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A Tight Market

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There are many ‘haves’ in the current ‘have not’ Western PA construction market but there are not enough to ease the competitive nature of bidding at the moment. A couple of cases in point:

* Last week’s bids for the Natali Center at California University came in at $23.6 million, about $1.4 million under the published estimate for the job. Part of what drove the numbers was an extremely tight bid for general construction. Nello Construction was low by $37,000 on $13 million, a delta of 2/1000th – .002 from the second bid. the low three were:
1) Nello Construction $13,037,000
2) Walter Mucci Construction $13,070,000
3) Gurtner Contracting $13,450,000

* The $7 million, 12-screen Cinemark at McCandless Crossings in the North Hills has been released to 7 invited contractors to bid on November 28. This may be the most poorly-matched list I’ve seen in two decades. Asked to price the project were BRIDGES, Continental, EMJ, Graycor, Harchuck, PJ and Rycon. The sizes and styles of these contractors couldn’t be more disparate. The list includes the contractors that built Consol Energy Center, USSteel Clairton Battery C/D, Childrens Hospital, The Waterfront, as well as retail contractors who do $200,000 Dunkin’ Donuts profitably. Subcontractors and suppliers trying to figure out how to bid to this cast of characters will go crazy.

You can’t blame the contractors from accepting the opportunity to bid but the potential for an ugly job is high. The generals will end up with numbers from subs they never work with, can’t comfortably scope and don’t know their capabilities; however, the may have to take numbers from unknown subs to remain competitive. The owner may get a number he/she likes but the chances of the low general having a cohesive team for the project are slim.

Backlogs are too thin for too many contractors as the 2012 building season ends. Rather than laying low and riding out the market, contractors have been too willing to bid with little or no margins to get work booked. That doesn’t mean owners are getting bargains. It’s great to get low numbers on bid day; it’s even better to have them at closeout. Maybe the Cinemark has iron clad documents but it’s more likely they have asked contractors to bid representations of their intent that will leave the door open for a lot of interpretation.

At the other end of the spectrum is the Seton Hill Natural Health Sciences project, for which the owner is seeking preconstruction service proposals for the $13-14 million project. After earlier qualification submissions the college has narrowed the field to Jendoco, Landau, Mascaro, Mosites, PJ and Rycon. That’s a field of contractors that competes for similar projects all the time. More to the point, the subcontractors that serve these contractors have experience with almost all the contractors regularly and have experience with private higher education projects. The sub and supplier market won’t be as critical in preconstruction for final pricing but having reliable subs involved is the only way that the chosen general can provide a reasonable budget to Seton Hill, especially since the architect – MCF – is not one that has projects on the street regularly. MCF is a great designer but without regular feedback from the market it will be tough for them to hone in on a budget. Getting a homogenous construction team in place during design will be essential if Seton Hill wants to avoid the design/value engineer/re-design cycle.

2012 Isn’t Dead Yet

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It isn’t even Halloween yet but in terms of the contracting market there are but a few weeks left for projects to get on the streets and priced before everyone goes into holiday mode. While 2012 has been something of a disappointment for construction in Pittsburgh, there are a few pearls out to bid before Thanksgiving.

After earlier pre-qualification of contractors, WVU has issued its $38 million Advanced Engineering Building to Mascaro, Massaro, PJ Dick, Turner, Whiting-Turner and Walsh, with bids due Nov. 15. Handicapping this is impossible. Given how aggressive Turner and Walsh have been in pursuing work over the past year and how much Whiting-Turner seems to want to remain in this region, it’s hard to predict who might have an edge based on backlog or project fit.

Walsh and Turner, along with Clayco Construction from St. Louis are the finalists pursuing the design/build contract for the $60 million Quattro buildings being developed by Burns & Scalo Real Estate in Southpointe. The RFP for the 416,000 sq. ft., two-building development – which includes the new HQ for Ansys – is out for response by these three contractors.

The bid packages for Mercy Hospital’s new $80 million chiller plant are soon to go out to bid from Mosites Construction, with bids in early November. Construction on the project is expected to start before the end of this year.

One project that was not trending for construction this year but is going ahead is the LA Fitness and garage at the Don Allen site. Gleason Construction is taking bids on that project now. The deal for the development seems to have been on and off again more times than a bathroom light over the past couple years and with the LA Fitness/Urban Active merger, there was talk that the Urban Active facility in Bakery Square would nullify the LA Fitness. It seems that rumors of the project’s demise were premature.

Pittsburgh Housing Market Stays Consistent

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There is one significant positive hanging over the U.S. economy that could help un-stick the seemingly endless no-growth cycle that has gripped business: the housing market recovery. Unlike the overall U.S. market, the housing market in Pittsburgh does not have to bounce back from falling prices and is showing remarkable consistency across a number of metrics.

For more than six months the prices of houses sold and the number of homes sold have remained solidly up more than 10% year-over-year. That’s an unusual level of consistent growth, especially since the sales took place in periods of both higher and lower seasonal activity.

The third quarter also showed a consistent trend in the year-over-year growth in new construction. Through nine months there were a total of 2,396 new dwelling units started compared to 2,155 during the same period in 2011, an increase of 11.2%. The increased activity was constant whether the construction was traditional detached single-family homes and attached or multi-family units, with each cohort up between 10-12%. Permits were issued for 1,393 units of detached dwellings compared to 1,264 in 2011 and for 1,003 attached units this year compared to 891 last year.  A breakout of the top areas for construction is below.

While there is growing evidence that financing conditions are normalizing so that buyers can buy, the dwindling supply of lots will keep a broader housing recovery from spreading into 2013, although the construction of multi-family apartments will boom for at least the next 18 months.

If the developers stick to their plans there will be another 1,000 units started in large multi-family projects before the year ends in Green Tree and Southpointe. This is good news but the volume will skew the perception of the total market in Pittsburgh if that occurs. Should the activity unfold in that manner the total housing starts for 2012 will approach or exceed 4,000 units, a level not seen since 2006. On one hand the volume reflects the pent-up demand for housing in the region, but to more accurately judge that a true housing recovery is underway you should focus on the single-family detached market.

The West Penn Monkey Wrench

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The news that West Penn Allegheny Health System had backed out of the Highmark merger on Sept. 27 created some big ripples throughout the business and healthcare community. The decision added more uncertainty to a picture that was already uncertain because of the pitched battle between UPMC & Highmark. Businesses starting to feel comfortable about the impact of the competition now question insurance rates and availability after next year; hospital and doctor availability; and the economic impact on their customers in general. Whatever the eventual outcome, the prospect of WPAHS going its separate way from Highmark – given the hospital’s financial position – adds another level of nervousness to an already uncertain business climate.

One of the related industries that could be impacted is construction. Highmark’s acquisition has already resulted in millions invested in hospital infrastructure and their plans for creating a world-class provider system was going to mean a billion dollar construction program – at minimum – over the next five years or more. Now, that capital program is a big question mark, or maybe a series of question marks.

The most obvious question mark is how does a system with little or no capital keep up with the high costs of maintenance and upgrading that a hospital demands. UPMC annually budgets $250 million or more for capital expenditures. WPAHS has not spent that much on facilities in aggregate over the past ten years. Without a source of capital, WPAHS will have little chance to improve that track record. Projects like the $20 million or so invested in re-opening the West Penn ER or the Forbes Regional modernization probably cannot be done without Highmark or another suitor.

The subject of a partner is probably the biggest question mark hanging over the whole subject, given WPAHS’s debt and operating deficits.

For construction-related businesses, the questions revolve around opportunities (see paragraphs above) and relationships. The firms that have been involved in the work at WPAHS and Jefferson have had ties to the former facilities and executives there but mostly had ties to either John Paul or Ken Melani. As often as not the professionals involved so far have had ties to both. Assuming WPAHS finds either a partner or some working capital what happens to the firms that are asked to work on projects at a WPAHS facility who also retain contracts with Highmark (or who want to keep those doors open)? Astorino has doubtless learned some painful lessons about the West Penn facility since taking on the design/construction mgr. role. Getting familiar with an institution like that takes time and costs money that can be recouped on later projects. Will Highmark view Astorino’s work with them as exclusive and therefore see an independent contract for future West Penn work as disloyal? Do specialty contractors like McKamish or Lighthouse Electric – who were among the first firms working on West Penn because of their extensive experience at the hospital – have to make ‘us or them’ kinds of decisions about responding to requests from WPAHS? What about the dozen or so general contractors who have bid and/or won work thus far at West Penn or Forbes Regional? Must they now decline opportunities in order to have a shot at a multi-million dollar Highmark medical mall?

All these questions are of course still on the table. The WPAHS decision may indeed be just a negotiating strategy designed to push Highmark back away from their apparent desire to see WPAHS restructure its billion dollar debt through bankruptcy. Thus far – and its only one week remember – none of the players serving the proposed capital work have been instructed to stop work. Jefferson’s work can go ahead regardless of the outcome of the WPAHS/Highmark spat so a few bigger hospital projects will advance. And the business case for the medical mall concept hasn’t evaporated so the Wexford project Highmark has been advancing – rumored to be as much as $100 million – may still make sense. For an industry trying to get traction for the next growth cycle, the timing of this latest uncertainty stinks.

 

Apartments, More Apartments & WalMart

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The hottest property type in the market (aside from natural gas projects) remains multi-family. Five years after the housing crisis started it remains more difficult to buy a house than normal conditions, yet the need for housing increases more each year. With big financing chasing apartment projects all over the country the conditions are right for an apartment boom – and later an apartment glut of course. For 2012 it appears the number of multi-family units started will be up over 25% and here in Pittsburgh there is a wave of apartments also breaking.

Last week’s announcement by Massaro and Dawson Co. of a 320-unit apartment at the South Hills Village transit station marked yet another of a string of similar projects. With a day or so, NRP Group from Cleveland was identified as the developer interested in the Warrendale Point site for another 300-plus units. That brings the number of units in the pipeline for 2013-2014 – of projects over 100 units – to over 3,500, of which fewer than 400 have started.

Another announcement that helped the market was that Morgan Management was finalizing negotiations to acquire the apartments that Nationwide Insurance developed through Continental Communities almost 15 years ago. Morgan had expressed interest in having 2,000 or more units in Pittsburgh and was looking at a number of new construction sites. This aquisition may change that strategy and keep the market from getting saturated quite so fast, but an overbuilt apartment market still looks likely by 2015. With home ownership getting easier to accomplish, a tipping point looms with higher rents and lower interest rates that will require only more reasonable lending conditions to trigger. Look for that spark to occur next year, maybe as quickly as the spring buying season.

The contracting market remains unspectacular now. After a minor post-Labor Day surge, bidding has slowed again. Two projects of interest are out. The first is the $15 million Rosenbaum Family House job down at WVUH, a project that has to happen to allow the $250 million Ruby Hospital expansion to occur. WVUH has invited Landau, MBM, G. A. Brown and Volpatt to bid on Oct. 4.

The other interesting job is a new WalMart at the Northern Lights Shopping Center site in Economy on Route 65. With retail still struggling in the U. S. , Pittsburgh remains a countercyclical market, with low vacancy rates and new construction. WalMart scaled back plans for new stores again this year but after opening one in North Huntingdon earlier, they have moved ahead with another in the area. The Economy project bids on Oct. 10 with Adena, dck, Carlson, Fiore, L. Keeley, Pike and Tri-C invited.

Public Construction Bump

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It seems fitting that in an election cycle where candidates get a post-Convention ‘bump’ in polling approval the public construction market is experiencing a little pre-election ‘bump’ that may help a few contractors deal with a tough year.

The outlook for public construction remains bleak for local, state and federal projects. Revenues at the state level are up but Gov. Corbett and the state legislature will be using any surpluses to pay down past deficits before funding more construction.  This is a game of chicken when it comes to infrastructure, which may or may not have a catastrophic failure or major shutdown before government responds to the failing roads and bridges. It’s not just the state, of course, the federal government is the primary funder for highway construction and the Congress again refused to deal with anything more than a Band-Aid approach, using funds that weren’t adequate in 1995 to fix 2013’s problems.

In the short term, however, the current bid market is marked by a half dozen publicly-funded projects that are in the range of $15-$25 million. The projects include multi-prime projects like the $17.5 milion Clearfield PennDOT Engineering Office, a rebid of the $16 million Lockley Early Learning Center in New Castle and the $24 million Cal University Natili Center.  Mortenson is taking bids on multiple prime packages on Oct. 2-3 for the $18 million Penn State IM Building. The state of WV is re-bidding a single prime contract for the $13 million Buckhannon WV Readiness Center and the $25 million Kiski Wastewater Treatment Plant bids Oct. 17, with only an electical and combined General/mechanical contract.

There will be a few more projects in this range bid before Thanksgiving but this is the last hurrah for 2012. With a moratorium on schools in the PlanCon design phase in place for 2013 there will be no significant K-12 school bid until well into 2014 at the earliest. The public market is in for a rough couple of years.

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.

The Last Week of Summer

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With the last die hard school districts opening this week it finally feels like summer’s done and for 2012 good riddance. At least from a business standpoint. Uncertainty made cowards of a lot of business people and projects scheduled to move just sat and waited. Now it appears that owners are feeling a bit better or have realized there’s no advantage to waiting to see who’s president next year because there has been an uptick in activity on the real estate front.

One place that’s definitely jumping is Southpointe. Rycon is working on a 150,000 sq ft spec building called the J. Barry Center and the developer – Horizon Properties – is re-bidding its 130,000 sq ft Town Center retails buildings on the 18th. Bear Construction has started on the 20,000 sq ft Fletcher Industries building. Burns & Scalo Real Estate has upped the size of their plans for 2 office buildings from 125,000 sq ft each to a total of 416,000 sq ft. An announcement about tenants may come soon.

Marshall University has its $50 million Weisberg Center out to bid due October 3. In PA the biggest public job bidding now is the $5 million PA Lumber Museum project in Galeton. In the private sector, USAA has the tenant space for Williams Midstream out to bid to Landau, Martini, Rycon, Harvey-Clay & James Construction. That’s a 75,000 space in Park Place Corp. Center near the airport. Following up some recent bids, Busse was awarded a $2 million renovation at the Doubletree in Green Tree. TEDCO is working on the Janney Montgomery Scott space – 22,000 sq ft in One PPG Place.

There are lots of big space users looking right now. With an economy that is growing while the national economy is fizzling, Pittsburgh should be a good place for construction in 2013, although the same could have been said about 2012.

Has the Market Turned Again Already?

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Just as the summer slowdown had convinced all of us that the potential for a recovery in construction in 2012 was lost, there is an upswing in the contracting market heading into the Labor Day holiday. It seems way more likely that this is a last-minute flurry to get projects underway before the weather turns than a shift in the market but for now it’s a welcome change.

What makes me optimistic is that the commercial developers are behind some of the work and as a group, they are seeming more optimistic about 2013. Developers are positive thinkers by nature – no matter how much they grouse about conditions – but this shift is probably coming from the continued increase in leasing activity and interest from users of all shapes and sizes. Again, these conditions have existed all year without signaling a new building cycle so this may be a fleeting phenomenon. For the short-term it is at least better to have a temporary uptick than none at all.

Among the bigger projects making progress, Bakery Square II received word of a $2 million grant to assist with infrastructure, etc. in its East Liberty/Shadyside development. There are other state and federal monies in the pipeline that will be needed to close the gap on the $120 million mixed-use project but the developers still hope to break ground in 2013. UPMC selected PJ Dick to build its $35 million sports medicine facility and Penguins practice arena in Cranberry Twp.  Martini was awarded two facilities at Excela in Greensburg and Latrobe that will be more than 250,000 sq. ft. And Horizon Properties put out the retail Building 100 at Southpointe Town Center, a $15 million, 120,000 sq. ft. project. The bidders invited are BRIDGES, Continental, Franjo, Nello, Neyer, PJ Dick and Rycon, a somewhat mixed list.

Similarly mixed lists exist for a couple of $ million jobs, the new Salvation Army facility (BRIDGES, Continental, Rycon, Sota) and the 430 Shady Avenue residences (BRIDGES, Franjo, Martini, Nello). Also in the $2-$4 million range are bids for the Heart/Vascular Center at UPMC Passavant and the shell space for Aquion Energy, a 300,000 sq. ft. leasehold for RIDC at the former Sony plant in New Stanton.

Construction opportunities in the public sector are dwindling or smaller. Several good opportunities are about to hit the streets at WVU or its hospital, including two $30 million projects for which contractors recently pre-qualified. Landau was the low bidder on the $10.9 million Law Building at WVU, with Massaro at $11.3 million and Yarborough at $11.5 million. There are several other smaller projects at other West Virginia colleges out as well. Here in the Pittsburgh market, the re-bid of the $35 million Laurel Highlands school is the only public highlight at the moment.

Election season starts in earnest after Labor Day. If the uncertainty of the outcome has been hindering investment, things shouldn’t pick up much more before November and the year will be shot. Sometimes the drone of negativity, like has been the backdrop all year from politicians, can get to be white noise that developers drown out. If that is the case there may be the fourth quarter surge that will lift backlogs. That would be a welcome development but not one I’d bet on just yet.