The Amazon of Housing

Amazon of Housing

Amazon is known for starting from a garage selling books, with Jeff Bezos and his team boxing up orders themselves. Amazon has since grown to be one of the largest companies in the world, and the king of online shopping. Ben Lane, a managing Editor of at HousingWire sums up Amazon’s impact by saying:

 

“Amazon reshaped the entire retail landscape, changing how people shop, what they expect of their retailers and what they expect of other companies they deal with. It came from nowhere and now it’s resting comfortably at the top of the mountain while everyone else scrambles for whatever is left over.

 

Amazon didn’t invent online shopping, retail, video streaming, music streaming or any of the other business segments that the company is into now. What it did do is take what others had done, improve upon it by a dizzying degree, and market it brilliantly.”

Amazon reshaped the entire retail landscape

If Amazon was able to change the world of shopping to this degree, it must be possible for others to accomplish this in other industries, in particular, housing. There are currently several companies that are each racing to become the premiere one-stop shop for buying, selling, and renting.

 

Amazon has created expectations within customers that buying should be easy. If you want something, the entire search and purchase process should be simple and easy. Rarely is searching for housing simple and easy, yet it is what customers are becoming accustomed to. If a company could take advantage of this expectation in other industries, they could become the next Amazon.

What Companies Could Be the Amazon of Housing

What Companies Could Be the Amazon of Housing

Three of the companies Lane lists as currently competing for this role are Zillow, Opendoor, and LoanDepot.

 

Zillow began by denying its identity as a real estate company. The CEO of the company said in 2015, 

 

“We sell ads, not houses…We’re all about providing consumers with access to information and then connecting them with local professionals. And we do a great job of giving those local professional high-quality lead, they’ll convert those leads to at a high rate and then want more media impressions from us. So we’re not actually in the transaction, we’re in the media business.”

 

Zillow has since embraced real estate, with the goal of becoming that one-stop shop. It created the Zillow Offers program, in order to buy homes directly from homeowners, flip them, and then list them for sale on its own platform. Zillow also purchased the Mortgage Lenders of America in order to enter the mortgage industry. 

 

Opendoor had a similar expansion mission, but went in the opposite direction. It started out buying homes in select cities, and then grew to providing mortgages, and then to connecting homebuyers with homesellers. To accomplish this, Opendoor purchased Open Listings, a real estate site that provides a less expensive alternative to real estate agents. The company also acquired a title and escrow company called OS National. The co-founder and CEO of the company, Eric Wu, commented on the acquisition saying:

 

“Moving into a new home should be one of the most delightful and memorable moments in life, yet the closing process gets in the way…Our goal with this acquisition is to make title and escrow feel less like a barrier in the home purchase process and more of a welcome mat at the front door of your dream home.”

 

Opendoor has made it so that it can introduce people to homes, give them tours, let them buy, let them finance, and get them to closing. 

 

Lastly, LoanDepot also has plans to become a one-stop shop. The company connects borrowers with real estate agents and home improvement providers, but is attempting to support buying, financing, and improving homes, as well. In order to accomplish this, LoanDepot brought in the former CEO of Keller Williams, but he ended up leaving the company to work at OJO Labs, a real estate tech startup. The move may have worked in LoanDepot’s favor, though, because they were able to agree to a partnership with OJO Labs to share their AI technology and lending platforms.

Is Amazon the Amazon of Housing?

Is Amazon the Amazon of Housing

Ironically enough, Amazon has been looking to get into real estate. So the next Amazon of housing may be Amazon itself. The company has also struck a deal to partner with OJO Labs, but has also recently partnered with Realogy, and Guaranteed Rate. The company has also acquired businesses like SmartRent, another real estate tech startup.

 

Amazon’s partnerships allow for it to match homebuyers with real estate agents, get mortgages, and even get thousands of dollars in Amazon products to help stage their new homes.

Going Forward

Becoming the next Amazon of housing is not easy, but there are a handful of companies trying to accomplish this in the housing market, including the star in question (Amazon). Regardless of which company wins his race, the housing industry will be reshaped like never before.

PIT Airport Modernization Update

In December, the Allegheny County Airport Authority will put the first packages out to bid for the Terminal Modernization Program (TMP). The packages will be access roadway and site work that are enabling projects for the main program. These packages will be worth roughly $15 million.

The TMP overall consists of two main components, the $750 million new terminal (including renovations to existing) and the $250 million Landside/Ground Transportation Center. PJ Dick/Hunt is the CM on the terminal. Turner Construction is CM on the Landside portion.

During the middle/latter portions of 2020, there will be multiple packages bid, many with multiple prime contracts (as required by the PA Procurement Code). By the end of 2020, more than $500 million in contracts will have bid. The packages have been designed so that there are opportunities for general contractors and specialty contractors of all sizes. Some of the contracts will exceed $50 million, and approach $100 million. There is a Project Labor Agreement being negotiated for the TMP.

One pre-TMP project has already been let to Mascaro Construction for $3.4 million worth of demolition and renovations to the access and passenger boarding bridge areas that will be adjacent to the new terminal.

In other project news, Thompson Thrift Construction took bids on the $50 million-plus Watermark at Meeder Apartments in Cranberry Township. Fontainebleu Development agreed to purchase the Kaufmann’s Grand project and complete the construction started by CORE Development. Sentinel Construction will manage the $8 million renovation. Trek Development’s $12 million Garden Theater redevelopment is being presented to Pittsburgh Planning Commission. Mistick Construction is the contractor for the mixed-use development, which includes 47 apartments. Franjo Restoration Services has begun the $2.2 million fire restoration of the Durham Court Apartments in McCandless Township.

High Mortgage Rates are Decreasing Mortgage Applications

High Mortgage Rates are Decreasing Mortgage Applications

For the majority of Americans, buying a home requires a mortgage loan. There are many factors that impact a person’s ability to purchase a home, but a mortgage will always be one of the most significant factors in determining whether a house is affordable or not. Given the impact they have on your monthly payments, mortgage rates are also relevant.

Mortgage Rates

Mortgage Rates

When mortgage rates are higher, less mortgage applications tend to be filed. What has been happening as of late, is a fluctuation of mortgage rates that has made home purchases difficult to predict. The Mortgage Bankers Association keeps track of changing mortgage rates, and publishes the numbers. In the last month, the country has seen mortgage rates plunge, and then recover, and then go back down again. The market is volatile right now because of the US’s relationship with China, and home buyers are making sure to only act when rates are low. 

 

Refinancing of homes is also impacted by mortgage rates. Generally homeowners will refinance their mortgages for the purposes of lowering their monthly payments. Due to this, applications for refinancing loans are extremely sensitive to changing mortgage rates. Mike Fratantoni, the Senior Vice President and Chief Economist of the Mortgage Bankers Association, commented on interest rates:

 

Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day…Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.

Home Sales Projections

Home Sales Projections

Mortgage applications to purchase a home have certainly been falling compared to weeks prior, but the good news is that the numbers are still better than a year prior. This is good news for the market. Additionally, there is hope that the market could be improving in the near future. Joel Kan, the Mortgage Bankers Associations’ Associate Vice President of Economic and Industry Forecasting, had his own comments on the state of mortgage rates.

 

U.S. Treasury yields trended downward over the course of last week, as the Federal Reserve meeting highlighted the elevated uncertainty in the economic outlook. However, despite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks…The increase in rates led to fewer refinances, and activity has now dropped 17% over the last two weeks…The recent data on increased existing-home sales and new residential construction points to the underlying strength in the purchase market this fall.

 

Kan believes that buyer demand was stronger than expected. If this trend continues, prices on homes will be higher, and the supply of homes for sale will lead to a stronger housing market. That would, of course, be the preferred outcome, however sales are not increasing as much as they should be given the lower mortgage rates as compared to those from one year ago. Home sales should be increasing, but due to home prices being too high, any savings made through lower mortgage rates is being negated. 

 

The National Association of Realtors reported the increase in September’s home prices, and experts point to a lack of supply for the unexpected falls in sales. Diana Olick, a real estate correspondent with CNBC explained:

 

The problem is low supply combined with high prices; prices jumped nearly 6% annually, according to the National Association of Realtors, the biggest gain since January 2018. Prices are being juiced in part by lower mortgage rates. Lower rates help with affordability, but they also give buyers more purchasing power, which in turn causes prices to rise.

 

Matthew Speakman, a Chief Economist at Zillow, agreed with Diana, and doubled down:

 

Much of the sales boost this summer can be chalked up to interest rates dragging along the bottom this year, which enticed more would-be buyers into the market…Now, sales are coming back to earth, largely because of an ongoing shortage of inventory. There simply are not enough lower-priced homes to keep the market humming. While builders are putting up more homes, their pace is not keeping up with what buyers demand.

rates dragging along the bottom this year

Going Forward

Mortgage rates have fluctuated quite a bit, and these rates have negatively impacted mortgage applications, refinancing, and home sales. The fluctuation can be attributed to many things, but the fact remains that at the moment, the housing market has seen dips in sales. When the mortgage rates are high, potential homebuyers don’t buy, and homeowners don’t refinance. When mortgage rates are low, demand ends up driving prices up, which keeps people from purchasing. The foreign influences on mortgage rates are also a factor in the fluctuation.

 

Going forward, the market needs to see an increase in construction, and the best way for this to take place is through competition. With new players breaking in to the industry, the burden of additional home development won’t be placed on the builders that are currently holding back on the number of production projects they take on.

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

The US Department of Labor’s Wage and Hour Division published a notice to announce that minimum wage for federal contractors will increase to $10.80 per hour from $10.60. A change that has become a regular occurrence thanks to the Obama Administration.

 

This regular minimum wage increase is the result of the Obama Administration’s Department of Labor’s final rule which implements Executive Order 13658. The order determined that a minimum wage would be set for contractors to pay their workers for work completed for federal contracts. This minimum wage started at $10.10, but has had consistent annual increases.

Explaining the Minimum Wage Increase

Explaining the Minimum Wage Increase

The executive order states:

 

This order seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage paid by those contractors. Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.

 

As stated in the executive order, the original minimum wage standard was $10.10, and now (over the course of 5 years), it has grown to $10.80. Assuming that the executive order is not undone, there will be more minimum wage increases in the future. Is this what’s best for the construction industry though? Some people don’t think so. 

Opposition to the Executive Order

Opposition to the Executive Order

Associated Builders and Contractors, Inc. submitted a letter to the administration with concerns over the executive order. They claimed that it would cause confusion amongst government contractors, and lead to additional burdens thanks to unnecessary regulation. 

 

The regulation itself was seen as unnecessary due to the majority of government contractors already surpassing the $10.10 threshold in paying their workers. There were also concerns about setting a precedent where a government can come into an industry and tell them what to pay workers. Years later, the opposition to the executive order still exists, however, the order has not been rescinded.

Explaining the Execution of the Minimum Wage Increase

Explaining the Execution of the Minimum Wage Increase

The final rule/fact sheet attempts to address the concerns of contractors by breaking down the obligations that contracting agencies, contractors, and even the Department of Justice have. Not only does this attempt to address those concerns, but it also explains how the order is to be enforced. The final rule explains that the process itself “should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage. The Department of Labor generally has adopted existing mechanisms for enforcing long-established prevailing wage laws to enforce the provisions of the Executive Order”. It even confirms that around 200,000 workers will benefit from the order.

 

The obligations for contracting agencies, contractors, and the Department of Labor are broken down as follows:

 

Contracting agencies are responsible for ensuring that the contract clause implementing the Executive Order minimum wage requirement is included in any new contracts or solicitations for contracts covered by the Executive Order. Contracting agencies are also responsible for withholding funds when a contractor or subcontractor fails to abide by the terms of the applicable contract clause, such as by failing to pay the required Executive Order minimum wage, and for forwarding any complaints alleging a contractor’s non-compliance with Executive Order 13658 to the Wage and Hour Division.

 

Contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts. They also must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. Contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts, and must comply with pay frequency and recordkeeping obligations. Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

 

The Secretary of Labor is required to determine the Executive Order minimum wage rate yearly beginning January 1, 2016, and publish this wage rate at least 90 days before the wage is to take effect. The final rule outlines the methods that the Department will utilize to notify the public of the Executive Order minimum wage,

 

Finally, the order explains how complaints against it can be taken up. It outlines a process for filing these complaints with the Wage and Hour Division. It also allows for investigations into instances of believed violations or abuses of the executive order, as well as resolutions/consequences for these violations. Lastly, the order provides an administrative process for resolving legal disputes over the order’s enforcement.

Going Forward

Despite opposition by contractors and contracting organizations, the executive order was submitted and enforced. This bill focuses on workers, and paying them a wage that the government believes to be fair. The final rule also states that it accomplishes this in a way that has long-been accepted, and in a way that multiple industries are familiar with. This should not only limit confusion, but prevent legal challenge due to the precedent of such laws being deemed as constitutional and acceptable.

 

There may still be opposition from contractors, however, the order is still in effect, and for now it looks like it will stay in effect moving forward.

Fannie Mae and Freddie Mac Now Retaining Profits

Fannie Mae and Freddie Mac Now Retaining Profits

In 2008 when the economy crashed, the housing market was not immune to its effects. Companies like Fannie Mae and Freddie Mac, which guarantee the majority of America’s mortgages, received bailouts in order to stay alive. At the time, the government made the decision to take control of the two companies in order to keep the housing market afloat. Now, however, it seems that action is finally being taken to free them from that control.

Bailing Out Fannie Mae and Freddie Mac

Bailing Out Fannie Mae and Freddie Mac

With two giants losing money as a result of the declining housing market, the government felt the need to step in in order to prevent further losses, and to ensure that Americans still had somewhere to turn for mortgages. In 2008, NPR discussed the news, saying:

 

In the short term, the rescue is meant to help calm the markets and to offer some measure of stability to help the U.S. economy weather the housing correction. In the longer term, the goal is to keep the two companies afloat so that they can continue to support the U.S. housing market.

 

The Treasury Secretary at the time, Henry Paulson, agreed stating that, “Action was taken to ensure the continued availability of mortgages and to protect taxpayers.”

 

What did these actions entail? This requires looking into the original agreement made between Fannie, Freddie, the Treasury, and the Federal Housing Finance Agency (the FHFA). The agreement that was put together took control away from the companies’ executives, and gave it to the FHFA. The agreement also gave the Treasury Department 80% of the common stock for both Fannie Mae and Freddie Mac, as well as stock agreements. Lastly, a 2012 addendum instituted a profit sweep, which prevented the two companies from retaining any profits. 

Freeing Fannie Mae and Freddie Mac from Government Control

Freeing Fannie Mae and Freddie Mac from Government Control

After a decade of working under these conditions, the call has finally been made to begin putting an end to this agreement. Earlier in the year, the Treasury Department was ordered to put a plan together with the Housing and Urban Development Department to reform financing for housing. Freeing Fannie and Freddie from government control was a part of that plan.

 

Giving Fannie Mae and Freddie Mac independence is not something that can happen all at once, however. This will be a process that takes several steps, and the first will involve altering profit structures. The aforementioned report was released recently, and in it, the Treasury Department recommended ending the profit sweep of both Fannie Mae and Freddie Mac.

 

The Treasury recommended ending the profit sweep as part of a comprehensive effort to shore up their finances and shrink their overall footprint in the market.

 

Pete Schroeder at Reuters commented, saying, “Ending the government’s sweep of their quarterly profits was widely seen as a first step in any effort to end the 2008 bailout.” He goes into further detail explaining that in order to remove Fannie Mae and Freddie Mac from government control, the two need to have their own cash reserves (as opposed to relying on government funds). The first step to accomplishing this is to allow them to keep profits. Specifically, Fannie Mae will be allowed to retain $25 billion, and Freddie Mac allowed to retain $20 billion. The original 2012 sweep barred the two companies from retaining profits, so undoing the sweep can only mean that the companies are moving forward towards independence.

 

When originally taken over by the government, Fannie Mae and Freddie Mac together received $191.5 billion in aid. Since then, the two companies have paid the Treasury Department back over $297 billion; a sign that the bailout was successful, and the two companies are back on their feet. These results contribute to the confidence that Fannie and Freddie can survive on their own now.

Fannie Mae and Freddie Mac together received $191.5 billion in aid

Going Forward

Now that Fannie Mae and Freddie Mac have regained some of the government’s trust, the two companies will now be able to regain the trust of homebuyers throughout the country. The further this plan for independence progresses, the more the landscape of the housing industry will change. Homebuilders should keep track of these changes, but also understand that more may be on the way.

 

There may still be more changes on the horizon for Fannie Mae and Freddie Mac. The current FHFA director, Mark Calabria, wants to explore other ways for the two to raise capital. In a statement he released, Calabria said that he did not see retained earnings alone providing the reserves that Fannie and Freddie would need to operate comfortably. This implies that the FHFA could be instituting more changes to the two companies’ operations throughout this independence process.

 

The landscape of the housing industry changed significantly when Fannie Mae and Freddie Mac were taken over by the government, and the landscape will change again now that they are regaining that control. The process will not be instant, and there will be many steps to accomplishing this. Homebuilders should stay on the alert so that they will be prepared for every change that is made to the current operational structure of the two companies.

Developing University Buildings for the Biotech Industry

Developing University Buildings for the Biotech Industry

The University of Pittsburgh is actively seeking proposals from developers for multiple parcels on or near the university. Part of Pitt’s master plan is the private development of property along Forbes and Fifth to be space used for research partners from industry and government. These projects won’t be university-owned but the tenants will be driven by the university’s technology transfer activity, much like as happened with the Murland building, which is being occupied primarily by Pitt users. This search is in addition to the Walnut Capital research tower and Wexford Science Technology research building that have been proposed to Pittsburgh Planning Commission. 

 

What is being proposed and envisioned for the future of Oakland’s “Main Streets” is very much part of a national trend for university-adjacent development.

 

Alexandria Real Estate Equities Inc. recently won the rights to develop a property in Stanford University’s research park. The company will be opening a San Francisco Bay location for its life science and biotech start-ups. This area of the country has a thriving life science industry, and could serve as a target demographic for developers moving forward.

Growth in Biotech and Life Science

Growth in Biotech and Life Science

A study by commercial real estate firm CBRE explains that the San Francisco area is the country’s second largest biotechnology/life science cluster (with Boston being number one). San Francisco’s growth as a biotech hub facilitates the creation and maturation of start-ups and businesses in these fields, while also attracting venture capitalists who are looking for investment opportunities. Many venture capital firms are located in the area because they anticipate investing in the biotech field, and want to be close to the start-ups that they foresee themselves investing in. This is in addition to the fact that Stanford itself is one of the top recipients of funding from the National Institutes of Health. This allows Stanford to provide additional support for biotech initiatives on its campus.

 

Clare Kennedy, a commercial real estate reporter at CoStar, addressed why biotechnology is an attractive investment for venture capitalists:

 

Some of the proliferation of these companies stems from the region’s robust venture capital, which built Silicon Valley and is now pouring money into biotech-oriented businesses in fields such as pharmaceuticals, genetic research and medical devices that don’t directly provide health care services, but serve a fast-growing life science industry developing treatments for an aging population, whose need for medical interventions is expected to rise in coming decades.

Developing for Biotech and Life Science

Developing for Biotech and Life Science

How is Alexandria going to take advantage of this space? Currently, their plans are to use the facilities to house its many life science start-ups. Alexandria has a program called LaunchLabs, which provides member companies access to multiple perks as described in its press release:

 

The unique, full-service platform will provide member companies with highly flexible, move-in-ready office/laboratory space, sophisticated mentorship and access to strategic investment capital through the Alexandria Seed Capital Platform, the company’s innovative seed-stage funding model.

 

Alexandria has put LaunchLabs into practice in other areas of the country and is now expanding it to one of the top biotech hubs. The culture, infrastructure, and assistance that they provide does, in fact, facilitate the growth of its member companies, so expanding it to San Francisco is the next logical step. The start-ups and small businesses that take advantage of this opportunity will find themselves benefiting thanks to the LaunchLab philosophy.

 

According to Alexandria, biotech companies are best able to succeed “when they are in close physical proximity to capital, academia and other firms that have a complementary purpose.” Jennifer Cochran, the Shriram chairwoman of bioengineering at Stanford, adds in that, “biotech entrepreneurs often need to commit to multi-year leases, large footprints and expensive lab build-outs when they aren’t even sure they have a viable product yet.” Stanford and Alexandria believe that the addition of LaunchLabs should serve as a lifeline to these small and mid-sized companies.

Partnership with Stanford University

Partnership with Stanford University

Alexandria’s confidence is clear. There was a bidding process to determine who would be able to develop this property within Stanford’s research park, and Alexandria won. At a cost of $26 million, the company was able to get the rights to use, and redevelop the land over the course of the next 51 years. Stanford discussed the thought process behind this move, and what lead to its deal with Alexandria.

 

When the building was recently vacated, Stanford saw an opportunity to create a flexible and vibrant space that would enhance the connections between the existing life science ecosystem of medical facilities, researchers and companies in the surrounding area, while also encouraging progress toward an even more diverse life science community. The university held a competition for firms that specialize in this work and chose Alexandria, an experienced developer and operator of successful life science communities near academic campuses.

 

Together, Stanford and Alexandria are aiming to continue the growth that the biotech and life science industries are seeing in San Francisco.

Going Forward

What the partnership between Alexandria and Stanford shows us is that the life science and biotech field is growing rapidly, and developers would do well to consider how that may benefit their own business moving forward. A growing industry that requires specific infrastructure to be able to fully act on its growth potential could serve as a prime target demographic for developers who operate in any of the growth regions in the country as listed by CBRE. By developing buildings for universities and/or for biotech/life science companies, developers can find a niche demographic to market, design, and build for.

Pittsburgh’s Regional Update (A Preview)

Today’s groundbreaking for the new milllion-square-foot Amazon fulfillment center at Chapman Westport is an example of how the commercial real estate market has driven construction in Pittsburgh over the past decade.

The November/December edition of BreakingGround is in production now. For those who want a sneak preview of what’s inside, below is an excerpt from the Regional Market Outlook that deals with commercial real estate:

 

In the September Metro Mix publication by the Federal Reserve Bank of Cleveland, Pittsburgh’s employment situation was characterized as “steadily advancing.” Among the data cited by the Fed are an unemployment rate that fell 0.4 points to 3.8 percent from September 2018 to 2019, and total payroll employment of 1.123 million, a net gain of more than 10,000.

Metro Mix also took a look at the income and balance sheet of Pittsburgh residents. The real income per capita of a Pittsburgh resident was nearly $56,000, a 2.1 percent increase from 2017. This is above the income per capita for Pennsylvania and the U.S. Consumer debt in Pittsburgh is significantly below the Pennsylvania and U.S. levels as well. Debt per capita for the average Pittsburgh consumer was $26,968 after the first quarter of 2019, following one percent growth in 2018. Not surprisingly, the credit card delinquency rate for a Pittsburgh resident was only 6.6 percent, lower than the 7.5 percent U.S. average.

A strong economy is a good indicator for commercial real estate development. The resurgence of Pittsburgh’s economy over the past decade has been matched by a strong, if not booming, commercial real estate market. A number of factors suggest that commercial real estate will continue to be a positive driver of construction in 2020.

Pittsburgh’s industrial market is extremely robust as the third quarter ends. Normally a slower season, summer saw unusually high activity for leasing and acquisition. The latter is getting a boost from capital sources outside of Pittsburgh, which love the steady returns and strong fundamentals. Among the metrics that are tempting investors and developers are the low vacancy rates, especially for Class A warehouse, and the steady increase in rents. Occupancy levels for Class A reached 97 percent through the end of September and the overall industrial vacancy rate was 6.4 percent. Rents for Class A space rose to $5.70/square foot. Most impressive was the net positive absorption of 1.9 million square feet, which threatens to eclipse the highest annual total on record.

According to Newmark Knight Frank’s analysis of the industrial market, the high absorption, coupled with increased users in the market for space, will drive construction of build-to-suit opportunities in 2020. They specifically forecast increased activity for users of 200,000 square feet or more.

One of the factors driving industrial development in Pittsburgh is the growing demand for smaller warehouses to meet the demands for e-commerce fulfillment. Heretofore, fulfillment centers, like the one million square foot warehouse under construction for Amazon at Chapman Westport, were large and sited close to interstate transportation hubs. The growth of e-commerce volume is accelerating delivery times and pushing warehousing and fulfillment to smaller facilities located closer to denser population centers. This shift in logistics is making Pittsburgh more feasible for warehouse development than it was when the previous logistics models drove construction.

Pittsburgh’s office market held strong through three quarters, despite increases in space available for sublease. Through September 30, net absorption stood at 160,000 square feet, according to CBRE. The increases in absorption were mainly due to strong activity in the Central Business District (CBD) fringes – primarily the Strip Distict – and in the Airport Corridor, which saw positive absorption of 130,000 square feet. The occupancy level rose to 86.3 percent, with a total Class A direct vacancy rate of 12.5 percent.

Vacancy increased in Downtown proper due to large corporate consolidations, including BNY|Mellon, PNC and Bank of America. Falling vacancy rates in the Strip District and Oakland helped offset these holes in the market. According to CBRE, Oakland’s Class A direct vacancy rate fell to one percent. Even with more than 550,000 square feet of new space under construction, occupancy levels are expected to remain constant. Rents rose for the sixth consecutive quarter, hitting $27/square foot overall and topping $30/square foot in the CBD.

The office market is less supportive of new construction than industrial, primarily because of the available space and the high cost of construction in the most desirable locations. The continuing growth in employment in the emerging technology, healthcare, and research fields will create more demand for space and new construction. The market for tenant improvements should be more robust in 2020 and, depending upon how much of the proposed spec development proceeds, new construction in the Strip and Oakland could top two million square feet.

Not a lot of construction news. Volpatt Construction was selected as CM for $3.5 million Mellon Institute 1920 Lab Renovations. PJ Dick will build the $20 million natural gas power plant that will generate electricity for the airport’s microgrid. EIS Solar will design/build the 7,800-panel solar farm.