Housing Continues to Rebound

Three metrics that reflect the health of the housing market continue to be increasingly positive in metropolitan Pittsburgh over the past six months.  The volume and average price of home sales, as well as the amount of new construction are all trending towards a robust recovery in home construction through July.

Both RealStats and West Penn Multi-List reported another month of double digit increases in home sales, the six month of double digit growth, which pretty well confirms a trend of accelerated home sales. Prices for homes also jumped by a double digit rate again. This data supports the anecdotal evidence of growing multiple-offer sales on existing homes. Because of lingering mortgage qualification problems, however, the shortage of homes to sell (which is what is driving the pricing action) isn’t triggering a new construction boom. Even though new construction could be a relief valve for the supply, the financing conditions aren’t allowing demand to surge like it should after being pent up for so long. Lenders are indicating that conditions are starting to change but they also warn that some of their discretion has been blunted by the federal regulations that followed the mortgage crisis.

Even with a tougher borrowing climate dampening demand, new construction is still up.  New construction in July was up 27%, with new single-family detached units up 70.4% over July 2011. For the first half of 2012, the housing market in metro Pittsburgh was up 12% year-over-year, so July’s results are indicating an acceleration of the trend. More than any year since 2007, the fall selling season will be an important indicator of the 2013 market.

Aside from the short term trends, there are a few factors that should be followed to understand how a housing recovery will unfold. One significant limiting factor will continue to be financing. As banks have firmed up balance sheets and become more competitive in lending, the Fed and Congress have added or strengthened regulation. This will dampen demand to some degree for several years. Also hindering a recovery is a shortage of lots. Several thousand buildable lots exist in the metropolitan area but the inventory could be wiped out with one ‘normal’ year of 5,000 new construction units. The dynamics of residential development aren’t making that shortage go away any time soon either.

On the plus side is the natural gas industry’s coming demand. In 2012 it’s impossible to judge how many permanent jobs and homes will result from the maturation of the industry and its downstream industries, but there are indications that the heavy hitters in the business are afraid of a housing shortage as early as 2015. As part of their due diligence for a decision to build an ethane cracker, Shell is studying the housing options in and around Monaca. There are reports that Shell is investigating the availability of rental housing and viability of new rental construction so that they can budget the housing of construction workers into their plans. At least one option being pursued is the offer of a flat – but generous – rental rate per person for an extended lease. If that option is indeed true and viable it could spur thousands of units in new construction. Remember that Shell estimates it will take 10,000 workers to build the plant and its related facilities.

The Roller Coaster Goes Back Up

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

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

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.

Two Housing Markets

Today’s press release about the national new home starts coincided with our release on the second quarter housing activity. First, the good news. In both the regional and national markets, housing starts are up significantly. Census reported that housing starts were at the 760,000 unit pace, a multi-year high. For the first six months of 2012 in Pittsburgh, permits for new homes were up almost 12%, with single family homes up over 8%.

In the case of both national and local volume, however, the activity levels are still roughly half of the supply of new construction needed to meet the demand from new household formation.

U.S. population has been growing by 3 million per year and using normal formation rates that would create demand for 1.5 million new homes. Even if household formation was now being held back by economics a conservative estimate of demand would be 1 million new homes. There’s still a ways to go before the housing industry is adding to the economy.

In Pittsburgh there are a number of economic drivers that are creating jobs faster than even a recession could offset. According to last year’s Census numbers on household formations and jobs, there is a need for about 15,000 more homes than we currently have. New construction should be going at a rate of 5,000 or 6,000 new homes but the current pace is roughly half that.

The big difference between the two markets is that housing prices are much lower nationally now than in 2008 while prices continue to climb in Pittsburgh. The figures from the first six months of 2012 for sales show an increasing trend of appreciation, with prices up between 15% and 20% in April and May. This is a recipe for a new construction boom but there are few lenders anxious or willing to finance spec homes or new developments. A lot shortage looms but in the meantime, construction is lagging demand all over.

The top municipalities for housing permits during the first six months of 2012 in metropolitan Pittsburgh.

Summertime Blues

Even in the midst of a generally good regional economic environment the heightened level of uncertainty about the national/global economy has brought progress on new development and construction to a virtual standstill. After a winter/spring that looked like southwestern PA was on its way back to pre-recession levels of construction the activity has cratered, with public projects (an unusually slow sector in 2012) actually being the most appetizing opportunities on the street of late.

The sweet spot appears to be the $20 million education job.  PJ Dick was awarded the $22 million Avonworth Primary Center project and Nello Construction, the $19.3 million Campbell Hall at West Liberty University.  Two K-12 schools bid within the last month with similar results, both coming in about 25% higher than the published budget. L. S. Fiore Inc. was the low general on the $19.3 million Philipsburg-Osceola Middle School project and Mark Hudson Construction was the low bidder on the $21.2 million Lockley Early Child Learning Center in New Castle.

Still to bid are a couple of nice opportunities at WVU. The $12 million law library project opens on July 24 and the $30 million Advanced Engineering Building is out for pre-qualification of general contractors, with RFQ’s due on August 7.

ALCOSAN took bids on its main pump station upgrade on Preble Avenue, which came in at $22.4 million. Kokosing Construction from Columbus was the low general on that bid. Local contractors Wellington Power and A. J. Demor were the low bidders on the electrical and plumbing portions.

That ALCOSAN job highlights one of the real blues of summertime 2012: the heightened competition. Kokosing has been involved in less than a handful of projects in western PA in the last 20 years, virtually all of which involved repeat clients from Ohio. Like Gilbane, Whiting-Turner, Hunt, Clark, etc. , Kokosing finds its home market too slow to support its operations and has received the news that Pittsburgh is a hot city. This is something of a surprise to the local contracting and design community, whose firms are still fighting to get back to “normal” market conditions.

Owners in the region – and I’m talking about some of the region’s biggest institutional owners – are finding it difficult to resist the siren song of more competition, even though most know that forcing bids lower seldom results in savings by job’s end and often leads to a painful project. That contractors and architects with overhead structures much larger than Pittsburgh companies can be competitive here is mystifying, and in fact most times the truth is that the larger companies are better at making it up as the job progresses (which isn’t good for owners). The phenomenon does not appear to be going away however, so Pittsburgh area firms will have to not only fend off increased competition from local businesses but also those from Ohio, DC and the east coast that are finding their pickings slimmer.

On the private sector front, UPMC has the new $45 million Penguins practice and sports medicine facility in Cranberry out for construction mgt. proposals. They have asked Mascaro, Massaro/Clark, PJ Dick and Rycon/Whiting Turner to respond.  Norfolk Southern has awarded Shiloh Construction a contract for the $14 million Back Shop renovations at their Conway yard.

There will continue to be these sorts of gems bid throughout the remainder of the year but the backlog of projects in the pipeline for 2012 is shrinking. Perhaps a pro-business result in the November election or some easing of economic concerns will trigger an unexpected spike in decision-making from users in the market, but the damage is mostly done for 2012. The pipeline of real estate demand continues to grow fuller but the valve remains closed for summer.

Some News in a Slow Market

While the bid market has boiled down to almost entirely public work in June there are some interesting results and awards in the past week or so.

One of the tightest bids of the year opened last Thursday at West Liberty University. Nello Construction from Canonsburg was low on the Campbell Hall Science Building project by three-tenths of a percent, edging Landau by $63,000 on a $19,287,000 bid. Massaro Corp. finished roughly one percent behind in third.

Contracts were let for mechanical and electrical trades on the $71 million Cardinal Wuerl North Catholic High project in Cranberry Twp. The HVAC and plumbing were awarded to Renick Brothers from Slippery Rock. Lighthouse was selected for the electrical work and Interstate Fire Protection for the sprinklers. The official groundbreaking was held earlier this week and Mascaro Construction is readying the remaining bid packages.

General Electric selected E. E. Austin & Co from Erie as the construction mgr. for its $70 million new plant and locomotive engine facility upgrade in Grove City.

A corporate project of similar size in Akron, OH is attracting a lot of attention from contractors.  Diebold Corp. is planning an $80 million new headquarters and is soliciting construction mgt. proposals ahead of the design. The project has drawn responses from a dozen or more contractors from all over the country. Two local contractors, PJ Dick and Mascaro are among the group vying for the project.

Good Signs in a Mixed Signal Market?

The pending election seems to be more and more of an anchor on the prospects for a more robust construction recovery in 2012. Anecdotes from peers and real estate brokers tell of business owners who need more space sitting on their wallets out of concern for how much different the business and  tax landscape may appear next year. Most businesses are small around here and the owners get to pull a fair amount of profit out of them. Right now the rhetoric from the administration makes owners worry that this might be the best (last) year they can expect to be taxed at lower capital gains rates for a while.

The word from the right is that Obama has put the economy on the verge of another recession. Not very accurate but definitely not very comforting to business. The word from the administration is that the excess (their words) profits made during the past couple years of recovery need to be redistributed to those without. Again, not accurate and discomforting.

Net result: let’s wait and see who’s standing in November. Not much of a business growth strategy but one that is gaining credence it appears.

In the midst of that uncertainty comes a couple of surprising signals. First, the leaders of the local residential realty firms are all crying about not having enough houses to sell for all the people that want them. That seems to be at odds with the accepted wisdom of an extended housing slump. I also spoke with Colliers International managing director Gregg Broujos about the recent ICSC RECON show in Las Vegas. The big retail show was packed. No official word on numbers yet but the estimates are near the 45,000 people that attended in the mid-200’s hey day. Confident retailers are positive historical indicator of construction.

Finally, Oxford Development announced plans for a new office tower today. The press conference may mostly be intended to drum up interest in the concept but Oxford has not historically been a company that made noise without something to back it up. Rumors abound that USSteel is again interested in downtown as a new HQ location or that one of the oil/gas companies could land as a lead tenant. DL Astorino and Mascaro Construction had been working on some concepts for repurposing the building at 441 Smithfield Street to create the office space but the costs and viability may not be sufficient for Oxford  to follow that path, although that scope of work hasn’t been officially ruled out. A new cast of characters would likely be involved in a new mid-rise tower should the developer go that route.

Oxford’s press conference on the 24th revealed Dennis Astorino’s conceptual design and their stated preference to develop new construction at the site rather than renovating the current 441 Smithfield property. One extra advantage of the new construction option is that the new tower would be sited directly opposite the Tower at PNC Plaza on Forbes Ave. that PJ Dick is preparing to start building. The juxtaposition might finally give someone (PNC?) enough motive to buy the Warner Center and do something with it to serve the thousands of workers who will inhabit the new buildings.

Although Oxford’s Steve Guy spoke at the press conference of the direction and schedule being dictated by their success in finding a tenant, Oxford historically hasn’t been a developer that used the press to float speculative ideas. Don’t be surprised if an announcement of a lead tenant follows this summer.

Power Plant Work to Start

After years of wrangling and court cases and fines, the construction to correct the emissions problem at the General Electric-owned Homer City power plant is finally ready to commence.  Kiewit Power Constructors is the engineering/procurement/construction entity overseeing the $700 million addition of two scrubbers to Homer City’s units 1 and 2. Construction is expected to last into 2014 and will require about 600 workers at the peak of the project.

About 30 miles to the south along the Conemaugh River near New Florence,  a similar project is in the works at the Keystone Generating Station. GenOn Energy has narrowed the search for  an EPC contractor to oversee the installation of scrubbers at the plant to Babcock & Wilcox and Interfab. The project is larger than the Homer City plant, approaching $1.2 billion. Construction won’t start until late 2012 or 2013 and should take several years to complete.

Although neither project is within the technical boundaries of the Pittsburgh MSA the labor required for the work will draw from the regional pool of skilled workers. At a time when industrial work is accelerating from the growth of the natural gas industry, another draw on the construction labor force will stretch capacity.

Some Rumblings from the Outlying Markets

Coming into the summer in Pittsburgh the contracting market is not making anyone think it’s 2007 all over again. The projects in the pipeline are moving along and architects are busier but the benefit of that activity will be delayed until later in the year. Perhaps this would be a good time to look two hours north and south.

Erie Insurance Group is in the midst of a $100 million expansion of their headquarters in downtown Erie. They have hired Walsh Construction as CM for the program, which kicks off with a 1000-car cast-in-place concrete garage adjacent to the HQ. According to their preconstruction manager, Chris Burns, the project should bid imminently. CBT Architects are designing the remaining phases that will follow the garage next year.

Another multi-year program that is moving into a more active phase is the expansion and upgrading of the Hamot Medical Center in Erie, with an infusion of capital as a result of their partnership with UPMC. The plan is for roughly $300 million over the next 3-5 years.

Two hours south of town, Morgantown is heating up again. The big project on the boards there is the expansion of the WVU Hospital System, a $250 million program that will include a new south tower by Ruby Hospital. IKM is busy designing the project but construction has been pushed back because of an eleventh hour challenge to WVUH’s certificate of need by rival Monongalia Hospital. WVUH is running at 87% occupancy so the need should be demonstrable but the first phase of the project will probably not start work until late 2012 or early 2013, which will push the big pieces of the project out to 2014.

Coupled with the active projects in WVU’s campus master plan, the work at the institutions in northern West Virginia, along with the growing private sector plans to meet demand from the gas industry are making West Virginia an alternative market for Pittsburgh-area firms.