Affordable Housing and More

On Friday the PA Housing Finance Agency announced its grants for this 2019 cycle. PHFA grants are one of the effective vehicles for financing affordable housing throughout the state. The announcement coincided with two local project announcements that also focused on affordable housing.

After the wave of market rate private housing development peaked a few years ago, the City of Pittsburgh created regulations that are aimed at bringing affordable housing into the city along with the higher renting multi-family projects. Developers aren’t fans of the regulations, which tie public subsidy to inclusion of at least 10% of the units (on developments of 20 units or more) being reserved for rents that are affordable for people earning 50% of the median family income or less. Since the city is not budging on this, developers have begun to accommodate this requirement in their pro forma.

One of the two projects publicized last week, Arsenal 201, fits that description. Milhaus is proposing 343 units, along with a 454-car garage, and will have 10% that are affordable. The project is the second phase of the Arsenal development. This phase, which should top $60 million, needs to get through city approvals before starting work late this year or early 2020. Franjo Construction is doing preconstruction on the project now.

The second project getting ink on Friday was the Fifth & Dinwiddie Apartments, which is being developed by Derrick Tillman’s Bridging the Gap LLC, along with HB Development.  The $51 million project in the Hill District will bring 161 apartments and ground floor commercial space. Tillman says the project is applying for PHFA funding and is expected to start in about 18 months. Nello Construction is the general contractor.

PHFA’s awards were good news for Mistick Construction, which is the general contractor on half-dozen of the projects funded. Among them are the $13 million Larimer Phase 4 and the $10 million New Granada Square Apartments, which will bring another 40 apartments to the Hill District.

Rendering by PWWG Architects of the Granada Square Apartments.

In construction news unrelated to housing, the KML Carpenters selected Rycon Construction as contractor for its $9.5 million expansion. Jendoco Construction is taking bids on the $9.5 million Fifth & Neville Residences, which will be apartments for CMU students. Another CMU residence hall, the $32 million Fifth & Clyde, is being budgeted by Rycon Construction.

Advertisements

State Government Influencing Construction

As a buyer, the Commonwealth has been a minor force in the construction market for a decade. Over the past week, our state government has made a much bigger impact in other ways.

The legislature passed a 2019-2020 budget that has no relief for construction, but within the negotiations there was a break of sorts in the K-12 logjam. The results of a PlanCon task force report were accepted as the framework for a new PlanCon process. Sadly, this new framework did not coincide with a lifting of the moratorium on projects entering the PlanCon system (nor did it accompany funding for more projects). Getting agreement on what PlanCon will look like is a head start on the next wave of projects, which is building behind a decade of underinvestment.

Legislative action also occurred on PA’s Separations Act, although the action is likely to be moot. A full repeal of the Separations Act was passed in committee by a straight party 15-10 vote. Since Republicans control both houses, the repeal may pass; however, most legislators are aware that the full repeal will be vetoed by the governor and many understand that a full repeal was not the intent of the coalition lobbying for amending the Separations Act for years. A last-minute maneuver changed the proposed legislation from one that offers school districts choices of delivery methods to the full repeal. The last-minute measure was backed by AIA Pennsylvania, which had previously signaled alignment with the choice option. The full repeal legislation is probably dead on arrival, which means PA will remain the only state in the Union requiring separate prime contracts. Keep those claim forms handy!

Finally, PA’s attorney general, Josh Shapiro, may have catalyzed Pittsburgh’s two healthcare giants into an agreement that keeps the status quo for access. UPMC and Highmark announced last week that another 10-year agreement was reached. The upshot for construction seems to be limited. UPMC’s major capital plan is mostly aimed at replacing outdated facilities and supporting innovative new medicine (see Vision & Rehabilitation Hospital at UPMC Mercy). Its South Hills hospital is on hold, so the agreements with Jefferson and St. Clair probably make that permanent. Highmark/AHN has been investing significantly in facilities that were meant to capture the patients that would be without access to UPMC centers, so the construction is underway or completed on many of those. According to AHN officials, plans for further investment – like the $100 million Allegheny General Hospital Cancer Institute expansion and the Route 28 site – are being explored actively. It’s unlikely that the 10-year truce won’t have an impact on capital spending, but it doesn’t appear to be imminent.

Some project news updates:

The last two major K-12 projects of the bidding season were awarded. Franklin Regional re-bid its Sloan Elementary and new Grades 3-5 schools mid-June and awarded R. A. Glancy the general construction for the $14.6 million Sloan Elementary, and Walter Mucci Construction the general for the $26 million new 3-5 school. Mosites Construction won the $104 million Tuscarora Tunnel renovation on the PA Turnpike.

Volpatt Construction has started construction on the $4.5 million 6th floor Nursing Unit at Butler Hospital. Guardian Construction Management is underway on the $4 million renovation and addition to Grace Community Church in Cranberry Township. Turner Construction has been awarded the CM contract for the $8 million cooling tower upgrade at UPMC Shadyside Hospital, the enabling package prior to construction of a $50 million new central plant in mid-2020. PJ Dick is CM for a new Combined Cooling Heat and Power Plant for AHN in Wexford. Rycon Construction is renovating Ally Financial’s offices in Cranberry Township, a $2.5 million tenant improvement in Westinghouse Building 2000.

Keep An Eye on the Yield Curve

This is more than a bit wonky. As the U.S. economy hits a new record for economic expansion, the age of the business cycle is making people worry about the next recession. That’s not a bad thing. The longer expansion continues, the closer we are to the next recession. One of the indicators that is getting more airplay these days is the inverted yield curve. I don’t blame you if you can’t get too motivated to get to know this indicator but here’s the thing: an inverted yield curve has preceded the last three recessions and seven of the last eight.

We’re going to devote an article to the yield curve in the July/August BreakingGround but here’s the short-hand version until then.

The yield curve describes the difference between the interest rate on short-term and long-term government loans (or bonds). The long-term bonds should have higher rates because there’s a greater risk of something (like inflation) eating at the money you get repaid as time goes on. When the long-term rates are lower than short-term rates, the yield curve is negative or inverted. There’s a whole technical explanation in BreakingGround (and on the Internet) but the short version is that the yield curve inverts when lots of people are nervous about the economy and invest in long-term bonds with lower rates. The longer this situation lasts (see the red line below the white one below), the more likely that a recession will occur within 6 months to 2 years. It also makes it more likely that the Federal Reserve Bank will cut rates in July. That will make the economy happy, at least for a while.

 

 

 

 

 

 

 

 

PBX reports that March Westin has early bid packages out to bid on the $60 million Hodges Hall renovation at WVU.  The PBX also reports that Al. Neyer will start construction late summer on the $39 million first phase of its new office building at 21st & Smallman.Dick Building Co. was awarded the contract for the $2.7 million TI for Industrious at Liberty Centre. A. Martini & Co. will be doing $1.8 million renovations to PPG Wintergarden’s event space for Bottle Management (the company that developed City Works restaurant). Jendoco Construction has started on the new $5 million exhibit and office for Contemporary Craft in Lawrenceville. Shannon Construction was awarded the contract for the shell and core renovations at Station Square.

Loose Ends

While there are still a lot of RFPs out there, especially in the developer market, the summer slowdown in bidding is settling in. There are a couple of interesting projects to follow up.

The team of Etzel Engineer & Build/CJL Engineering was awarded the $13 million buildout for DataBank’s data center in North Fayette Township. Lifetime Fitness’s $50 million new facility at South Hills Village has been approved. Lifetime Fitness Construction handles the contracting for the project.

Bank of America awarded a contract to A. Martini & Co. for the new branch in Robinson Township. The Bank of America branch in Cranberry Township, which will be about 6,400 square feet is out to bid now. Rycon Construction started work on a $1.5 million renovation to Canonsburg General Hospital’s pharmacy. DiMarco Construction is about to start work on the Norfolk Southern facility in Pitcairn and an expansion of Universal Refractory in Wampum, PA.

Regional Scorecard Points to Regional Construction

Today’s release of the Pittsburgh Regional Alliance’s annual Business Investment Scorecard shined a light on how the regional economy’s strengths are driving construction in Western PA. The PRA noted that there were more deals – 340 – in 2018 than in any year since the scorecard started in 2007. In those deals was $1.2 billion in capital investment in development. Drilling into the major business sectors, you find that the top job creating areas were IT/robotics, energy and manufacturing. It’s not a coincidence that these sectors are the ones filling up the new buildings in the Strip District, Bakery Square, Robotics Row, etc. The new economy in Pittsburgh is driving commercial construction.

From the news, it appears these sectors are still driving construction in 2019. Al. Neyer Inc. announced it had landed Victory Packaging as a lead tenant and was starting the 220,000 square foot Jackson Distribution Center (rendering above) north of Zelienople. RDC Star took its $50 million District 15 Version Beta through the city’s planning process this week. RDC Design + Build hopes to start construction on the building in August.

PA Turnpike Commission awarded contracts for the $20.3 million Southern Beltway maintenance buildings. Nello Construction is the general construction contractor. Mascaro was selected for the $40-45 million UPMC Mercy 3rd floor renovation. Dick Building Co. started work on the $2.3 million new quest cottages at Laurel Valley Golf Club.

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.

ECS Press Release 05.01.19 _1_

“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.

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.