A Final Look at 2016

Our research at the granular level is about completed for 2016 data and it appears we underestimated the housing market a bit and had the non-residential market pretty close. For the latter, the final number for non-residential/commercial contracting in 2016 was $4.13 billion. That’s the highest number since Tall Timber (or the Pittsburgh Construction News before it) has tracked going back to 1995. In that number is about $1.9 billion for natural gas processing plants, the Tenaska combined cycle power plant and the Shell cracker progress. That leaves a lot less for the mainstream commercial construction industry.

Residential ended a bit higher than expected. Single-family detached home construction finished up more than expected, as did the apartment market (although the latter was off more than 10%). The final numbers are below:

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2017 is shaping up to be a surprising year for higher ed construction. Overall the category is depressed compared to the volume of most of the past decades. PASSHE schools will again have about $65 million to share, leaving few significant projects. Private colleges are facing some real challenges too but those in the region have some nice projects in the hopper. Yesterday’s announcement from Robert Morris about its $50 million new convocation center/practice gym is one of a dozen or so throughout the footprint. PJ Dick will be building that project (although they are not one of the funders, as the PBT reported). There are plans for a new building at W & J; a $25 million STEM facility at Westminster; a new $15 million field house at Grove City; several new buildings at CMU (Tata Consulting, ANSYS and the planning for a new science building); and Pitt should be looking for its team for the $100 million new building at the Syria Mosque. That’s not bad for a segment in tough straits.

Confidence is High

The prospect of lower corporate taxes and less regulation has business swooning at the start of 2017. One of the measures of small business confidence – the National Federation of Independent Businesses index – soared more than 7 points in December to 105.8. That’s the highest since the end of 2004, when the economy took off after an uneven recovery from the 2001 recession.

PNC Senior Vice President and Chief Economist Stu Hoffman gave an equally confident forecast for 2017 (and 2018 for that matter) when he addressed a crowd of NAIOP Pittsburgh/BOMA members this morning at the William Penn. Hoffman liked the chances of tax cuts, stimulus spending and less regulation during this year and forecast that GDP would respond by growing closer to three percent. Hoffman saw that happening in late 2017 and into 2018 – maybe even a quarter or so of 4% growth – assuming the stimulating measures are enacted during the first months of the Trump Administration. He also warned that overplaying trade sanctions could blunt the growth from the stimulus.

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BOMA President Tony Young from the Carnegie Museums (left) with PNC’s Stu Hoffman and NAIOP President Dave Weisberg from BNY Mellon.

Confidence in the construction industry has been boosted by the strong year-end activity. In addition, there are a half-dozen or so major projects that are in the process of moving forward in 2017, although few will start construction until afterwards.

UPMC announced its big investment in Hamot in Erie but the healthcare system is also on the verge of an announcement about its direction in the South Hills, where a new hospital or multiple mini-hospitals may be built to serve its patients. Another major South Hills hospital project, the St. Clair Hospital expansion, is getting a redesign but should be put before selected CM’s for proposals before spring. Reports are that the Dick’s HQ expansion is back on the front burner. And Pitt is moving forward with early programming for a new building at the Syria Mosque site that is in the 350,000 sq. ft. range.

A couple of $30 million-plus projects that have been kicking around for a while appear to be heading for a competitive hard bid. Oxford Development is rumored to be close to a major tenant announcement for its Riverfront West project at 3 Crossings. In Oakland, Campus Advantage will be bidding its 300,000 sq. ft. apartment project on Forbes Avenue.

Murland Associates selected Mascaro Construction as contractor for its proposed 97,000 sq. ft., $15-18 million office at 3422 Forbes Avenue. Landau Building Co. was selected as contractor for the $4.5 million Mars Library. Pitt awarded the $3.4 million Barco Law Library project to TEDCO Construction. Chapman Corp. is the apparent successful bidder on the mechanical piece of three major compressor stations for Energy Transfer Partners, in Clarington OH, Majorsville PA and Burgettstown PA.

Mall Closings Shouldn’t Surprise

Today’s announcements from Sears, K-Mart and Macy’s were headline news around the country but the closings are really “dog bites man” news. The ever-growing share of online shopping is a five-year story that has left retailers struggling to find the right mix of bricks-and-mortar vs. online retailing. Research has shown that retailers that do both well get more money from shoppers than those that just do one or the other well. I don’t envy any company trying to figure that out, especially since the landscape is constantly shifting.

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Macy’s Ross Park Mall store was one that escaped closing.

Pittsburgh was left relatively unscathed by the closings, with only a few malls in outlying areas affected (although you have to wonder about the wisdom of closing Beaver Valley Mall stores at this point). On the upside for the region, it seems that Pittsburgh is on the radar for fulfillment centers, which is the upside of retailing these days. Several of the big warehouse leases signed in the past 6 months have been for online fulfillment and the prospect of Amazon as the user for the million-square-foot warehouse at Chapman Westport remains strong. One of the many companies scrambling to get into this business is Macy’s, which is converting some of its big closed stores into fulfillment centers. Perhaps that fate awaits one of the two stores announced for closure in metro Pittsburgh.

Look for this industrial market niche to be a hot – if not huge – property type over the next few years. FedEx Ground has invested significantly in facilities over the past decade but expect to see it, and its competitors, try out new ways to get products to consumers quicker. Amazon’s arrival will signal to others, like Zappos and Wayfair, that Pittsburgh is a viable next-step market. With the industrial demands that will come from Shell’s cracker and related industries, warehousing will be a steady source of millions of square feet of new construction between now and 2025.

New Year, New Opportunities?

Small businesses, which are the drivers of the business economy, are entering 2017 with a renewed sense of optimism. Whether it’s the belief that a Trump Administration will drop regulations or roll back Affordable Care Act, owners of small businesses are responding to surveys about 2017 in a significantly more upbeat manner than they did in recent years. If that optimism survives the first few months of transition, that is a very good thing for construction. More small companies grow than big ones and that means more expansion and new construction opportunities.

There is growing excitement in Pittsburgh about the impact of the Shell cracker project but its effect on 2017 will be mild compared to the years that follow. According to Bechtel, it’s estimated that “only” around 1,000 workers will be on the site by the end of 2017. That’s a fraction of the 6,000 that Bechtel still says will be needed during the following two years, when most of the plant facilities are brought on site.

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This is what $500 million-plus in “ready” work looks like at the Shell site.

One construction buyer that has come back into the market is the General Services Administration. The GSA manages the federal government’s property and has been all but missing for the past decade. The agency currently is seeking qualifications for a 3-step best value process that will occur next spring for $20 million in renovations to the federal courthouse Downtown. GSA is also looking at sites in Butler/Beaver/Lawrence to locate a 400,000 sq. ft. records warehouse. Here again, if the Trump Administration can deliver on promises to stimulate spending on construction, GSA may become a regular buyer in the region.

Some projects that are active in Pittsburgh include the new $25 million Waters Senior Living community underway in Marshall Township, which is being built by Continental Building Co. The PA Builders Exchange reports that the $28.7 million Latrobe Elementary School is due Feb. 16. Pitt took alternates that made TEDCO Construction the successful contractor on the $3.4 million Barco Law Library. Rycon Construction is starting work on converting the 65,000 sq. ft. Latitude 360 into a Main Event entertainment complex. Rycon is also the CM on a 20,000 sq. ft. renovation to Mellon Pavilion’s second floor at West Penn Hospital. That’s mainly an MEP upgrade.

Big Year for Industrial Construction

As the year winds down we’ve done the first estimates for the total construction and the big factor in 2016 was heavy industrial/energy work. The total non-residential construction volume for 2016 is $4.07 billion, the highest level of activity since 2000. Hidden in that number is about $1.3 billion from just three jobs: $580 million Tenaska Westmoreland combined-cycle power plants; the $500 million Revolution cryogenic gas processing plant in Burgettstown; and about $300 million in construction at the Shell petrochemical site in Monaca. Because of the Shell project, volume in this sector will be extraordinarily high for the next three years as well.

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Brian Chlop, Eric Starkowicz and Jason Sigal enojy the YC Holiday Party, which raised $4,000 for the Lemieux Foundation and 200 toys for Toys for Tots.

In commercial construction, Massaro Corp. is finalizing the GMP for the $50 million Campus Advantage apartments in Oakland. UPMC announced its $111 million Hamot Hospital expansion. The first phase of that project is $10 million of relocations for users in Hamot’s professional building. Building Systems Inc. is doing relocations in the hospital and Massaro Corp. is handling relocations in non-hospital sites. Burchick, F. J. Busse and Landau are putting in proposals today for a new $4.5 million Mars Library. Zamagias Properties has asked Continental Building Co., PJ Dick, Massaro and Rycon for proposals Jan. 10 on its 26-unit Sewickley Lofts, a high-end condo project being built in Sewickley’s village.

Hope the year has been prosperous and 2017 will be better. Happy Holidays!

Catching Up With the Trends

One of the best programs of the year is the Urban Land Institute’s “Emerging Trends in Real Estate.” The 2017 version of this was held this morning at the Rivers Club. There was a great panel, with Maureen McAvey from McAvey consulting in Washington DC as the keynote speaker. Her presentation centered on the theme that commercial real estate was in a good place but probably not getting much better for this cycle. In fact, she predicted that the good run probably had another 12-18 months to go before a cyclical slowdown. She called it the “kinder, gentler real estate cycle,” which is more good news. ULI makes the “Emerging Trends” document available at their site.

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Flemming Bjoernslev – former CEO of Lanxess – address the crowd at ULI’s Emerging Trends in Real Estate conference at the Rivers Club.

The rest of the program focused on the Pittsburgh market and the changes occurring. I found the best points were made by Claire Hosteny, one of the partners in East End Development Partners (which brought us the Ace Hotel). Claire spoke about the residential conditions and emphasized that Pittsburgh was beginning to push up against the boundaries of our affordability limits, emphasizing that affordability was one of the region’s biggest selling points. She really hit the mark when pointing out that the biggest threat to continued growth of city living was the inadequate public education system. She urged the crowd to consider investment in the Pittsburgh Public Schools or charter schools as a top priority.

One of the drivers of Pittsburgh’s resurgence has been the 25-35 year-olds returning to the city because of great jobs. Reluctant (or unable) to buy, this group of Pittsburghers have been paying the rents that we middle-agers think are outrageous and driving the apartment market. As this age group does marry and reproduce, the same factor will drive where they live as drives all American home buyers: where are the schools we want? If the city schools don’t pass muster for the Millennials, they will head to the suburbs just like their parents. There is a home buying/building boom in the near future. How good Pittsburgh Public Schools are perceived to be will determine if that boom includes Pittsburgh proper.

A couple of project follow-ups: CCAC put a design RFP out for its 150-bed student housing project at the Boyce campus. The RFP included (sort of) the option to add development and finance to the package. Pitt opened bids last week on its Barco Law Library project. Rycon was low at $3,049,000. TEDCO was second at $3.1 million but could become the low bidder if Pitt were to take 3 or  more of the alternates. Massaro CM Services will be releasing the $5 million North Allegheny Intermediate School renovations on Dec. 12 with bids due on Jan. 11.

Sewickley is Hopping

During a visit to Sewickley on Nov. 17, I saw the recently-opened new Howard Hanna office on the corner of Thorn and Broad Street and got to experience what can only be calleda building boom in the village of Sewickley. Hanna’s office (picture below) was the fourth new commercial building started in the tiny commercial district in the village. Nearly 60,000 square feet of new office and theater have been started and nearly completed. Around the corner from the commercial activity, demolition was going on to clear the way for the Sewickley Condominiums, a 24-unit luxury development of two buildings on Locust Street by Zamagias Properties. And at the eastern end of the village, Charter Homes built 22 new homes in the last two years.

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The new Howard Hanna Real Estate Sewickley office, Thorn & Broad Street.

Another bit of space in the village will soon become a parking garage, infrastructure that is desperately needed. WTW Architects is designing the 250-car garage, which should cost between $5-6 million.

In other project news, the contractor for Hanna’s office, Dick Building Co., was selected to build the new 4,800 sq. ft. First National Bank branch on McKnight Road. MBM Contracting started construction last month on the $1 million Butler Hospital 6th Floor Administration project. Continental Building Co. was hired by Shorenstein Properties to act as construction manager/owner’s rep for the modernization of the One Oxford Centre building, a project that should run $50 million or more.