Building Pittsburgh

Single family detached housing starts rose more than 16% compared to last year during the first half of 2010, according to the Pittsburgh Homebuilding Report. The pickup in new home permits in May and June is the first positive sign in almost three years, and it obviously was happening without aid from the tax credit. More than just the volume increase – which was fairly small – the better sign was seeing builders who had largely disappeared for a year or more get some new business.

During the January through June period 810 permits were issued for single-family detached units, up from 697 during the same period last year. Attached units declined more steeply, with 325 units started compared to 614 during the first half of 2009.  The overall housing construction market was down 13.4%. 

Tempering the optimistic side of the data is the surprising drop-off in attached housing. The numbers last year included the permits for a large market-rate Hope VI project so that may have skewed the 2009 numbers; however, the demographics really favor this kind of product so you might expect to see a recovery in villas and quad homes first.

Non-residential construction was down 13% compared to the same period last year, but contracting volume was up over 200% from the first quarter of 2010.  Contracting during January-June was $1.13 billion, down from $1.3 billion in 2009.  Most of the larger projects started were publicly funded so far this year. During the past 45 days or so there has been an improvement in the amount of private sector projects being bid but the market remains hypercompetitive and there are fewer opportunities for the larger firms in the region.

The improved global economic picture has helped manufacturers pull the trigger on some of the large industrial projects that have been pending. AK Steel has contracted its $140 million upgrade and USS Clairton Works is preparing to start roughly $450 of the $1 billion it has planned to invest in its coke batteries. Allegheny Ludlum selected an engineer for its mill equipment, which should signal the renewal of their plans for a new $1.2 billion plant in Brackenridge. Even with the industrial projects included the volume for 2010 should remain below $3 billion.

The top municipalities for new permits were:

It’s not a big deal but Hill International (NYSE:HIL) announced July 7 that it has acquired the Construction Management Division of dck worldwide, LLC. Terms of the transaction were not disclosed.

The Construction Management Division of dck worldwide, with approximately 90 employees, provides program management, agency construction management and construction inspection services primarily on transportation and building projects in Pennsylvania, Ohio and Florida. This group primarily provided non-contracting services. dck’s construction groups, which will still perform construction management contracts will remain unaffected by this transaction.  No formal announcement was made by dck as to the assignments of the CM Division employees in their Jefferson Hills offices.

On the regional level dck has been more active in the past year, competing for the kinds of projects that the former Dick Corp. would have built in the institutional and commercial sectors.  The company is currently bidding on a $10 million ambulatory center for Canonsburg Hospital, a $200 million youth detention center in Baltimore, the $100 million second phase of the FBI building in Clarksburg and the $15 million Uniontown-Brownsville maintenance facility for the Turnpike Commission.

Monday, June 28 saw the announcement of two acquisitions for regional construction industry firms L. Robert Kimball and Traco.

Philadelphia-base CDI Corp. (NYSE: CDI) acquired L. Robert Kimball & Associates to add architectural and engineering infrastructure services to its Engineering Solutions group. CDI Engineering Solutions provides engineering to the aerospace, government services, infrastructure, life sciences and process/industrial markets. The acquisition is expected to be accretive to CDI’s earnings in the third quarter of 2010.

Jeff Kimball will remain in his role as president of L. R. Kimball and will also serve as new senior vice president of CDI Engineering Solutions. L. Robert Kimball & Associates will continue to do business separately and will remain headquartered in Ebensburg PA.

Alcoa Inc. announced that it has agreed to acquire commercial window and door maker Traco Inc. of Cranberry Twp. The deal provides the aluminum maker with opportunities to increase its product line in the building and construction industry.

“Traco’s strong brand and product lines are well-known throughout the commercial building market, and we look forward to helping the brand continue to flourish,” said Glen Morrison, president of Alcoa Building and Construction Systems, in a statement.

Morrison will oversee Traco operations when it becomes part of Alcoa’s building and construction business. Alcoa will continue to market products under the Traco name, a spokesman said.

Alcoa, which has its corporate center on Pittsburgh’s North Shore, anticipates it will be completed by Sept. 30, pending regulatory reviews.

It’s been more than a year since the bid market has been anything but brutal and May 14 wasn’t any different but there were at least some exciting results.

This morning ALCOSAN opened bids for its $25 million maintenance facility and received nine bids from general contractors, including all of the big guns in Pittsburgh. The low three were PJ Dick, Mascaro and Rycon, with PJ finishing low at $17.3 million.

Also on the 14th came the letters from Slippery Rock University announcing the successful contractors on its $27 million new Student Center. This project has been the center of much controversy over the past few months because SRU used a modified version of the state’s best value process to select contractors for general, mechanical and electrical trades, none of whom were the low proposer the first go-round. As a result of legal protests the project went out for another best-value round in March and the same general, Mascaro Construction was selected. With protests being filed again (and rejected) during the bid period this time it is not a forgone conclusion that the project will now proceed, but the results certainly capped off an interesting day at Mascaro.

The recession has been less severe in western PA but it is real. One of the byproducts of tighter conditions is increased competition & therefore more angles played & corners cut. Bids have been coming in well below budget on most projects for a year, although architects/developers have now moderated those budgets down to meet the expected market. Still, when the low contractor is 10-15% below the mean (or often the second low bid) that usually means that he has an angle or corner the architect/developer hasn’t considered.

This can be a more creative solution to the problem of building the job but often it means doing a better job of finding the holes in the documents to be exploited later, or counting on the conditions to create enough confusion or slow response to RFI’s that delays (and claims) will follow. Neither of these are good things for the owner.

Add to that now the gulf that is growing between the revised AIA 201 contract documents (a historical standard for construction contracts) updated in 2007. The revision was the first not endorsed by the Associated General Contractors of America because there are several revisions that attempt to shift the risk of uncertainty in documents to the contractors without compensation & that put the onus for interpreting design intent on the contractor not the designer.

Locally that has led to some interesting documentation on project plans & specs. In the case of the $80M Bethel Park HS there were notes on the addenda drawings to the effect that the drawings were to be considered a convenience for bidding & that the architect wasn’t responsible for the accuracy of those drawings. There was also an interesting mechanical spec section that stated that the specs were intended to outloine the best system available but the contractor was to figure out if something else was better. In the case of Montour’s $45M project the bidders were asked to sign a document that certified that they understood the documents to be an accurate representation of the architect’s intent, which would effectively close the door on future “re-interpretations” of the intent.

(Montour bid March 30 and came in just under budget. Yarborough Development was low at $23.948M on the general. The other bids were Burchick at $25.189M & Mascaro at $25.198. None of them verified the accuracy of the documents as was requested in the documents. See the complete results at the Pgh Builders Exchange http://www.pbe.org/ipin/ProjectAL.asp?txtPID=2006-09FE-A)

These changes in documents are an understandable attempt by archtiects to deal with a trend that has resulted from their dealing with tighter competitive conditions for some time. Tighter fee structures and unrealistic expectations from the clients have resulted in less and less complete plans over the years. Contractors have exploited those incompletions to create change orders (mostly a reaction to their own competitive pressures) so this change in language to shift the risk of the owner’s expectations to the contracting side of the table is meant to reverse the trend. Contractors don’t have a professional liability or the training to interpret owner’s intent into a design, however, and this strategy isnt likely to hold up when challenged in court.

The Montour project will be an interesting test. Roughly half the bidders chose not to verify the accurate intent of the documents statement, including several of the low bidders. If the district accepts the bids as is there will be no incentive for similar disclaimers to be included. If the district decides to reject the bids that did not consent to the disclaimer there will have to be a re-bid of a job that has already bid twice over two years, and that was in under budget. The politics of that will be interesting.

School board members are volunteers, often with a single issue ax to grind. Rejecting these bids will cause a hailstorm from taxpayers * the rejected bidders will probably sue. That would test the risk-shifting pretty quickly. Stay tuned to the local news….

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 new 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.

On March 5 the state’s Department of General Services (DGS) issued revised Request for Proposals for the first two of the remaining four state correctional institute expansion projects that were held up from contracting last summer and fall. Best value design/build proposals will be taken for the $14.5 million, 200-bed expansion of the SCI-Forest in Jenks Township, outside Marienville and the new 1000-bed, $181.5 million unit at the SCI-Benner (formerly known as Rockview) just east of State College.

Technical proposals were due back for Forest on April 6, with cost proposals due May 11. For the Benner facility the technical proposals are due April 13, with costs due May 25.

In response to judicial decisions regarding overcrowding, the Department of Corrections is utilizing the DGS best value procurement system, adapting it to a design/build delivery system. Design/build is most efficiently delivered under a single contract and DGS is satisfying the requirements of the Separations Act by mandating that the successful construction manager/design builder take separate bids from HVAC, plumbing and electrical contractors.

Several hurdles still exist for the prison projects. One main problem is budget. While the SCI-Forest project has likely been given a maximum cost that exceeds the actual cost (similar “butterfly” units bid last year at about $11 million each), the SCI-Benner maximum cost of $181.5 million was 20% below the level of the median original bids last summer.  Because the ground rules have changed, requiring design/build proposal teams to bond that their proposals are below the maximum cost before bidding, the possibility exists that few or no teams will risk that surety unless some significant reductions in scope are apparent in the early reviews of the plans.

Additionally, the delivery system of the project is abnormal for PA public bidding and could potentially be challenged, even though the process was thoroughly vetted by DGS, the Governor’s office and the state’s attorney general’s office.  Project labor agreements have been made optional, which makes labor an opponent; and, the lack of separate contracts held by the owner (the Separations Act will be satisfied by having the design/build team take separate HVAC, lumbing and electrical bids) could give the mechanical and electrical contracting associations a reason to protest or challenge legally.

Whatever obstacles, if any, arise will need to be ironed out on this round of bids so that the two remmaining prison projects can proceed without encumberance.

Proposals for the 2,000-bed, $400 million expansion of SCI-Graterford in Montgomery County should be taken later this spring. Site selection for the $200 million SCI-Fayette expansion is being finalized and design/build proposals will be requested later in 2010.

Moody’s Economy.com released its housing market forecast for 2010 and the results were glum for most of the nation, with only one of the 100 largest metropolitan markets forecasted to experience price appreciation.

Mark Zandi, chief economist for Moody’s Economy.com pointed to the sluggish employment picture and the stubbornly high foreclosure rate as factors that will keep the overall housing price down for another year in 2010. Zandi expects that another 2.4 million houses will have to clear foreclosure in 2010, and predicts that will be too much downward pressure to offset recovering markets. The good news is that Moody’s expects this year to be the last of the decline.

“It’s clear we’re closer to the end of this crash than the beginning,” says Zandi. Housing is more affordable, and construction is still low, so sales will eat up excess inventory. “We’re moving in the right direction, and that’s reason for optimism,” he says.

Pittsburgh’s appreciation is a reflection of the stability of the region, which also means that the market did not enjoy the unsupported price appreciation that occurred in other regions in the middle of the last decade. Like eight of the other ten best markets, Pittsburgh’s median price is still below $140,000.

On February 19 the online magazine Forbes.com released its list of the ten best markets to buy a house and ranked Pittsburgh number one. Using the Housing Opportunity Index, a metric created by the National Association of Home Builders and Wells Fargo, the magazine said Pittsburgh’s appreciating prices, affordability rating and low number of foreclosures, which help keep prices stable, all factored into the city’s ranking.

 According to Forbes, “For a housing market to be attractive it should have appreciating prices that show homeowners are making wise investments; an affordability rating that gives middle-class families with good credit entry into the market; and a relatively low number of foreclosures, which keeps prices stable and indicates there isn’t an excess of inventory.”

New house permits in metropolitan Pittsburgh jumped 41.2% in the fourth quarter of 2009, compared with the last quarter of 2008. This is the first indication we’ve seen in two years that the levels of new construction may be ready for a year-over-year increase. Permits for housing units started in October through December totaled 815, versus 577 during the same period in 2008.

Activity levels are still terribly low compared to the historical norms. Even with significantly higher activity in the fourth quarter the number of single-family detached homes started in 2009 was 1517, the lowest for any year since we began tracking activity in 1994. That volume represented a 24.4% decline compared to 2008 starts. The overall housing market fared better, however, with total units permitted (including attached units) declining 16.2% to 2,807.

The outlook for 2010 is brighter, but not sunny. The depressed level of activity in 2009 almost certainly represents the bottom of the market. Local builders have cut their activity and supply remains close to demand. The extension of the tax credit, and improving overall economy should provide enough additional demand to boost new construction comfortably above the 3,000-unit level in 2010. The top municipalities for new construction in 2009 were:

Non-residential construction plunged predictably in 2009, with $2.4 billion contracted for the year, a decline of more than one billion dollars, and 31%, from 2008. Contracting slowed dramatically in mid-year, as did planning for new construction. Like housing, non-residential contracting showed some renewed life in the fourth quarter, and bidding activity has been livelier in early January than normal.

Financing remains a key to seeing a commercial construction recovery take shape. There are lots of indications that the global economy is recovering from the financial crisis, and our region seems to be heading in the direction of where the new economy’s jobs will be; however, the financing climate is still not where developers want it to be to make their risk/reward expectations make sense for new development.