A Slow First Half

Construction of all kinds lagged significantly behind the activity in the first half of last year. Housing starts in Pittsburgh plunged 37.3 percent in the first half of 2014 compared to the same period in 2013. The drop in activity was driven by a significant drop in apartment starts coupled with a downturn in single-family permits that is attributable to weather and market conditions.

New home construction is still lagging the pent up demand for housing of all kinds. Some of the decline in starts can be explained by the severe winter, but much of the decline is due to the profile of the custom builder and the lot shortage in Metro Pittsburgh. The average builder is smaller here than most markets and it’s difficult for smaller builders to catch up when weather holds down buying for an extended period. More importantly, the dominant share of NVR’s Ryan/Heartland brands has made it very appealing to develop new lots for that juggernaut and unappealing to develop traditional neighborhoods that feature multiple custom builders.

Total residential starts fell to 1,813 during the first six months of 2014. Because several large multi-family projects got underway in the second quarter of 2013, the year-over-year comparison reflects a steeper decline than the Pittsburgh market might normally support. With another 2,000 units in the multi-family pipeline, permits for attached and multi-family units will still top 2,000 units for the full year, a total that is roughly 25 percent above the historical norm.

The top municipalities for residential construction during the first half of 2014.

The top municipalities for residential construction during the first half of 2014.

Demographics are really behind this part of the market. For as many apartments as have started since late 2012, leasing remains brisk, even accelerated compared to 2013.

Nonresidential contracts reached only $1.02 billion from January to June 2014, down 29.7percent from $1.45 billion during the same period in 2013. The pace of activity seems to be finally increasing, although the market is nothing like the boom of construction that took place after the last recession. Because of the cold winter and slow spring bidding, there is little expectation of a significant turnaround in 2014 but the pipeline is filling up with projects that bode well for 2015. Jobs like CMU’s Tepper School and the Cohon Center, the next phases of Bakery Square 2.0 or the Three Crossings are some examples of projects that will get underway in the next six months.

The big trigger will be the Shell cracker in Monaca, I believe. There are bigger industrial users looking for space now but the demand for manufacturing and industrial space will explode once plans for the site are announced. Jacobs Engineering took bids on some early packages over a week ago and confidence is still very high that work will go ahead by the end of this year on the preparation for the chemical processing facility, even if only to prepare it for Shell to sell to another producer. That prep work should be in the billion dollar neighborhood.

Amazon Lands

Online retailer Amazon has apparently selected the former Roomful Express warehouse in Crafton for its fulfillment & distribution center in Pittsburgh. While no one directly involved in the deal can confirm the selection, brokers involved in other space searches say that the Crafton warehouse has gone off the market. The deal is reported to be for 300,000 sq. ft.

Amazon’s decision to move to Pittsburgh doesn’t mean a ton of jobs but it puts the industry leader in online sales in this region. With online shopping expanding into all retail segments, the trend is for more regional fulfillment centers. Amazon’s CEO Mark Bezos plans to sell “everything to everyone” and is aggressively moving to one-day or same-day fulfillment. That he chose Pittsburgh is likely a sign that competitors will view this region as an expansion site.

Building automation and controls giant, Johnson Controls, is close to making a decision about the design/build team for its new $100 million office/research facility in York PA. The University of Pittsburgh is making a final selection for construction manager for the $17 million Murtha Center project at its Johnstown campus after interviewing Massaro Corp. PJ Dick and Volpatt Construction.

Commercial Real Estate Booming

Commercial real estate is the hottest segment of the construction market in 2014. Spec office projects are moving forward in strong submarkets across the city. Highmark’s medical mall has sparked construction of 3 new medical-related office buildings across Route 19. One of the developers, ACRES, is contemplating another new office building further north in the Warrendale area and there are 2 new 42,000 sq. ft. office buildings proposed at the Brooktree Center in Wexford. Burns & Scalo announced the signing of a 30,000 sq. ft. lease for the second building in its Zenith Ridge project at Southpointe. The developer is more than half leased there and plans to start the third 150,000 sq. ft. building next spring. Burns & Scalo has also leased half of its Concord project in the RIDC Park West.

These offices complement the spec construction at Southpointe Town Center by Horizon Properties, Elmurst’s Schenley Gardens in Oakland, Millcraft’s Gardens project downtown and the Three Crossings and 350 Fifth Avenue projects that Oxford is planning. Expect to hear more about the latter in August, along with possible news about the ALMONO site from Oxford and Millcraft.

The demise of the bricks and mortar retail store hasn’t occurred yet in the far northern and southern suburbs. Dynamic Building Co. is starting construction on The Street, a 132,000 sq. ft. retail town center Horizon is developing near the Meadows. Work is underway on the Field & Stream and Hobby Lobby spaces at the Old Mill, another 100,000 sq. ft. plus being developed by TSG Properties and Mosites Construction. In the north, WalMart is dipping its toe back in the water in Pittsburgh with a 150,000 sq. ft. store planned for McKnight Rd. at Blazier Dr. in McCandless and Dominic Gigliotti is proposing another neighborhood retail center in Cranberry, a 93,000 sq. ft. center similar to the retail portion of the Village at Pine. At the same time, Wexford is seeing a boom in small retail, with a Wendy’s, Auto Zone, Chick-fil-A, new branch bank and a handful of new tenants in the Wexford Plaza. And all of this is in addition to another 90,000+ sq; ft. of new construction at McCandless Crossing.

The other leg of the CRE boom in Pittsburgh is the apartment market. The Business Times reported yesterday that Ambling University Development Group would be presenting a plan to Zoning Hearing Board for 389 apartments at the former Allegheny Health Dept. site at 3333 Forbes Ave. in Oakland. That property is the site of a mixed-used hotel/apartment/office project proposed by MWK Development, a partnership of the Massaro Corp., Gary Wilson of LWE and Tasso Katselas.In the 2 weeks prior to that hearing. The ZHB will also hear plans for a new 7-story, 74-unit apartment Uptown from Castlebrook Development and for a 7-story, 32-unit building at 2607 Murray Ave. in Squirrel Hill being developed by AHI Development. During those same 2 weeks, adaptive re-use projects from Solara Ventures and Collier Development in the Strip will be reviewed. In total, the number of units under construction and in the pipeline tops 5,000.

One legitimate concern about commercial real estate in general is the push to build by investors rather than supply and demand. Fed Chair Janet Yellen addressed this in her comments to Congress yesterday about yield-chasing, even though she didn’t refer specifically to CRE. Most of the recent real estate bubbles have had an element of overzealous investing pushing construction near the top of the boom. Multi-family is the poster child for this right now, although other categories will attract investment soon, at least as long as interest rates remain low.

These dynamics aren’t as important in Pittsburgh. There remains an abundance of demand compared to supply in all segments of commercial real estate. While no one can predict the impact of the ethane cracker plant, its construction will likely kick start another surge in demand for commercial and industrial land and space. Bids are coming in this week for some of the first packages on the cracker, by the way, although nothing has been officially announced. That announcement may still come at a time when such news is politically advantageous to a gubernatorial race, but the real work seems to be moving anyway. Even without that catalyst, it’s a good time for commercial development.

Mid-summer News

The most recent economic data shows a U. S. economy in better shape and headed towards more robust growth throughout the remainder of 2014. Construction starts are up 6.6% year-over-year in May, unemployment declined again to 6.1% and even the big drop in GDP of 2.9% in the first quarter was shrugged off as an anomaly because of the weather. This last report bears closer examination, however.

Stuck in the data of the Bureau of Economic Analysis’s June 25 report was a detail on reduced consumer spending in the first quarter. When you pick it apart it becomes clear that consumers were actually spending in the places we commonly associate with consumer spending (retail, restaurants, appliances), even if the weather took the edge off. The red flag was a huge drop of roughly 30% in healthcare spending. While some of this can also be attributed to the weather (discretionary doctor’s visits pushed back), most of the decline is due to the impact of Obamacare.

In a slow bidding environment, a couple of opportunities stand out. 4Moms has asked Burchick, A. Martini & Co., MBM, Mosites & TEDCO to bid its 78,000 sq. ft. fitout in Elmhurst’s 912 Ft. Duquesne Blvd building. Pitt took CM proposals last Thursday for its $17 million Murtha Center at the Johnstown campus from Mascaro, Massaro, PJ Dick, Rycon & Volpatt. the Ligonier Valley YMCA is taking bids July 22 from A. Martini & Co., Dick Building Co. Jendoco, MBM, Turner & Volpatt on its $6 million addition. Millcraft/McKnight has selected Carl Walker Construction to build its parking garage and 25,000 sq. ft. retail center at the former Saks Fifth Avenue site.

Goodbye to Gary

This morning there is a celebration being held to mark the life of Gary Carlough, who passed away on Sunday. Gary was one of the good guys of our industry and his death diminishes Pittsburgh a bit.

Gary’s architectural pedigree is pretty impressive. He cited Dahl Ritchey as a mentor, working for Deeter Ritchey Sippel (now DRS Architects) towards the end of their run designing some of Pittsburgh’s iconic modern structures. Gary also was part of the first team at The Design Alliance when that firm was breaking ground in architecture.

I met Gary in 1994 as we were starting the Pittsburgh Construction News. He had recently left TDA with the intention of going to London to study but one of his former clients had asked him to help out with a project so he delayed that trip to take on the job. Before he could go he got another call, then another and you get the picture. His office was in the carriage house behind Dutch MacDonald’s and Becky Mingo’s home in Friendship. When I stopped in to introduce myself, Gary jumped at the chance to stop working and chat. Barefoot and smoking a cigarette in the un-air-conditioned garage, he talked about going to London and what he believed about architecture; and he asked a lot of questions about what we were doing. He seemed to be having fun. As I learned later, it was a fairly typical Gary Carlough experience.

Aside from his personal nature, what I liked about Gary was his passion for what he did. He had different ideas about design and was willing to try them. His firm, EDGE Studio, did some of the more interesting projects of the last decade or so. I admired that EDGE tried to create all the time. Chances are good that EDGE designed one of your favorite projects from the last 15 years.

I wish Gary’s sons and his wife, Anne Chen, peace and healing from this loss. Perhaps they will take solace in the number of people who were shocked by Gary’s death and touched by his life. I will miss him.

Decipering the GDP Report

Yesterday’s Commerce Department announcement of a steep decline in first quarter GDP was met by a huge yawn by the business and investing community. That’s good news considering that GDP fell 2.9% in the first quarter, an enormous decline that outstripped any estimate of the decline. The collective shoulder shrug was because the decline was expected and even though it was forecasted to be worse, most economists knew that they didn’t have a good way to estimate the true impact of the polar vortex winter. For those wondering why the government’s estimates of first quarter GDP were so much higher in April and May, the answer is that Commerce takes in more information with each month and adjusts the estimates appropriately. As usual, some of the most important data just isn’t available until almost three months pass.

OK, here’s why the drop is no big deal. Cold weather kept shoppers, home buyers, contractors, etc. home instead of out doing what they do. Frigid temperatures kept freight from moving many days this winter. The normal measures of output are inventory building, consumption and foreign trade. None of these could function properly in January and February but the upside is that most activity gets deferred in those kinds of winters. Dining out, movie-going and seasonal activity won’t be made up but most consumption that would have occurred will happen later – or has already.

The bad news in the report was called out but seems to have been obscured by the yawn. The biggest output revision done in June was for healthcare spending, which could have been affected somewhat by the weather but is more likely to have been a reflection of the new normal post-Affordable Care Act.

When I researched the healthcare edition of BreakingGround, I was surprised to hear from so many sources that visits were down – in some cases more than 30%. People who found out this year that the MRI or follow up visit with the specialist was going to cost them much more money decided not to go. Emergency rooms, which saw a big increase in co-pay charges, have seen big declines in visits. Not every place is experiencing this phenomenon but most are and in a city with more than its share of older people on fixed incomes, this trend is more noticeable.

Economists expect that the spring rebound is real and that second quarter GDP will be up well over 3%. That’s good. Watch the healthcare spending line item when these reports come out. That winter drop is a trend worth following. In a town where hospital construction makes up one of the highest portions of the construction industry, declining visits will keep capital spending down too.

Not much on the project news front. Mosites and Carl Walker put revised BAFO pricing in Tuesday on the former Saks site project. Carl Walker’s previous bid was reportedly the low proposal.

Some Construction News

Last week’s jobs data helped put a happier face on the state of the overall economy. The comments from a Shell executive about the signing of 10 third-party agreements for supply and product from the proposed ethane cracker also should add optimism to the business outlook in the region; however the bidding activity remains very light, even for June.

The highlight of this week’s bid board is the addition and renovation to the Fox Chapel Golf Club. FCGC has invited BRIDGES, Franjo, Jendoco, A. Martini & Co., Mascaro, MBM & Volpatt to bid the $6 million, 12,000 sq. ft. addition, which also includes a similar amount of renovation. MIllcraft is reportedly interviewing Mascaro, Massaro, PJ Dick, Mosites and Turner in follow-up to an RFP for the redevelopment of the former Saks Fifth Avenue site.

Harrison County Board of Education awarded Landau a $2.5 million contract for work at the Simpson Elementary. Volpatt Construction was selected to renovate the Hamburg Theater, the first phase of the City Theater’s $7 million capital project on the South Side. A. Martini & Co. was selected by Excela Healthcare to act as the design/build contractor for a $9 million renovation to Frick Hospital’s entrances. Work is beginning on the emergency entrance. Excela also gave Martini the green light to do site work and access road construction for its $20 million-plus new ambulatory center in Latrobe.