Disappointing Results – Brightening Forecast?

Budgeting for owners/developers and bidding at the subcontractor level has ramped up in recent weeks. Among the general contractors, as many as ten major projects are being budgeted right now for a variety of owners. Construction is getting underway on several large projects that have been in development for a year or more. These developments raise optimism for 2015 and hopes that the fourth quarter will be a boost going into the coming year.

Among those ramping up, Massaro Corp. is doing the demolition and abatement at the former Allegheny Health Dept. site to start the 389-unit Ambling Apartments in Oakland. Mosites is doing the prep work for the $22 million Cohon Center expansion at CMU. Also at CMU, Mascaro is supposed to start work on the $18.5 million Hamburg Hall addition. Mascaro was awarded the Union Trust Building and is awaiting the green light for the $32 million Heinz Field South Plaza expansion in January. Up north of Zelienople, the Jackson Twp. supervisors have approved the 350,000 sq. ft. FedEx Ground distribution center, to be built by Jackson Taylor Contractors.

Setting optimism aside in favor of reality (or at least results) the construction activity through the first 3 quarters of 2014 remains disappointing. The Pittsburgh Homebuilding Report for Jan-Sept shows residential construction down 30% from last year, mostly due to a drop in apartment construction. In part this is a reflection of the unusually high activity levels in 2013, but housing construction in general is softer. Another 1,200 apartment units are expected to get underway in 2014 but the market will still fall short of 2013.

pgh housing 2014-3

Non-residential construction is off 15.4% from the first nine months of 2013, according to Tall Timber Group’s research. Contracting through Sept. 30 totaled $1.92 billion compared to $2.27 billion during the same period in 2013.

 

Tracking the Millennials

Tuesday’s joint NAIOP Pittsburgh/Corenet presentation on the impact of the Millennial generation was very illuminating, especially in that it partly debunked the theory that this cohort of young Americans was changing the way everything worked. Ian Anderson from CBRE spoke about the Millennials’ use of technology and lifestyle expectations but fit it more into the context of trends that have been in place for some time. Workplace trends towards collaborative and play space or more dense, open office plans have been developing for more than a decade. Likewise, the trend towards more renting and urbanization are rooted in larger context than just the needs of the Millennials.

David Weisberg, Gennaro DiBello and Pete Sukernek at the NAIOP/Corenet event.

The young generation of adults are going to be hugely influential inside of a decade but for now the CBRE research showed that for the most part, Millennials want the same things from work and living that Gen X and Baby Boomers want.

On the project news side, Turner was selected as CM for the $15 million Butler Health System medical building. Davis & Associates selected Mascaro Construction as CM for the renovation of the Union Trust Building.

Are There Users Out There?

Yesterday’s announcement by CBRE of a new 600,000 sq. ft. office complex on the North Shore proposed by Merrill Stabile looks for the most part to be a well-crafted effort to market a good site (it certainly attracted the media attention). According to the Tribune Review, Stabile is hoping to attract a Google-like company to Pittsburgh. From time to time developers or property owners are willing to pay an architect or broker for some preliminary work so the owner can float ideas about a piece of ground. In recent years there have been similar announcements about the former Pittsburgh Brewing site or the Burns & Scalo site on First Avenue. There are project looking for an anchor. Sometimes the marketing works and sometimes it doesn’t.

RenderingWithTB

The Stabile announcement is probably no different except that most of the real estate people I talked to after the press release were truly puzzled by the size of the project given the location. On some level, that’s how brokers react about projects they aren’t working but the secondary reaction was also one of curiosity about who might be out there looking.

Over the past few months there have been rumors of several big users looking for space in excess of 200,000 sq. ft. at places like ALMONO or Oxford’s new building. USX has been tied to the Strip District and the former Civic Arena site.  Wednesday’s announcement may be just a marketing exercise but it’s timing raises the level of optimism about 2015 if there is indeed the hope that the North Shore project is competing for actual users in the market. With so little supply in the market since 2011, expansion or relocation or attraction of an anchor user for the office market would set off some dominoes. It would certainly mean more construction than the market has seen in a while.

Market Stirrings

As the fourth quarter of a disappointing 2014 gets underway there are rumblings from the marketplace that suggest that the steady improvement in the economy may be loosening the purse strings that owners have kept tight. Given that this year has seen more fits and starts than any in memory, you might want to take the uptick in activity with a grain of salt but there are some users out there looking for bigger spaces.

Sippel Development brought plans for a 305,000 sq. ft. FedEx distribution center in Jackson Twp. north of Zelienople. Jackson Taylor Contractors from Mentor, OH is the project’s contractor.

Fourth River Development is finalizing approvals for a 104,000 sq. ft. industrial building at Starpointe that will be anchored by Mach 1 Global Services taking half the building. Dynamic Building Co. will build that project. Continental/Chaska has started Building 300 at the Pittsburgh International Business Park. That’s a 55,000 sq. ft. spec flex office. Interest is high in that property and the next building there is likely to be larger, perhaps 100,000 sq. ft.

Beyond the horizon of those projects, Chapman Properties is looking more seriously at starting the first large spec building at its Chapman Westport property, probably something in the 90,000 sq. ft. range. And the most interesting prospect out there is an RFP for architectural/engineering services for a 250,000 sq. ft. building from a confidential client. Those looking at the RFP have been given no specific indication of the site or the user. There have been a couple 250,000 sq. ft. users in the market during the last few years (USSteel, Chevron, etc.) but this appears to be a different company than those being shopped previously.

The construction boom that occurred between recessions kicked off with a big jump in activity in the last quarter of 2004. Let’s hope for deja vu all over again.

The Amazon Effect

Monday night Jackson Township reviewed Doug Sippel’s plan for what will be a FedEx distribution center on 60 acres north of Zelienople. The 305,000 sq. ft. facility is exactly the kind of industrial project that has been missing from the region until recently. The FedEx project will be the third big user over 250,000 sq. ft. to enter the Pittsburgh market since last year (Gordon Foods and Amazon are the others). Sippel’s development may be another one-off (although by definition that is already impossible) but my guess is that it is part of a trend that was included in our industrial feature in DevelopingPittsburgh last month – a trend that Jeffrey Ackerman of CBRE spoke about two weeks ago.

Amazon’s lease is for a fulfillment center that is a mini-distribution model aimed at handling their overnight and same-day fulfillment goals. Amazon’s vision of selling everything to everyone is creating tremendous logistical needs in markets that are below the super distribution center size. Ackerman talked about the trend at the CBRE Real Estate Symposium and predicted that the Amazon lease would draw the attention of other logistics providers like FedEx and UPS. Let’s hope this is the start of a wave. Even better, let’s hope it inspires some big spec warehouse space construction.

Some noteworthy commercial construction updates: WVU short-listed Mascaro, PJ Dick and Turner on the $30 million Milan Puskar Stadium upgrade. The proposers on the $30-50 million Union Trust Building renovation will interview this week. Beaver Area Heritage awarded $1.1 million in contracts for the Beaver Station restoration. Arcon was the low general. Franjo Construction got started on a new $2 million Goddard School down in Upper St. Clair and a new 16,000 sq. ft. Aldi’s at the Crossings of South Fayette on Washington Pike south of Bridgeville.

Ray Volpatt, Bill Engel & Dollar Bank's Joe Smith having fun at the MBA golf outing.

Ray Volpatt, Bill Engel & Dollar Bank’s Joe Smith having fun at the MBA golf outing.

Something Has to Give

After doing some preliminary work on construction volume in metro Pittsburgh thru the first three quarters – with an estimate for September – I am expecting that less than $2 billion will have started during the first nine months. Only in 2010 was the volume so low through three quarters, at least since the 2001-2003 slowdown. Architects and engineers continue to be busy but the amount of work getting through the pipeline is still a trickle.

Last Wednesday, CBRE presented its annual real estate symposium at the Westin. The global real estate firm was upbeat about the economy in general and commercial real estate in particular. Local managing partner Jeffrey Ackerman characterized the Pittsburgh market as “booming.” Given the data on high occupancy and absorption of space, his assessment is correct. What isn’t booming is the new construction that should result from such incredibly tight supply and demand fundamentals.

The last time the construction market felt like this was during the summer of 2004. Following the Plan B boom of stadiums and the school construction boom of the late 1990’s, there was an implosion of construction when the 2001 recession hit. That slowdown lasted over three years, breaking in the fourth quarter of 2004. Like then, the fourth quarter of this year will be an indicator for the coming year.

By November, we’ll have elections won and lost. Any owner waiting for signals will have them by then. Look for the opportunities to build backlog before Christmas to get an inkling about whether the pipeline is going to break loose in 2015 or not.

Hola Pittsburgh and a Workforce Solution

Yesterday’s Allegheny Conference Regional Investors’ Council meeting offered a few things beyond the usual regional cheerleading. More important to the construction industry were two programs that may help with workforce issues.

First there was an interesting video and short speech about the Hola Pittsburgh initiative. This is a effort aimed at attracting the professionals and workers leaving Puerto Rico because of the poor economy. The figures the Conference gave were about 50,000 people emigrating every year. Pittsburgh may not seem the most likely place for Puerto Ricans to land but there is a connection because of career of Roberto Clemente of all things. If successful, Hola Pittsburgh would have the unintended benefit of making the region seem more like home to Hispanic workers in all industries. And construction is an industry that has been attractive to Hispanic workers in other major cities.

The second initiative is the Service to Opportunity effort, which connects returning veterans to jobs. The thrust of the initiative is to match valuable skills learned in combat and service to the civilian opportunities, especially in energy and construction.

Construction is facing a serious workforce shortage as Baby Boomers retire with no backfill of labor ready to move in. Trades have been increasing recruiting but this segment of the population – veterans – comes equipped with transferable skills and excellent attitude. Both these regional initiatives have potential to draw people to our industry.

Not much construction news this week. UPMC selected Alexander Building Construction as CM for its $20 million Altoona Hospital job. Another big piece of the Route 219 extension in Somerset has been put out by PennDOT. The $80 million Garrett Bridges project is due October 23.