjust its expectations. By market I mean owners of projects.
Competitive pressures have kept construction prices aggressive since 2009. Owners are beginning to see higher prices now, depending on what contractors they have asked for numbers. This is especially true in the specialty contractor segment. Construction projects are justified by a pro forma projection of return on investment that starts with the cost of the building at occupancy. Land prices have risen. Site costs have gone up more than inflation. Building costs are going to have to follow within the next 6-12 months. That means owners will have to adjust rents, the horizon for return on investment or the rate of return. If your pro forma is built upon 2013 or even 2014 prices, you may want to revisit it, or build sooner.
Rising wages are on balance a good thing. More workers making more money improves the business climate and the rationale behind the construction project in the first place. But there will probably be a balancing period while owners, contractors and occupants adjust their expectations. You can wish the market were not moving higher but markets dictate rather than follow.
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.
There’s an analogy used to describe certain kinds of people who appear to be laid back but are intense on the inside. They are said to be like a duck – calm on the surface and paddling like crazy underneath.
That’s a good way to describe the Shell cracker project. Royal Dutch Shell announced earnings yesterday. They were up 31% for the quarter to $5.8 billion (even though their income dropped because of declining oil prices). The increase came from their liquefied natural gas business. There was no mention of the cracker project.
Late last week I was told by an engineer familiar with the Monaca project that Shell had decided to proceed with nine support buildings for the plant. At about the same time I heard from two other sources that big infrastructure/site packages had been awarded – as in contracts. It’s been no secret that both Jacobs Engineering and Bechtel have been bidding packages for months, even as the project is still being studied. That’s been the paddling beneath the surface.
The calm duck has been Shell’s public position. In response to my inquiry about the nine buildings and contracts, Shell’s answer was that they had not yet approved any specific plan and that the project was as yet not approved to proceed. That’s what the late Washington Post editor Ben Bradlee called the “non-denial denial.”
All year long, political observers predicted that the announcement of a green light would come when it would benefit Gov. Corbett the most. Given the polling thus far, that would seem to have been before the final campaign weekend. I don’t pretend to understand political campaigning but I do believe that we are about to get that announcement. The best political bounce would be today or Saturday, when coverage in Sunday papers would be assured. Maybe the plans will remain in the “duck” stage for a while longer but I expect some excitement in the next few days.
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.
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.
Tuesday’s joint NAIOP Pittsburgh/Corenet presentation on the impact of the Millennial generation was very illuminating, especially in that it partly debunked the theory that this cohort of young Americans was changing the way everything worked. Ian Anderson from CBRE spoke about the Millennials’ use of technology and lifestyle expectations but fit it more into the context of trends that have been in place for some time. Workplace trends towards collaborative and play space or more dense, open office plans have been developing for more than a decade. Likewise, the trend towards more renting and urbanization are rooted in larger context than just the needs of the Millennials.
The young generation of adults are going to be hugely influential inside of a decade but for now the CBRE research showed that for the most part, Millennials want the same things from work and living that Gen X and Baby Boomers want.
On the project news side, Turner was selected as CM for the $15 million Butler Health System medical building. Davis & Associates selected Mascaro Construction as CM for the renovation of the Union Trust Building.
Yesterday’s announcement by CBRE of a new 600,000 sq. ft. office complex on the North Shore proposed by Merrill Stabile looks for the most part to be a well-crafted effort to market a good site (it certainly attracted the media attention). According to the Tribune Review, Stabile is hoping to attract a Google-like company to Pittsburgh. From time to time developers or property owners are willing to pay an architect or broker for some preliminary work so the owner can float ideas about a piece of ground. In recent years there have been similar announcements about the former Pittsburgh Brewing site or the Burns & Scalo site on First Avenue. There are project looking for an anchor. Sometimes the marketing works and sometimes it doesn’t.
The Stabile announcement is probably no different except that most of the real estate people I talked to after the press release were truly puzzled by the size of the project given the location. On some level, that’s how brokers react about projects they aren’t working but the secondary reaction was also one of curiosity about who might be out there looking.
Over the past few months there have been rumors of several big users looking for space in excess of 200,000 sq. ft. at places like ALMONO or Oxford’s new building. USX has been tied to the Strip District and the former Civic Arena site. Wednesday’s announcement may be just a marketing exercise but it’s timing raises the level of optimism about 2015 if there is indeed the hope that the North Shore project is competing for actual users in the market. With so little supply in the market since 2011, expansion or relocation or attraction of an anchor user for the office market would set off some dominoes. It would certainly mean more construction than the market has seen in a while.
As the fourth quarter of a disappointing 2014 gets underway there are rumblings from the marketplace that suggest that the steady improvement in the economy may be loosening the purse strings that owners have kept tight. Given that this year has seen more fits and starts than any in memory, you might want to take the uptick in activity with a grain of salt but there are some users out there looking for bigger spaces.
Sippel Development brought plans for a 305,000 sq. ft. FedEx distribution center in Jackson Twp. north of Zelienople. Jackson Taylor Contractors from Mentor, OH is the project’s contractor.
Fourth River Development is finalizing approvals for a 104,000 sq. ft. industrial building at Starpointe that will be anchored by Mach 1 Global Services taking half the building. Dynamic Building Co. will build that project. Continental/Chaska has started Building 300 at the Pittsburgh International Business Park. That’s a 55,000 sq. ft. spec flex office. Interest is high in that property and the next building there is likely to be larger, perhaps 100,000 sq. ft.
Beyond the horizon of those projects, Chapman Properties is looking more seriously at starting the first large spec building at its Chapman Westport property, probably something in the 90,000 sq. ft. range. And the most interesting prospect out there is an RFP for architectural/engineering services for a 250,000 sq. ft. building from a confidential client. Those looking at the RFP have been given no specific indication of the site or the user. There have been a couple 250,000 sq. ft. users in the market during the last few years (USSteel, Chevron, etc.) but this appears to be a different company than those being shopped previously.
The construction boom that occurred between recessions kicked off with a big jump in activity in the last quarter of 2004. Let’s hope for deja vu all over again.
Monday night Jackson Township reviewed Doug Sippel’s plan for what will be a FedEx distribution center on 60 acres north of Zelienople. The 305,000 sq. ft. facility is exactly the kind of industrial project that has been missing from the region until recently. The FedEx project will be the third big user over 250,000 sq. ft. to enter the Pittsburgh market since last year (Gordon Foods and Amazon are the others). Sippel’s development may be another one-off (although by definition that is already impossible) but my guess is that it is part of a trend that was included in our industrial feature in DevelopingPittsburgh last month – a trend that Jeffrey Ackerman of CBRE spoke about two weeks ago.
Amazon’s lease is for a fulfillment center that is a mini-distribution model aimed at handling their overnight and same-day fulfillment goals. Amazon’s vision of selling everything to everyone is creating tremendous logistical needs in markets that are below the super distribution center size. Ackerman talked about the trend at the CBRE Real Estate Symposium and predicted that the Amazon lease would draw the attention of other logistics providers like FedEx and UPS. Let’s hope this is the start of a wave. Even better, let’s hope it inspires some big spec warehouse space construction.
Some noteworthy commercial construction updates: WVU short-listed Mascaro, PJ Dick and Turner on the $30 million Milan Puskar Stadium upgrade. The proposers on the $30-50 million Union Trust Building renovation will interview this week. Beaver Area Heritage awarded $1.1 million in contracts for the Beaver Station restoration. Arcon was the low general. Franjo Construction got started on a new $2 million Goddard School down in Upper St. Clair and a new 16,000 sq. ft. Aldi’s at the Crossings of South Fayette on Washington Pike south of Bridgeville.
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.
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.