General Electric & Char Valley Choose

Suncap Property Group from Charlotte NC has been selected to develop GE’s $30 million, 125,000 sq. ft. advanced plastics plant at the Chapman Westport industrial and office park southwest of the airport. GE had previously purchased the property from Chapman Properties, which has plans for an 85,000 sq. ft. spec industrial building adjacent to the GE site.

Chartiers Valley School District selected PJ Dick Inc. as the construction manager for its $60 million middle school/high school project. In other school district construction news, Canon McMillan has apparently narrowed the selection of a CM for its $26 million Muse Elementary School project to Campayno Consulting and Reynolds Building Solutions.

The Gas Tax

Gov. Wolf surprised no one on Feb. 11 when he announced plans to create a severance tax of five percent on the natural gas extracted in Pennsylvania. Wolf campaigned on this tax – this exact level of levy — and has wasted no time following through. Unlike his predecessor, who was hamstrung by his ‘no tax’ pledge to Grover Nordquist – Gov. Wolf can make good on his promise without having to put it into effect. The severance tax will have to become legislation, meaning that something specific will have to get through the Republican-controlled legislature. As of the announcement, there were few specifics of the proposed law released.

The lack of specificity tempered the remarks of anyone who responded. The shale gas industry responded negatively. There were implied threats of further slowdown in drilling and development of the resource in Pennsylvania. Comparisons to the extraction taxes of other states brought reminders that places with higher taxes – like Texas – have virtually no corporate taxes. The comparison to West Virginia prompted the reminder that drilling and processing in West Virginia lagged the activity in PA by quite a bit. But again, it was hard to lodge too much of a complaint against the proposal without knowing what was in the proposal.

One tidbit that the governor did mention was that local government would still participate in the impact fees, which will still be charge to some degree. My belief is that the loss of impact fees to local government is the biggest negative in Gov. Wolf’s proposal. The gas industry will figure a way to profitably get at the largest gas deposit in North America. Local municipalities and counties bear the brunt of whatever impact drilling has. The use of those impact fees has brought new roads and infrastructure to places that the state has barely invested in over the years.

Washington County Chamber of Commerce President Jeff Kotula may have spoken for all local government yesterday when he expressed concern about the share of impact fees that would find their way from Southwestern PA to Southeastern PA, where there is no drilling but a lot of votes.

Jobs Report Wows Again

This morning’s report on employment from the Bureau of Labor Statistics showed an economy strengthening more rapidly than even optimistic economists believed. For January the BLS reported 257,000 new jobs, well above the estimates. More importantly, the BLS revised its earlier estimates for November and December to 329,000 and 423,000 respectively. That is 147,000 more jobs than reported in an already strong fourth quarter. The average monthly jobs gain for that quarter was 336,000, the highest since 1997.

Jobs-Added-Jobs

As upbeat as the hiring data was, the report’s only negative note was actually the most positive. Unemployment rose from 5.6% to 5.7%. That uptick in unemployment was due to over 700,000 workers returning to the market. While many of those returning did not yet find employment, the labor participation rate jumped to 62.9%.

Investors may react to the news negatively because it may signal an earlier move by the Federal Reserve to raise interest rates but as a barometer on the health of the economy, the increased pace of hiring has little but positive ripples.

Where the Work is Starting

 

Friday’s groundbreaking for the South Side Works City Apartments marked one of a handful of significant projects getting underway as the year starts. Rycon is the contractor for the South Works apartments, which is almost $50 million in new apartments and a 562-car garage being developed by Village Green. In East Liberty, PJ Dick is starting the second $28 million Bakery Living apartment building at the Bakery Square 2.0 development by Walnut Capital.

South Side Works City Apts. Image courtesy Village Green.

South Side Works City Apts. Image courtesy Village Green.

Pitt’s board should give a green light to the contractors to start work on the $21.5 million Parran Hall renovation. Volpatt Construction is the general contractor for that project. The Pittsburgh Builders Exchange reported that the Montour School District awarded contracts for the $40 million new K-4 Elementary. Lobar Inc. from Mechanicsburg area was the low general on that project. Mascaro is getting underway with the $32 million expansion of the South Plaza at Heinz Field.

Down at WVU bids were taken on the HSC Simulator Center Expansion last week. Manheim Corp. was low at $1,794,000, followed by TEDCO at $1,824,000 and MASSCon at $1,925,000.

 

South Side Works is Hot Again

It’s been almost 10 years since the South Side Works burst on the scene with the Cheesecake Factory and a bunch of one-off retailers (at least one-off to Pittsburgh) to join the office and apartments that had been developed earlier. In the intervening years, retail habits have changed and the Soffer Organization had endured some financial pressures. There was also a deep recession. The net result was stagnation in what was a hot spot.

Apartments and a fresh business cycle are bringing the South Side back into the limelight. On Friday there will be a groundbreaking ceremony for the South Side Works City Apartments, being developed by Village Green and built by Rycon Construction. The $50 million development includes 264 luxury apartments and penthouses with 12,000 square feet of ground floor retail/commercial space and a 562-car parking garage.

The City Apartments join the 117-unit Hot Metal Flats (being developed by Oxford Development and PJ Dick) and the 56-unit 3030 South Water lofts (from Ralph Falbo and P. W. Campbell), all under construction. Highwoods Properties has announced plans for a 158,000 sq. ft. office building within a blocks of all this residential development along the river.

Construction continues at Oxford's Hot Metal Flats. Photo by Cody Phillips

Construction continues at Oxford’s Hot Metal Flats. Photo by Cody Phillips

Don’t Bury the Apartment Market Yet

One thing I noticed when the year-end party circuit was in swing was that lenders have about had it with apartments, at least in Pittsburgh. After tow or three years of cautiously making loans to one developer after another, the Pittsburgh banking community seems ready to throw dirt on the apartment boom.

They may indeed be correct. After all, the combined total of apartment starts for 2013-2014 is four times what the average number of units started was for the previous 13 years. I’ve gotten several calls in the last three months from appraisers trying to estimate absorption and looking for starts information. I understand the mentality, especially in Pittsburgh, that looks for the ride to end. Here’s where I think the problem may be in that thinking.

First, there really isn’t any time in the working careers of Pittsburgh lenders and appraisers that is a comparable market reference – at least if the career was here. Population, particularly in the urban core, has been declining for much of the past 30 years so there hasn’t been an apartment driver like in the south or in major landlocked cities like New York or DC.

More important are the supply/demand dynamics. There is net migration into Pittsburgh and there are between 8,000 and 18,000 new jobs being created in the region annually – depending on whose estimate you’re using. Each new job essentially  creates a new household (if you compare Pittsburgh existing households and total employment, the numbers are almost identical). So take the 8,000 job number and do this math: there will need to be 8,000 new dwelling units created for those workers. Single-family homes are stuck at about 2,000/year with no increase expected in the next year or so. Even with 3,838 units started in 2013, there would still be a shortfall of more than 2,000 units.

Currently, some 3,500 units of apartments are in the pre-construction pipeline. Even with most of the 2,500 units from 2014 still to be delivered, that means there won’t be enough apartments to match up to job creation/household formation again in 2015 or 2016, unless the employment picture goes backward significantly – something no one foresees. And none of this takes into account the facts that suggest that the Millennials are starting to emerge from sharing apartments or their parents’ basements.

I imagine that the lenders are going to drag the apartment development down somewhat but I expect that developers will just find another source of funding seeking higher yields than the Treasury or their local bank is giving. With an impressive recent history of rental growth, apartments should still be a hot ticket in 2015.

Apartment development will probably push the envelope a few more years in fact, at least until the growth in rents and birth rate creates the next boom in home ownership.

The Data Doesn’t Lie

Even with the surprisingly strong fourth quarter for contracting, most involved in the construction industry will find 2014 a bit disappointing when the dust settles (especially when the financials are reported). That will be less because of the performance of the market than the underachieved potential.

The last quarter of 2013 showed real economic promise. National GDP was up 3.7% and job creation in Pittsburgh was estimated at 18,000 jobs for the year. That potential for loosening the market just didn’t kick in during 2014. Or at least it didn’t feel that way. The numbers mostly back up that disappointment, although they tell a mixed story.

Non-residential structures totaled $2.77 billion in 2014. That’s a mere $5 million below the $2.82 billion of 2013 but given the outlook coming into 2014, flat was disappointing. The residential market may appear way off the 2013 levels, falling over 24% year-over-year. But much of that decline is due to a 30% drop in multi-family starts to 2,572 units. That’s actually a pretty healthy year in Pittsburgh but the 2013 total of 3,838 dwarfs that number. It’s worth noting that the 2013 total was a 239% increase over 2012 and 2,572 units tops every other year going back to 1995 by at least 15%. More about the apartment market in a future post.

Total Pittsburgh MSA 2014 1,971 2,902 4,873
Total Pittsburgh MSA 2013 2,164 3,838 6,002
% Change -8.9% -24.4% -18.8%

There were over $900 million in non-residential starts in the 4th quarter of 2014. That’s a good start for backlogs. While the bid market isn’t racing out of the chute in the first 2 weeks of the year, more than $250 million has already been awarded or started already in 2015.

Last week NAIOP Pittsburgh presented PNC’s Gus Faucher talking about the economic outlook for 2015. Faucher was very upbeat, mostly because of the improved job market, lower gas prices and the lack of any economic headwinds from consumer or government de-leveraging. PNC is predicting GDP growth above 3%, even with the global economy tanking.  It’s worth pointing out that PNC’s Kurt Rankin was the one economist willing to say that he thought surprises in 2014 would be to the upside and he turned out to be very accurate in guessing what those upside numbers would be.

Business wasn’t as bad in 2014 as it felt. One of the tougher tasks of business is separating emotion from reality and that cuts both ways of course. My forecast for 2015 is that it will be a breakout year. That doesn’t mean gangbusters necessarily. I think too much Pittsburgh business is tied up in global business for the Pittsburgh economy to not be impacted a little by the world’s problems. But I do think that 2015 will be the year that we see the long-term optimism about Pittsburgh and its maturing technology and energy industries translate into bricks and mortar.