Construction Cost Concerns Return

Construction Market News

The new tariffs imposed on China last week have raised concerns about another run up in construction costs again this year. Since late fall 2018, the upward pricing pressure created by last year’s tariffs has receded. According to the Bureau of Labor Statistics (BLS), the producer price index (PPI) for inputs to construction was 2.8 percent higher in April 2019 than 12 months earlier. Although still higher than consumer inflation or overall PPI, the inflation for construction had been as high as 9.6 percent higher year-over-year in spring of 2019.

The potential hike in material prices comes as evidence grows that contractor prices are rising nationwide as a result of short labor supply. The PPI for nonresidential building construction has risen to between five and seven percent, depending on the type of structure. Likewise, PPIs for subcontractors has moved progressively higher. April’s data saw highs of 7.9 percent year-over-year for concrete contractors, with inflation for plumbers and electricians at 5.4 percent and 5.5 percent respectively.

Another BLS report suggests that the increase in contractor pricing is the result of lower productivity, rather than higher wages. Construction wages remain at or below overall wage growth levels, with April’s wage growth at 2.8 percent year-over-year.

Construction News

As the Penguins have been promoting their development of the 28-acre former Civic Arena site – now branded as Centre District – and searching for a lead office tenant, PennDOT has let the contract for the critical Crosstown Cap project. Joseph B. Fay Co. was awarded a $29.3 million contract for the structure and park, which should start construction by July.

Another project in the spotlight recently, the $13.7 million Mellon Orchard South apartments, is expected to start this summer. Mistick Construction is the general contractor. RDC Design + Build is preparing to start work on the $18 million 1823 Franklin Park Apartments in Franklin Park.

Project Spotlight

PJ Dick is in the final stages of construction on the new middle school for the Environmental Charter School, a complete renovation of the 60,000 square foot former Rogers CAPA School in the Garfield neighborhood of Pittsburgh. The team of Wildman Chalmers Design Architects & Interiors and McKim and Creed designed a dramatic overhaul of the building’s systems to create an energy-efficient, high-performance school.

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“Thinking Lab” specialty classroom at the Environmental Charter School.

The Rogers School was built in 1913. The $9 million renovations preserved the historic structure while replacing windows and insulation to improve the building’s envelope. The floor plan was re-worked, including new finishes, LED lighting and new technology.

The most significant change was the conversion of the original coal-fired heating to the complex HVAC system.  Featuring demand-based ventilation, there are sensors in each room that detect carbon dioxide levels and will provide additional fresh air on an as-needed basis.  The system also utilizes ‘energy recovery ventilation’, which uses air that would normally be exhausted to precondition the incoming fresh air.  Areas of the building that are warmed by the sun will exchange tempered air with areas that are in the shade, which will significantly reduce the energy required to heat and cool the building.

Construction will be complete for new enrollment in August 2019.

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Good News on the Economy

The first week of the month is an eventful one for economic data. Last week was no exception. First the Commerce Department announced that total construction spending had declined year-over-year, but was still near all-time record high levels at $1.282 trillion dollars annually. The news that followed was rosier.

The Commerce Department released its first estimate of GDP growth for the January-March 2019 quarter. The 3.2% annualized jump was higher than expected. The above average growth was a turnabout from the talk of recession from earlier this year. There were two notes of caution in the report, however. First, GDP was inflated by an unusual buildup in inventories, which generally means that a following quarter will have lower growth from inventory depletion, There was also a temporary decline in imports, likely resulting from tariffs, which boosted consumption of U.S. goods. The second caution was the 1.3% increase in the sales of domestic goods to consumers and businesses. This suggests that underlying demand is lower than the headline GDP growth.

On May 3, the Bureau of Labor Statistics released its monthly Employment Situation Summary, which found 263,000 jobs had been created in April. Unemployment fell to 3.6%, with the number of unemployed persons falling to 5.8 million. That’s more than one million fewer people than there are jobs open, which underscores the seriousness of the problems that businesses are having with finding workers. In reality, this trend of roughly one million more jobs than workers has existed for a year or so, and it should have slowed the economy by now. Obviously, that hasn’t happened.

Light regional construction news. Research of April’s building permits in Pittsburgh revealed that Cavcon was selected to build Vollmer America’s new $4.8 million building in Findlay Township. PJ Dick has started work on the new $26 million multi-modal garage behind Bakery Square on Dahlem Place. A. Martini & Co. started demolition on the $6.5 million Wabtec TI at 30 Isabella Street on the North Shore.

Big Pittsburgh Industrial Construction News

This morning’s headlines seemed like a blast from the past. US Steel announced it was investing more $900 million in a new continuous caster at the Edgar Thompson Works in Braddock and $150 million for a co-generation plant at the Clairton Works. The project is the first major project at a Pittsburgh-area steel-making facility by US Steel in decades.

Another multi-billion project is moving forward on the Ohio River. Bids have gone out for a site work package at PTT’s proposed $6 billion ethane cracker in Dilles Bottom, OH. No final investment decision has been announced for the plant and the project is without an EPC contractor, but taking bids on site work is a major step towards construction.

Image courtesy RDC Design + Build

Braddock is also going to be home for a new industrial facility of sorts for Robotany. RDC Design + Build started construction on a 58,000 square foot warehouse for the high-tech vertical farming company that grows and sells produce under the Sky Farms brand.

Pitt issued an RFP for CM services for its new Human Performance Center, Chilled Water Plant and Parking Garage to PJ Dick, Massaro/Gilbane, Mosites, Turner, Walsh and Whiting-Turner. The proposal covers three elements of Pitt’s ambitious new master plan. The chilled water plant and adjacent garage are integral to Pitt’s expansion, making this project more likely to start in 2019. The cost of the combined projects approaches or exceeds $200 million.

In other project news, UPMC took proposals from PJ Dick, Mascaro, Rycon and Turner for the $40-45 million UPMC Mercy Hospital 3rd Floor renovation last week. AIMS Construction was awarded the contract for the $4.6 million Palumbo Science Center renovation at LaRoche. A. Martini & Company was selected as CM for the $1.3 million renovation to 947 Penn Avenue by the Pittsburgh Cultural Trust.

Updates

Last week the Business Times reported that EQT was looking for a new headquarters. EQT joins First National Bank in the search for about 250,000 square feet of consolidated office space. Rumors have been circulating for months in real estate circles that both firms are being courted by Buccini/Pollin for the anchor of the first office building at the former Civic Arena site. A lead tenant would probably have its name on a mid-rise tower that would kick off the $100 million redevelopment. Reports cannot be confirmed that the developer is working with a joint venture involving Mascaro, PJ Dick and Massaro.

While the healthcare headlines are about UPMC delaying hospital construction and the Highmark/UPMC insurance battle at the Supreme Court, AHN has been quietly building hospitals. The Allegheny General Cancer Institute is rolling towards completion at year’s end. Construction is underway on neighborhood hospitals in McCandless, Greensburg, Harmar and Brentwood, and the steel is flying on AHN’s $220 million new Wexford hospital.

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Rycon has topped off steel on the AHN McCandless neighborhood hospital.

PJ Dick is doing preconstruction on the $50 million Scaife Hall replacement at CMU. And Findlay Township supervisors will meet tonight and reaffirm the August 2016 approval of a 1,054,000 square foot distribution center at Chapman Westport, which will be the long-awaited Amazon fulfillment center. Permits have not been issued yet but construction is expected to begin in June.

3 Crossings Phase 2 (And other office news)

Oxford Development recently announced that it was going to move its office later this year to 25,000 square feet in the Riverfront West Building at 3 Crossings, almost coincidental to the news that Honeywell was taking 25,000 square feet of the former Bosch leasehold at 2555 Smallman Street. Today, Oxford made the first of what may be several big announcements on the second phase of 3 Crossings, confirming that Smith & Nephew was taking 45,000 square feet of the Stacks at 3 Crossings building. The $16.5 million Stacks core and shell is under construction by Rycon.

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Rendering by Perkins Eastman.

Oxford also released more information about the full next phase of 3 Crossings, which will be located along Smallman Street and AVRR, between 28th and 29th Street. A design/build team of Mascaro Construction and Indovina Associates will be delivering a $16 million multi-modal center with more than 600 parking spaces. Including the two-building Stacks project (which is a rebuilding of the Packaging Corporation of America’s former buildings), 3 Crossings Phase 2 will have six office buildings totaling 600,000 square feet. Rycon Construction will also be building the 178,000 square foot 2 Hopper Place office building, which is being designed by WTW Architects for construction later this year.

Steve Guy, Oxford’s CEO, said that the heightened demand from users had surprised them, even though Oxford expected the project to move quickly. Guy suggested that another two or three office buildings, plus the multi-modal center, could be under construction by early 2020.

3 Crossings was developed in anticipation of the growth of the AI/robotics/autonomous vehicle industries in Pittsburgh and the landing of Petuum, Argo AI and Bosch proved that concept correct. The Smith & Nephew lease shows that trend still has legs.

Oxford’s announcement came 24 hours after Carlow University and Elmhurst Group broke the news that they had come to an agreement on the development of a 225,000 square foot office building in Oakland on Fifth Avenue at Craft Place. Elmhurst’s Bill Hunt explained that the rapid expansion of technology and medical innovation in Oakland drove the decision to proceed with the building, which will be directly across Fifth Avenue from the 10-story Innovation Research Tower being developed by Walnut Capital.

In construction news, F. J. Busse was awarded the $3.5 million renovation of the 20th floor of the Federated Investors Tower. A. Martini & Co. has started work on the $12 million Buchanan Ingersoll TI at the Union Trust Building. Wildwood Country Club chose the team of R. A. Glancy and HHSDR Architects & Engineers to design/build its $4 million expansion/renovation. Franjo Construction broke ground on the $2.5 million new Jaguar dealership for A & L Motors in Monroeville. MBM Contracting started work on the $3 million-plus renovation of the Asbury Heights patient wing in Mt. Lebanon.

Pittsburgh Jobs Bump

Department of Labor data this week showed Pittsburgh’s seven-county unemployment rate dipped to 3.6%, which is lower than the national rate of 3.8%. That’s the lowest since February 1970. Even more encouraging in the data was the estimate that Pittsburgh’s workforce grew by 8,000 in February, the second straight month of increased workforce. The Pittsburgh economy has been creating more new jobs each month than the net growth numbers, but the rapid retirement rate was consistently dragging the numbers down. Attracting population – and thereby workers – has been a major stumbling block for the region’s business attraction efforts. Let’s hope two months becomes a trend.

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One of the job creators in Pittsburgh, Facebook, is taking bids on the buildout of its 105,000 square foot VR space in District 15 in the Strip. Proposals are due from Burchick Construction, RDC Design + Build and Turner on April 5. RDC is also out to bid for subcontractors on its next building, the 260,000 square foot + 387-car garage District 15 Beta.

ConstructConnect is reporting that Carl Walker Construction was the low bidder on the Washington County Courthouse Square Parking Garage and Plaza renovations, at $8.5 million or $13.4 million depending on options selected. DiMarco Construction was the low general on the $6 million Gill Hall Elementary School addition. Volpatt Construction was selected for the $1.2 million West Penn Hospital ERCP project.

College Work Keeps Coming

The impending crisis for higher education is a real thing. There is a demographic cliff coming in the next five years that presents an existential threat to colleges and universities that aren’t prepared or positioned properly to deal with the shrinking enrollment. This problem is a major reason why you’re seeing Robert Morris proactively reorganize its colleges and curriculum. The good news for Pittsburgh is that the major higher ed institutions in the region are already well-positioned; and there capital spending belies the coming slowdown for colleges.

Pitt has issued an RFP for architectural service for its $100 million Center for Human Performance, part of the $400 million Victory Heights athletic complex. Pitt is also interviewing four finalists for its $100 million One Bigelow Square project and will put the $70 chilled water plant out for CM proposals soon. PJ Dick has started construction on the $30 million renovation/expansion of the Graduate School of Industrial Administration at Carnegie Mellon, one of six major projects in preconstruction or underway at the campus. Penn State has issued a request for letters of interest for A/E firms for its $92 million Liberal Arts Research & Teaching Building.

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Massaro Corp. is putting the new $5 million, 21,000 square foot Best of Batch Clubhouse out to bid. Massaro was also successful on a $1.5 million AHN neuro renovation at St. Vincent Hospital in Erie. MBM Contracting has started construction on the $9 million GI Lab at Allegheny General Hospital. MM Marra Construction is underway with the $2 million expansion of Pusadee’s Garden in Lawrenceville.  Turner Construction was awarded the $6 million Braskem USA lab renovations at the Pittsburgh Technology Center and a $3 million fit-out for Facebook at CMU. 

Check out the March/April BreakingGround to see what big data will mean for construction.