CRE Finance: Supply vs. Risk

The first quarter of 2016 was rocky for the permanent real estate financing markets, said a couple of Pittsburgh-based veterans of the industry at this morning’s NAIOP Pittsburgh breakfast. HFF’s Mark Popovich and Jim Scalo of Burns & Scalo Real Estate Services expressed surprise that the spreads and rates for CMBS and life company lending jumped up during the first three months of the year. Popovich attributed the rise in cost to a rise in fear of global disruption by a Chinese crash – a crash which never happened. Both expected conditions to remain stable the balance of the year.

IMG_20160519_081634

Mark Popovich (left), John Fetsko, Jim Scalo and M & T Bank’s Steve Olsavsky.

Liquiidity and capital supply is also running ahead of demand. Banker John Fetsko from Wesbanco noted that his bank (and others) had seen their fill of apartment, hotel and office deals and would be more selective about projects, even though capacity exists. Popovich said that capital supply was running well ahead of deals because of uncertainty but that there was more than ample liquidity to deploy. Scalo echoed the sentiment about uncertainty, going further to predict that presidential elections, oil/gas declines, and fears about China, interest rates and terrorism would slow down development and sales until 2017.

In project news, Excela Health held a groundbreaking for its new $40 million Excela Square ambulatory care center in Latrobe that A. Martini & Co. is building. BRIDGES & Co. started work on the new 110,000 square foot self-storage center for Guardian in Hampton Township and the new $5 million Eden Christian Academy school in Ohio Township. The Cranberry Supervisors approved contracts for the $42.7 million Brush Creek treatment plant upgrade. Mascaro is the general contractor.

Another large treatment project bid earlier this week and again highlighted the hypercompetitive nature of the public market. Port Vue Plumbing was the low general/mechanical contractor for Canonsburg Houston’s plant expansion at $18.7 million, some 15% lower than Kokosing’s $21.5 million bid. In a bit of a surprise the project only attracted two bidders. The week before, Mike Coates Construction was the low general on the $44 milllion Chartiers Valley High job at $28.9 million. That was $3.6 million – or 11% – lower than Rycon Construction second low bid. The low HVAC number was also 10% under the next bid, although the remaining contracts bid tightly.

The tight market worked to Char Valley’s advantage. The school board was able to accept over $3 million in add alternates on the $29.7 million middle school (awarded to Mucci Construction) and $650,000 in alternates to the $48.5 million high school (awarded to Rycon). At the same time Mike Coates Construction pulled low bids on both jobs, a situation that always creates confusion in the market.

Hotel Projects Continue to Proceed

Another sector of the market making lenders nervous is hospitality. Here again, the news isn’t taking hold in Pittsburgh. Alphabet City owner Tony Dolan has taken a plan to the city to add five stories to a building on Reedsdale Street to create a 130-room hotel. Just a few blocks away, Matthew Shollar is proposing to convert the former Burns White building on Isabella Street into a hotel. Both of those sites are just a few blocks from where Oktober Development is planning to convert the former ARC Building into hotel use.

Across the Allegheny River, new boutique hotels at the former Kaufmann’s flagship store – also planned by Shollar – and at the Granite Building are stuck on financing. It will be interesting to see if either, or any of those proposed for the North Side, get enough lender or investor interest to come to fruition.

The pace of suburban hospitality projects has slowed but in Cranberry, the construction still goes on. With the Marriott Town Place topping off in Cranberry Springs, Summit Development and Nittany Cranberry Inn LP have proposed a 101-room Best Western at the site. Bear Construction will build the project. Creative Real Estate is hammering out final details with Franjo Construction for the proposed 116-room Homewood Suites to be built at the Village of Cranberry Woods near Franklin Road. The 124-room Wood Spring Suites hotel is well under construction in the township as well.

In other project news, Volpatt Construction was awarded a $2 million contract to renovate St. Peter Parish on the North Side. The Exel Logistics/Wesex Construction team is about to start construction on a 260,000 square foot warehouse for Phillips Respironics in East Huntingdon Twp. near New Stanton. Berlin Packaging is reported to be near an agreement to lease all of the 250,000 square foot spec warehouse that Al Neyer is developing at Clinton Commerce Park in Findlay Twp.

 

So Much for the Dead Apartment Market

The first quarter of 2016 marked the first that there were no apartment complexes started in three years. At the national level, the apartment market has begun to slow. Lenders are growing very leery of the property type. Absorption in Pittsburgh is slowing. Multi-family has become overbuilt. Those are the headlines. It seems that developers aren’t reading the headlines.

One of the experts concerned about the pace of development is Paul Griffith, president of Integra Realty Resources. His firm forecasts that multi-family construction needs to slow below 500 units for the next 18-24 months for absorption of new units to catch up. The average for the past three years has been above 2,000 units of new apartments. In a recent conversation, however, Griffith noted that requests for appraisals on new deals have not slowed. The activity in the bidding market reflects that.

The most ambitious project in the city is Milhaus’ plan to redevelop the Arsenal Terminal complex just west of 40th Street in Lawrenceville into at least 625 units. The first phase of that project is about 300 units (to be built in 70-75 unit increments) and the $38 million project is being priced by Continental, Franjo, Mistick, PJ Dick and Rycon. Also bidding is the 300-unit South Hills Village Apartments in Upper St. Clair. Mascaro, Mistick, Dynamic and Rycon are bidding the $43 million project. Massaro has been taking bids on its $85 million, 326-unit Empire project in Oakland. In the on deck circle are the first phases of the Riverfront apartments, being developed by NRP Group at the Buncher site in the Strip, and the Station Square West apartments that Forest City/Trammel Crow are proposing. Each is about 300 units. Given the scope of these projects, the apartments won’t hit the market until late 2017 or early 2018.

These 1,500 units are less than one-third of the 4,800 units in the design/development pipeline at the moment.

 

K-12 Making a Comeback

Plunging tax receipts, state budget disasters, PlanCon moratoriums and attempts at PlanCon reform have all been wet blankets on what was once a staple of the construction industry: the K-12 school market. What was once regularly a $300-$500 million/year opportunity fell to $100 million or less after the recession. The market is still very thin by historic standards but the return of big projects has made K-12 one of the growth sectors of 2016 thus far.

Throught the first three months of 2016, K-12 contracting volume is way up over 2015. At $146 million, contracting is more than ten times what it was in the first quarter of 2015.

benchmarks 2016-5Most of the volume in K-12 has come from just a few projects: the $67 million Thomas Jefferson High, $25 million South Fayette High and $34 million Ringgold Middle School jobs. The $25 million Chartiers Vally Middle School project is awaiting award of contracts and nnother $49 million Chartiers Valley High project is out-to-bid. Also bidding now is the $10 million Bentworth High and the new $22 million Rogers Elementary in Shaler is about to be released to bid.That’s $230 million from a half-dozen or so projects.

The problem for K-12 is those projects more or less make up the market in 2016. There will be other work but the total for 2016 will probably not top $300 million. With PlanCon effectively shut down the past year, there will be fewer projects on the street in 2017. That’s why prices have been dirty low, even in a K-12 bubble.

In project news, Mascaro was the low general on the re-bid of the $42.7 million Brush Creek Water Pollution Control Plant in Cranberry Township. Mascaro was also low on the first round and their bid of $35.9 million is expected to be awarded at the May 5 supervisors meeting. Franjo Construction was identified as the successful bidder on the 116-room Homewood Suites at the Village of Cranberry Woods. TBI Contracting is preparing to start work on n 80,000 sq. ft. and 45,000 sq. ft. two-building expansion of Callery Industrial Park.

Late last week there was word that Shell had put the Monaca cracker on hold until February 2017. The project was one of several affected by a corporate capital budget cut that will result in a slowdown of the construction of the project in Monaca. Contracts will go ahead for work that was bid but the schedule will slow to reduce the cash flow impact in 2016.

Job Growth Again

Friday’s report from the Bureau of Labor Statistics wasn’t an April Fool’s joke. Employers added 215,000 jobs in March, boosting the year-over-year gain to just over three million. Estimates for January and February were also increased. The best news of the report was that nearly 400,000 people joined the civilian workforce. While that increased the unemployment rate, it’s a good sign that part-time or discouraged job seekers are re-entering the labor force.

job creation history

At the local level, job creation has been flat through February. One employer that is not holding still is Uber, which is estimated to have around 400 employees in Pittsburgh. While the private car service waits for its office and research center in Lawrenceville to be completed Uber is making plans for its $20 million-plus investment in automated vehicle research at Almono in Hazelwood. Franjo Construction has been selected to do the $11 million test track, as well as renovations to the Roundhouse Building.

Even as the hotel and apartment development markets are becoming less appetizing to lenders and investors, two projects in Pittsburgh had news last week. Developers of the $14 million Hotel Indigo in the Pittsburgh Technology Center are talking with Franjo, Cavcon and Dick Building Co. about construction of the project. In Lawrenceville, Milhaus Development has been working with Rycon during planning and preconstruction of its $120 million mixed-use project at the Arsenal Terminal Warehouse site. The developer is reported to have prequalified contractors to bid the first phase of the project, which is to include approximately 200 apartment units in 4 phases. Among those being considered are BRIDGES & Co., PJ Dick, Mistick, Franjo, Rycon and two companies from outside Pittsburgh.

In Praise of Collaboration

Last night the AIA-MBA Joint Committee held a launch event for its Project Collaboration Best Practices Guide at the MBA’s Training Center. The presentation was the culmination of several years of roundtables with owners from around the region and represents the suggested practices of companies that have been using collaborative delivery models, up to the use of IPD agreements. If you’re interested, there’s a short survey you can take to add your opinion about these collaborative practices.

IMG_20150921_202853952

Javaneh Jabbari and Jeremy Tong from CMU (center) are among the guests at the AIA_MBA Joint Committee presentation March 30.

One of the participants in the roundtable discussions, the University of Pittsburgh, approved its capital spending yesterday. The $34.7 million in projects was indicative of Pitt’s reduced construction spending, although the Gallagher Administration seems to be building momentum for some very significant projects within the next few years. The headline project for 2016 is actually the $5.7 million renovation of a building in downtown Bradford PA to make the Marilyn Horne Museum. Carl E. Swanson & Sons is the low bidder on that project. Among the other major projects planned is a $7.2 million upgrade to the Starzl BST and a $6.5 million renovation to a dorm at Pitt-Johnstown.

In other project news, Rycon Construction was awarded the Classrooms 232 & 332 renovation at the Cathedral of Learning. Uhl Construction was selected for the $8 million expansion of Sisson Motors in Washington, PA. PJ Dick was awarded the $4.5 million Ft. Ligonier renovations. PJ will also be building the 55,000 square-foot new office building at McCandless Crossing that Kevin Dougherty from AdVenture Development announced earlier this week. Sports & Exhibition Authority selected Massaro CM Services as construction manager for its 798-car, $14 million North Shore Parking Garage.

The Buzz About Transit

March 15 was the Pittsburgh Downtown Partnership’s annual meeting, which featured a speech by Gabe Klein, who was head of transportation for Chicago and Washington DC over the past five years. Klein’s a cyclist and entrepreneur who took a very private-sector approach to getting “sh*t done” (his quote) to change transit in those cities. He had a very exciting vision for what urban transportation would look like, especially after automated vehicles were the norm. His speech dovetailed nicely with the one Mayor Peduto made about Pittsburgh’s selection as a finalist for the $50 million Smart City grant.

For all the firsts in dining and entertaining and livability Pittsburgh has garnered, winning this grant in competition with cities like Austin, Denver, Portland and San Francisco would be a major win. Google the subjects and watch a couple of the YouTube videos with Peduto or Klein talking about smart transportation. It’s exciting stuff.

Gabe Klein 2 chicago proposed BRT

Rendering of Chicago’s Bus Rapid Transit System and the transformation of a six-lane street into multi-modal transit. Image courtesy Pittsburgh Downtown Partnership.

Along those same lines, Pittsburgh Today posted an article today by Julia Fraser, called Thinking Boldly that advocates for a braod-based coalition of ideas about the future of transit in Pittsburgh. It talks about the work of the new Regional Transportation Alliance that is attemopting to develop a strategy for combining light rail, bus, and non-motorized mobility to make Pittsburgh a model city. To accomplish anything significant in transit will require outside-the-box approaches like have been taken in Denver and Phoenix. There citizens agreed to tax increases dedicated to funding transit. Bold indeed.

In the construction market, competitive pressures continue to make winners out of owners that have projects on the streets. Last week’s winner was Chartiers Valley School District, which received bids on its new middle school. The low general was again from Ohio, Mike Coates Construction. At $24.5 million CV’s middle school was under budget. It will be interesting to see how market conditions  vary when the district’s high school project bids later this year.

Faros Properties is bidding a couple million dollars worth of renovations to the former Allegheny Center property it is in the process of re-branding as Nova Place. The concourse and parts of the plaza are being re-purposed to be amenity spaces and tenant space for new restaurants that have been attracted. CMU is in the process of selecting a CM for a $5.6 million investment to convert the former Deardon Center on Fifth Avenue to mixed-use. Turner and Graziano are interviewing for the project.