Category Archives: Construction news

How Opportunity Zones Impact Property Investments

How Opportunity Zones Impact Property Investments

In today’s political climate, the swinging pendulum of regulation vs. deregulation can be difficult to track. Yet sometimes government programs are put into place which can truly benefit both investors and the community. When Opportunity Zones were implemented as part of the Tax Cuts and Jobs Act of 2017, real estate investors were incentivized to invest and/or reinvest into low income areas through tax breaks including deferred capital gains, eliminated capital gains, and/or cost basis changes.

 

While the full tax benefits of Opportunity Zones will be lost starting in 2020, the program will remain in effect. Here’s how it works. 

 

What are Opportunity Zones and Opportunity Funds?

All investors know the pain of capital gains tax. At its core, cap gains taxes are taxes paid on the net gain of an investment. A common example would be buying and selling stocks. If an individual purchases $1,000,000 in stock and later sells that stock for $1,500,000, he or she would be responsible for paying taxes on a capital gain of $500,000. Traditionally, the best way to avoid paying capital gains tax was to defer payment through reinvestment.

 

The Opportunity Zone program takes this idea and builds upon it. Let’s take the above example. Instead of collecting the full $1.5 million after selling this asset, the investor could instead reinvest the funds into an Opportunity Fund. It is important to note that to be eligible for tax breaks, this individual would only be required to invest the gains, not the full amount. 

 

Opportunity Zones are Defined as an Economically Distressed

Opportunity Zones are Defined as an Economically Distressed CommunityCommunity

In order for a real estate reinvestment to qualify for Opportunity Zones tax breaks, it must be determined that the real estate falls within a designated Opportunity Zone. The IRS defines an Opportunity Zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity ZELASTO_Media Report_052518.pdf ones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.”

 

Qualified Opportunity Fund Reinvestment

Qualified Opportunity Fund Reinvestment

The other key component of the Opportunity Zone Program is participation in a qualified Opportunity Fund. It is not enough to simply reinvest capital gains into an Opportunity Zone community. Reinvestments must be made through the program. If these steps are followed, the initial investment gains and any gains made through the subsequent reinvestment within the Opportunity Zones Program may be eligible for significant tax breaks. 

 

One of the first Opportunity Zone projects in the Pittsburgh region, the construction of a 60,000 square foot indoor growing facility in Braddock for Robotany, will soon become one of the first projects to complete the investment cycle. Developer RDC Design + Build is nearing an agreement to sell the project to a permanent investor that will have the opportunity to reap the long-term tax benefits.

Opportunity Zones, Property Investments, and Capital Gains

There are four basic scenarios which can play out when an investor participates in an Opportunity Zone reinvestment:

 

 

  • If the investor sells the reinvested property in less than five (5) years: he or she will be responsible for paying capital gains tax at this time. Even without receiving the full tax benefits, this scenario does allow for tax deferment until the fund is sold or until December 31st, 2026 — whichever comes first.
  • If the Opportunity Fund investment is held between five (5) and seven (7) years: the full capital gain amount is deferred plus a 10 percent bump in cost basis. In our example, that would equal a saving of $100,000.
  • If the Opportunity Fund investment is held between seven (7) and ten (10) years: In addition to capital gains deferment, the cost basis is bumped a total of 15 percent, totalling a savings of $150,000 in our example.
  • If the Opportunity Fund investment is held for ten (10) or more years: the investor is responsible for paying nothing on the appreciation of the reinvested asset. This means that through the Opportunity Funds Program, it is possible to invest in real estate with zero liability for capital gains taxes on net gains.

 

 

2020 Changes to Qualified Opportunity Zone Funds

2020 Changes to Qualified Opportunity Zone Funds

As one last point, time is running out for investors to reap the full benefits of the Qualified Opportunity Zone Program. As of January 1st, 2020, the maximum cost basis deferment will shift from 15 percent to 10 percent. While this does not take away from the other benefits of the program, that 5% cost basis differential can equate to huge dollar volumes for investors. Despite this, real estate investors are always cautioned to never rush into a real estate investment to get under a time limit or deadline. The right investment with a slightly higher cost is likely more profitable that the wrong investment at a slightly lower cost.

Going Forward

With current regulations, Opportunity Zones and Opportunity Funds continue to be a great choice for real estate investors through 2019. However, starting in 2020, that appeal is somewhat diminished by lessened tax incentives. This may cause some real estate investors to panic and make unwise investments. We would caution that a smart investment is a smart investment and a poor investment is a poor investment. When it comes to real estate, a tax incentive should be viewed as the cherry on top, not a reason to invest.

 

Rather than rushing to make an Opportunity Zone investment before year’s end, going through your usual due diligence is almost certainly the right decision. Whether that misses the 2019 end-of-year cutoff or not, your interests will be better secured.

How Energy and Transportation Projects Came to Dominate Construction

How Opportunity Zones Impact Property Investments

Construction is the backbone of industry. Without construction there would be no homes, businesses, schools, or warehouses. In recent years, the construction industry has seen a marked increase in the share of projects that are large scale energy and transportation projects. This is true in the United States and across most advanced nations around the world. The question then becomes: how did this shift take place and why? 

 

The Current State of Infrastructure Construction

The Current State of Infrastructure Construction

The American infrastructure is aging. Most major infrastructure projects are upgrades to existing systems such as Tennessee’s $15.6 billion sewer project or Nebraska’s $12.5 billion highway maintenance effort. Let’s take a deeper dive to understand how modern infrastructure construction budgets are being allocated by examining the Nebraska transportation transportation update:

 

 

  • $7.1 billion is to be spent on highway maintenance, repaving, and other repairs. This asset preservation budget is primarily eaten up by $6.4 billion allocated to pavement repairs, with the remainder going towards the state’s bridge system.
  • $3.6 billion is to be spent on expanding roadways by way of building new roads, widening existing roads, and more.
  • $1.8 billion is slated for modernization of transportation services including rural roadways, bridges, highways, and railway crossing junctions.

 

 

This plan may be specific to Nebraska, but it is indicative of a typical mega-construction project in the US today. As you can see by the numbers, the number one concern for many areas is simply upkeeping the existing infrastructure. Modernization and expansion efforts take up less than half of the budget.

 

Construction Trends in 2019 and Beyond

Construction of rapid mass transit

Here are a few construction trends surrounding energy and transportation which we expect to continue beyond 2019:

 

Transportation construction projects at or near airports: even modern airports are in need of an upgrade in 2019. Most airports have a logistical problem moving people between terminals, parking lots, and other airport facilities. Chicago’s O’hare airport has undergone a massive construction project to replace their usual shuttles with a more sophisticated light rail system. More airports are likely to follow.

 

Construction of rapid mass transit: construction on heavy rail, light rail, and other municipal rapid transit is also on the rise. Even mid-sized cities like Pittsburgh have invested heavily into light rail transit to improve their public transportation offerings in recent years.

 

Massive energy projects including new power plants, refineries, and more: while the exact future of the energy industry is in a state of flux with new technology and legislations coming and going all the time, the demand for new energy solutions and the aging energy infrastructure all but demands massive overhauls. 

 

Why Energy and Transportation?

As mentioned in the previous section, the energy sector has an uncertain future. One reality which is having an immediate impact on US energy construction is global demand for natural gas. The US is uniquely positioned to extract, produce, and provide natural gas to the global market. Additional energy-related products such as plastic refineries and chemical processing plants have all seen a demand increase in recent years. 

 

As for transportation, we can primarily thank a crumbling infrastructure alongside population growth for construction demands. Whether it is maintaining existing roads, constructing light rail systems, or paving new roadways, the demand for transportation remains high in both urban and rural areas. 

 

Mega-Construction Projects are Taking over Mid to Small Sized Contracts

Mega-Construction Projects are Taking over Mid to Small Sized Contract

To understand why mega-construction projects are outpacing small and medium sized projects, we must first understand where the infrastructure spending budgets come from. While the federal spending budget is more easily tracked, the vast majority of infrastructure assets are owned and controlled by state and local governments. So why are these smaller governments suddenly funding more multi-billion dollar construction projects rather than many small ones?

 

There is no singular answer, but a major reason is that approving one project is easier than approving multiple individual construction efforts. These mega-construction projects with budgets in excess of $1 billion are also sold as economy-boosters. Whether they be a new sports stadium, improved transportation at the airport, or improving the current energy solutions, generating buzz around these projects is easier for politicians. 

 

There is every reason to expect this trend to continue and possibly even gain momentum moving forward. Consider California’s high speed rail authority project. The total project was quoted in the $50 billion range, but has since been re-estimated at nearly $100 billion. This publicly funded mega-construction project will someday connect most of the main cities in California including but not limited to San Francisco, San Jose, Los Angeles, and San Diego. California’s project is commensurate with the state’s enormous wealth. Yet it remains a sign of the future of transportation and energy construction in the US.

 

Going Forward

Unfortunately, the reality is that overall infrastructure spending is still down. Federal, state, and local governments had nearly $10 billion less in spending power for infrastructure projects in 2017 when compared to 2007. The good news is that Americans are growing more amenable to both increased spending on what is an increasingly outdated infrastructure including transportation and new energy solutions. 

 

The true trend is shifting from new construction to maintenance efforts. Despite the talk of modernizing transportation and energy infrastructure, most of those projects will be to retrofit current construction with modern solutions.

Hiring Bounces Back in November

Employers were signaling caution as summer wound down. The ADP private payrolls report for November showed a big drop early last week; and then on Friday, the Census Bureau released its Employment Summary for November and reported that 266,000 jobs were created. That’s about 40% more than the consensus forecast of Wall Street economists.

There were some details to unpack that moderated the gains a little. The great manufacturing number was inflated by 60,000 GM workers returning from strike (which dampened the October report). Construction jobs grew by only 1,000 from October, a surprise given the amount of activity; however, not a surprise given the severe shortage of workers. On the other hand, strong performance in the financial and business services sectors, and especially healthcare, showed there is still some life in the expansion. Some of the highlights:

  • Unemployment fell back to 3.5%. That’s the lowest for 50 years.
  • Wage gains were modest at 3.1% year-over-year but were much higher at the lowest end of the wage-earning spectrum.
  • The broadest measure of unemployment fell to 6.9%.

There are two significant positive conclusions that can be drawn from the November report (bearing in mind that it’s one month’s data of course). First is that consumers are in good standing. Virtually anyone who wants to work is working. Wages are growing at twice the rate of inflation. The consumer drives the economy and the consumer should be happy. The second conclusion is that businesses aren’t as negative as was thought. Because business investment has been declining, concerns about the economy were becoming self-fulfilling. So far there is no data showing that other business investment is ticking upward but the jobs report shows that businesses are still investing in their most expensive asset: people. Moreover, a Vestige survey showed that 60% of business owners plan to add staff in 2020, while only 4% say they are cutting.

In regional construction news, Thomas Construction was awarded a $7.5 million contract to repair the Somerset Lake Dam. Turner Construction was awarded $5 million buildout of Pitt’s BST. PJ Dick was selected for the $55 million Pennley Place East office/retail development in East Liberty. Metis Construction started work on the new $2.2 million JP Morgan Chase branch in McCandless Crossing. Continental Building Co. was issued a permit for $3.2 million buildout for ServiceLink at Pittsburgh International Business Park in Moon Township. Walnut Capital was selected to develop the lot adjacent the Children’s Science Center. Walnut was also chosen to develop the graduate student and faculty market rate housing in Pitt’s lower campus.

Suburban Office Growth

Suburban Office Growth

That morning commute from the suburbs into downtown might be getting a little easier in the coming years. Suburban office growth has taken off for investors and for businesses in recent years, and this trend appears to be strengthening over time. Yet some more conservative estimates warn that short term, overbuilding may lead to greater supply than current market demand. As is the case with many things, the truth likely resides somewhere in the middle.

 

Projected Value of Suburban Commercial Real Estate

Projected Value of Suburban Commercial Real Estate

Urban commercial real estate has become increasingly volatile in recent years. High cap rates and pricing in traditionally urban areas has driven many investors to the suburbs. Consider America’s biggest urban market: New York, which as recently experienced a 37 percent decrease in urban sales volume. This may be influenced by a lack of available real estate for sale, but a significant downturn also indicates a real lack of interest in high priced urban commercial real estate.

 

Instead, the projected value of the suburban commercial real estate market looks positive. This is particularly true for high value markets such as New York and San Francisco, where foreign buyers are effectively pricing out the competition in the urban space. The majority of Americans do live in suburban areas, which offers yet another unique advantage to employers looking to find their next commercial real estate rental or purchase.

 

A key factor in the value of suburban markets lies in their location and convenience. Commercial real estate within walking distance of retail amenities is projected to hold a higher value that suburban real estate that is more isolated. These mini-pockets of urban lifestyles allow for businesses to pay suburban prices with the convenience of an urban location.

 

The bottom line is that suburban commercial real estate is less expensive, has potentially high upside, and is becoming increasingly appealing to investors and businesses alike. The key is finding the suburban location and amenities which can sustain a commercial investment long term.

 

Suburban Offices vs. CBD

Suburban Offices vs. CBD

To a certain extent, urban sprawl has blurred the lines between urban and suburban real estate. Yet there remains a premium when it comes to traditional downtown work spaces that many companies and real estate investors are no longer willing to pay. The differences between suburban and central business district workspaces may be diminishing over time, but here are a few key factors which keep the distinction relevant:

 

Access to transportation: public transportation access is a huge driver of commercial property desirability and therefore it is a huge driver of commercial property value. While a massive amount of Americans enjoy access to public transportation including subway systems and city buses, nearly half have no access to public transportation. The value add of CBD is that properties are all but guaranteed the convenience of a nearby transportation option.

 

Walkability: along these lines, being within walking distance of retail amenities, restaurants, and other conveniences drives value. CBD again comes out ahead here, but modern suburban planning is catching up quickly. 

 

Price points: no matter how much we talk about how trendy and desirable suburban office space has become, central business district real estate pricing remains nearly double the cost of their suburban counterparts per square foot. This difference simply cannot be overlooked. The biggest difference between these two real estate options is, and will likely remain, the price.

 

The Advantages and Benefits of Suburban Office Growth

The Advantages and Benefits of Suburban Office Growth

As referenced above, the largest benefit of suburban office growth is undoubtedly the cost savings. Yet there are so many advantages that come with expanding beyond city limits. Here are just a few:

 

  • Commuting is easier for employees. Besides the issue of public transportation, suburban offices will reduce commute time for the vast majority of employees. Whether that comes via going against the flow of rush hour traffic or avoiding long commutes altogether, this is a huge plus.
  • Parking is cheaper, easier, and more accessible. Along those lines, suburbia comes with more space, and with more space comes more parking options. Employees will likely no longer have to shell out an hour’s pay just to find a spot to park.
  • Curb appeal is improved and often more prominent. Unless you are looking for a specific urban vibe to your workspace, properties in the suburbs generally afford greater curb appeal to visitors. Signage is more prominent and the options for landscaping and other exterior features are far greater.
  • Suburban offices tend to have a campus feel. The hustle and bustle of downtown life is appealing for many, but can certainly wear on already frayed nerves. Suburban office space offers a more serene, campus-like atmosphere which appeals to workers and employers alike.

 

Going Forward

The market is strong for suburban office growth. With lower barrier to entry and an increasing public interest in moving away from central business districts, the future of commercial real estate seems to be turning suburban. The key to smart investing is picking locations which are convenient with high quality amenities. If employers can offer the convenience of a downtown work environment without the hassle, all for a lower price? What is there to lose?

The Next Wave in the Strip District

Pittsburgh’s Strip District has seen a commercial real estate transformation that is nearly the equivalent of the changes in East Liberty. Once a wasteland of very profitable parking lots, the Strip has become a tech office hub. Thanks to two major master plan developments, Buncher’s Riverfront and Oxford’s 3 Crossings, more than one million square feet of office space and almost 2,000 units of new residential space will be occupied between the Convention Center and 31st Street Bridge. Other developers, including Jack Benoff, RDC/Orangestar, Chuck Hammel, and McCaffrey Investments, have also contributed major projects to the neighborhood.

Next week, Oxford Development is bringing an updated plan for 3 Crossings next phase to the planning commission. It includes 450,000 square feet of new offices (in addition to the 110,000 square foot Stacks under construction now), 300 apartment units, and a 606-space parking garage. Mascaro Cnostruction is the construction manager for the garage. Rycon Construction is CM for the remaining buildings. There will also be a presentation for 23rd & Railroad Apartments, a 220-unit apartment that Oxford is helping to develop on behalf of Steel Street Capital. That project, which Rycon is also building, will include 33 units of co-living apace. This is a relatively new concept to Pittsburgh, in which occupants share multi-bedroom apartments much like dormitories.

At least three other developers, including RDC/Orangestar and JMC Holdings, have proposed additional spec office buildings of between 150,000 square feet and 350,000 square feet.

Work is about to start on two other new condominium projects, both being built by Franjo Construction. Penn 23 is a $12 million, 21-unit condo being developed by Francois Bitz. Solara Ventures is developing a $17 Million, 50-unit condo three blocks further east at 26th and Smallman. Franjo is also expecting to get underway on the $50 million+ second phase of the Arsenal apartments near the 40th Street Bridge.

In other construction news, the Turner/Mosites Construction team was awarded the $100 million+ central utility plant at the University of Pittsburgh. PA Department of General Services has advertised the first major public project of the bidding season, the $21 million Greensburg DNA Lab, due Jan. 8. Massaro Construction Management Services was selected as CM for the $12 million Plum Town Center municipal complex. Franjo started construction on the first 20,000 square foot office building at the Rocks Multimodal Terminal being developed by Trinity Development in McKees Rocks.

An update on the construction news: Patriot Construction has started work on the $3.7 million buildout of Spaces, a 38,000 square foot Regus co-working office on the 2nd and 3rd floors of One Oxford Centre. Sota Construction is bidding the $5 million John Jay Center at Robert Morris University. Rycon Construction is building a new 6,200 square foot GetGo superstation in the Wexford Flats in McCandless. Walbridge is the construction manager for Elliott Company’s major new facility in Jeannette.

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.

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.