Category Archives: Construction news

An Outlook for Construction Costs in 2020

An Outlook for Construction Costs in 2020

Anybody who works in the construction or real estate industries understands that construction costs are rarely (if ever) static. Going into 2020, construction costs are less volatile than they have been over the past decade, but certainly won’t be static. So how can the commercial real estate industry adjust its outlook for changing costs? How will construction costs drive the market value of new and existing commercial real estate? Will construction costs continue to rise or is there an end in sight?

 

Understanding these and many more questions will give us a reasonable outlook of construction costs when it comes to commercial real estate and other sectors in 2020 and beyond.

 

American Construction Outlook for 2020 and Beyond

American Construction Outlook for 2020 and Beyond

Understanding the overall outlook for the construction industry is a key piece of understanding construction costs. The Dodge Data & Analytics report titled “2020 Dodge Construction Outlook” was put out in late 2019. This report attempts to give a comprehensive report on the construction industry within all sectors in North America. Here are some highlights of that report:

 

  • Total construction is expected to fall to $776 billion in 2020. This marks a 4 percent decrease year over year compared to 2019. 
  • The recovery process that began after the Great Recession of 2007-09 is nearing its end. This is good and bad news, as the construction industry has finally returned to normality, yet it also means that construction will likely scale down over the next few years as the market steadies itself.
  • Dodge Data & Analytics estimates that commercial real estate value will dip approximately 6 percent in 2020. The hardest hit are likely to include hotels and commercial warehouses.
  • The trend of commercial real estate growth in the energy and tech industries (such as data centers and other high security, high value tech facilities) looks to continue and grow in the coming years.
  • Commercial real estate for multifamily units are expected to take a large hit as well, with estimated drops to be between 13 and 15 percent in 2020. (This take isn’t held across the board with prognosticators. Most expect volumes closer to 2019’s.)

 

Construction Costs Outlook in 2020 and Beyond

The above report does not paint a particularly rosy picture for the commercial real estate industry overall. But what about construction costs in particular? Let’s examine some key questions and answer them going into 2020.

 

Will Construction Costs Increase in 2020?

Will Construction Costs Increase in 2020

While there is not a consensus on this topic, many construction experts feel that construction costs will slow their growth 2020 for the first time in many years. Year over year construction cost increases have been in the 5-6 percent range for commercial real estate projects for the past decade. As part of the levelling out referenced above, construction costs may actually slow to around a 2-3 percent increase moving into 2020 and over the next few years. This is partially due to a slowing construction industry, a flattening of real estate values, and many other factors.

 

Of course, all of these are merely projections. The price or permitting, entitlement, construction commodities, and labor are always changing in complex and impossible to predict ways. While there is no way to accurately predict construction costs, many signs point towards 2020 being a relatively stable and cost-effective year.

 

Will the Price of Construction Materials go up in 2020?

The materials price index (MPI) fell approximately 12 percent between Q1 2018 and Q4 2019. This is just one way to measure the prices of construction materials over time. Cumming Insights posits that this downturn is due in large part to trade uncertainty between construction powerhouses U.S. and China. Steel prices have been steadily dropping in recent years as production has outpaced demand, and this trend is likely to continue in the foreseeable future. 

 

However, the cost of many construction materials are still expected to rise according to some industry experts. While prices of steel, copper, and aluminum have been slowly falling, they will eventually flatten and recover. The costs of commodities such as lumber and gypsum will likely increase in 2020 and beyond. Lumber in particular took a sharp 10 percent cost decrease in a year’s time. That trend is expected to reverse and normalize this year.

 

Construction Labor Costs in 2020

Construction Labor Costs in 2020

There is a labor shortage in the construction industry. This and a number of other factors have led construction workers to enjoy an average pay increase of 3 percent year over year, well above the standard for all American workers. This shortage is due in part to a rapidly aging/retiring workforce with a lack of young workers to take their place. In fact, this lack of skilled employees is actually keeping labor costs for construction work manageable. If there were more skilled, experienced construction workers, that 3 percent number would likely be even higher.

 

Going Forward

Predicting the future is something that is both impossible and necessary to do for commercial real estate and construction industry veterans. All the detailed reporting in the world won’t do us any good if it is wrong. Yet understanding industry trends prepares us for the coming months and years of construction projects. All signs point to 2020 being relatively stable when it comes to construction costs. Labor will continue to rise while commodities will fluctuate at different rates. Construction costs will almost certainly increase year over year, just not to the same degree as we have seen in the past.

A Chill in the Pittsburgh Office Market

Sometime in October every year, there’s an afternoon when you feel the wind blowing colder. It’s not quantifiable but it’s a chill that you know means fall is serious about setting in.

This past week or so, there was a similar chill in the air about the Pittsburgh office market. This time of year is when all of the real estate service firms issue year-end reports and it looks like 2019 was a year when the metrics slipped into more troubling territory. The 2019 reports are hardly bad news. Net absorption was positive, ranging from around 100,000 square feet to almost 300,000 square feet, depending on which report you read. (That’s a matter of when the researcher times the construction and completion, which varies.) Positive absorption in the face of record office construction is a strong signal. Rents grew again. But there were a couple of yellow signals.

Occupancy declined again, this time getting to mid-double digits. There have been some big spaces coming onto the market over the past few years, especiialy in One Oxford and 525 William Penn Place, and some significant sublease spaces. The effect of that has been to create higher vacancy, especially in the Central Business District (CBD).

Grant Street Associates/Cushman & Wakefield has the direct vacancy rate for Class A CBD at 13.9%. Newmark Knight Frank has it at 18.3%. (NKF excludes owner-occupied buildings from the calculation since they aren’t on the market.) JLL puts direct vacancy at 14.6% in the CBD.

The data, along with the national reports like CoStar’s, has made some of the brokers, lenders, and developers nervous. There are still great economic stories coming from Pittsburgh but with flat job growth, you may see a chill in the speculative office market, especially after the next couple of major projects get underway.

Vision on Fifteenth

Speaking of the next major spec office, Burns & Scalo is bidding packages for the second phase of District 15, now called Vision on Fifteenth, a 275,000 square foot building. Carl Walker Construction is taking bids on a 376-car garage for the project.

In other project news, Al. Neyer will start construction on the 100,000 square foot Astra facility for Krystal Biotech in Findlay Township. The developers of 926 Smallman Street, an 81,000 square foot, 7-story mixed use building, are going through City Planning. Dick Building Co. is the contractor.

Insurance Costs Will Jump in 2020 – For Construction Industry Too

First the good news: improvements in workplace safety have helped push losses and Workers Compensation claims lower, which is expected to keep the insurance bill at the same rates or lower in 2020. Insurance for environmental contractors is also expected to be slightly less expensive in 2020. For the rest of the insured market, not so much.

Natural disasters and unlimited liability exposure have pushed the property/casualty sector of the insurance industry into unprofitable territory. Insurance companies have done well with investments and at attracting capital in recent years. Some $800 billion in excess capital exists in the insurance industry, but the additional capital is not expected to translate into more capacity for property/casualty lines. This is in direct opposition to what is going on in the construction surety market, which has seen steady low loss ratios for a decade and plenty of capacity for higher bonding limits. Insurance industry experts see the industry conservatively deploying and investing its capital, rather than expanding the capacity for property/casualty insurance. In fact, several of the industry’s biggest insurers are debating an exit from property/casualty insurance.

The biggest culprit is catastrophic losses on natural disasters. Regardless of your politics and beliefs about the impact of climate change, the frequency and severity of catastrophic natural disasters has increased. Floods, tornadoes, hail storms, and wildfires have all caused much greater damage than in previous decades. Houston, for example, has seen two 500-year flood occurrences in the past three years.

Likewise, the frequency and severity of liability claims have increased, with insurers seeing little hope of tort reforms or limitations in the offing. Casualty claims and losses, even for companies with risk-mitigation strategies in place, have increased.

Insurers, not surprisingly, are responding to these unfavorable trends by employing more conservative underwriting standards and raising premiums. It’s easy to shake a fist at the insurance company but it’s important to realize that the premium charged an insured is a calculation of the relative risk of the activity as a whole, in addition to the judgment of the insured’s risk. In other words, if the activity – such as driving a car – has become more expensive to insure or has an increased risk in general, the insurer needs to collect more money to respond to claims. Those actuarial calculations are the foundation of the insurance business. Companies can shave insurance costs by being safer but when insurance conditions become more expensive, everyone pays.

According to USI’s Commercial Property and Casualty Outlook for 2020, insurers expect to raise premiums on most property policies between 10% and 20% for most non-catastrophic property coverage, and as much as 60% for insurance with catastrophic coverage. Auto liability insurance is forecast to increase by 10% to 25%. Excess liability will go up 10% to 25%, as will errors and omissions. The cost of public company officers and directors coverage is set to increase 25% to 50%.

Regional construction news: ALCOSAN’s $130 million North Plant Expansion will be advertised for bid at the end of January. Duquesne University selected Jendoco Construction for its $18 million St. Martin Hall renovation. Fluor has issued the second phase package of US Steel’s $900 million Edgar Thompson Works modernization. The package includes a 50,000 square foot building. Mascaro, Songer and Stevens are expected to bid. Mascaro was awarded the $12 million first phase of the work. The $10 million, 376-car parking garage for District 15 should be bid by Carl Walker Construction after January 27.

Start the Week with Some Pittsburgh Construction News

The first packages for the $1.1 billion Terminal Modernization Program are hitting the streets. A $15-16 million package of site work and building work to enable the construction is coming out to bid. The work will allow for roadways, logistics, and mobilization around the existing airport infrastructure so that the multi-year project can proceed without interruption to the normal operations of Pittsburgh International Airport.

 

PJ Dick is taking bids on a couple of its $80-100 million projects, the WVU School of Business and Pitt’s Scaife Hall expansion. Rycon Construction will put CMU’s $36 million Fifth and Clyde Residence Hall out to bid next week.

 

Shannon Construction has been selected to do the $7 million TI for Siemens Mobility at the former Waterfront Macy’s. Sentinel Construction has started construction of the $3 million HDR Engineering TI at One Oxford. Timbers Building Co. has started work on the $15 million renovation of the Lemington Home for affordable housing. Jendoco started construction on the $9.5 million renovation of the Fifth/Neville Apartments. Sano-Rubin Construction is preparing to start construction on a $15 million medical marijuana facility for PharmaCann in Carnegie.

riazzi-substation-rendering

Rendering courtesy Duquesne Light Co.

In Oakland, two projects that might be below radar (although both have had public attention) are the new Duquesne Light Riazzi substation and the $7 million mixed-use development for Mike Wu at Craig and Winthrop. Burns & McDonnell is the turnkey engineer/CM for the Duquesne Light project, which is an 8,000 square foot (by four story) structure located on Boundary Street beneath the Schenley Park Bridge. No costs have been released but the project should be $5-10 million or more.

Medical Office Buildings Remain a Safe Bet

Medical Office Buildings Remain a Safe Bet

Commercial real estate, like many investment-based industries, can experience major flux over time. Yet certain CRE investments are safer than others due to strong demand and profitable business models. Medical office buildings have been a strong choice for CRE owners and investors for many years. We believe that this trend will not only continue, but trend towards greater value for investors. Some investors are hesitant to enter into this space for fear of policy change and bureaucratic red tape making the future murky. While these are certainly relevant considerations, today we will be reviewing why the pros of medical office building investment outweigh the cons.

 

The Value of Medical Office Properties

In order for an investment to be a safe bet, it must first be determined that the asset has value. Medical office property values have skyrocketed in recent years. Here are just a few reasons why.

 

Supply and Demand Favors Property Owners

Supply and Demand Favors Property Owners

There is no question that medical office buildings are in high demand. As the nation ages and healthcare becomes an even larger industry, outpatient procedures continue to climb in both quantity and quality. That handles the demand part of the equation. As for supply, medical office buildings often require specific layouts and capabilities which must either be designed from the ground floor or retrofitted into older properties. Simply put, there aren’t enough office buildings to handle the current demand. This obviously puts a premium on those properties which do exist and even those which are good skeletons to be converted into medical offices down the road. 

 

The Medical Industry is Booming

Say what you will about our nation’s healthcare system, but there is more than enough money to go around. No matter if we continue with Obamacare and other current policies, roll back current policies, or go in the other direction and establish Medicare for All, money will continue to pour into our medical care infrastructure. The reason is simple: the medical industry is extremely strong and will likely remain so for many, many years. When you combine favorable supply and demand with a cash-rich industry, that equates to high value investments.

 

Flexible Medical Office Layouts Add Value

On a more specific note, the future of medical technology is moving to a format which enables physicians to perform a wider range of tests within their offices rather than sending patients to specialists. For this and many other reasons, flexible medical office structures offer a unique value to investors and to lessees by allowing for greater capability and flexibility of care.

 

Why Medical Office Buildings are a Wise Long-Term Investment

Why Medical Office Buildings are a Wise Long-Term Investment

There are many reasons to believe that medical office buildings have strong value in today’s marketplace, but how can we be so sure that they will be a wise long-term investment? Medical office properties offer a unique safety net for investors for the following reasons:

 

 

  • Customer convenience means location is becoming more and more important. Nobody likes going to the hospital. This is particularly true when medical offices are more convenient from a location and practical standpoint. 
  • The aging population will require more regular check-ups and routine health care over time. The U.S. population is aging. This is particularly true in areas like our own Western PA region where one in five residents will be 65 or older by 2025.
  • Outpatient procedures are outpacing hospital stays. Outpatient procedures are viewed as more favorable by patients, healthcare systems, and doctors alike in the majority of cases. Obviously some medical procedures absolutely must be performed in hospitals. For more minor procedures and checkups, the future is trending towards medical offices and away from hospitals. 

 

 

Pittsburgh’s Medical Industry and Aging Population = Strong Medical Office CRE Market

Pittsburgh’s Medical Industry and Aging Population = Strong Medical Office CRE Market

As we mentioned in the previous section, our region’s population is aging rapidly. An aging population leads to greater medical care demands. Pittsburgh is also well known for offering world class healthcare. What this means for investors is that the demand for office buildings in our area is expected to climb for decades to come. As this demand climbs, well-funded organizations such as UPMC will have more than enough desire and capability to either purchase or lease medical office buildings at a premium.

 

Given the Pittsburgh region’s population trends, there is perhaps no safer commercial real estate bet than medical office properties. There is every reason to believe that UPMC and other local medical research facilities will continue to attract the best medical professionals from around the globe to keep our local medical economy strong.

 

Going Forward

It is impossible to speculate on the future of real estate, no matter how many positive indicators exist. As far as safe bets go, medical office buildings are about as close as you can hope to get. Aging populations, a demand that outpaces supply, a medical industry flush with cash and resources, and the national trend of outpatient procedures overtaking hospital procedures all add value to medical office properties. Medical office buildings are a unique beast, and all investors are also encouraged to understand the intricacies of medical office layouts and realistic expectations before taking the plunge.

Will Commercial Real Estate Adopt 5G?

Will Commercial Real Estate Adopt 5G

5G is the future of cellular service. Like 4G before it, 5G will revolutionize how we use our phones and other mobile devices online. The next generation of web-service will not just impact individual users, however. It will also lead to the rise of smart cities, autonomous cars, immersive education solutions, and much more. With these added capabilities also comes a greater demand for infrastructure support and technological planning.

 

The world of commercial real estate will see a massive impact upon the arrival of 5G. Whether or not the industry chooses to wholeheartedly embrace 5G is probably not a reasonable question. 5G is on the way, and CRE investors, builders, and planners must all take it upon themselves to prepare for the future of wireless technology. 

 

What is 5G?

What is 5G

5G is a next generation cellular network that provides extremely fast web service for mobile users. The “G” in 5G stands for “generation”, denoting that 5G is the fifth major leap in cellular service technology. Each new generation marks a technological advancement which is incompatible with previous technology. 5G will be fundamentally different than 4G on a technical level.

 

While 5G is not yet available commercially, major players in the telecom industry including T-Mobile, AT&T and Verizon have rolled out pseudo-beta tests for 5G. The jump to 5G may be a tumultuous one, with new infrastructure and widespread technological upgrades being required before launch. 

 

The practical differences between 5G and 4G capabilities stem from two key improvements: 

 

 

  • Extremely low latency: 5G drops latency (the delay while a network processes information) by 10 times or more compared to 4G wireless service. Latency can be as low as 1 millisecond. 
  • Vastly improved bandwidth: traffic capacity for 5G will improve by ~100 times compared to 4G. Network efficiency will improve by 100 times, and spectrum efficiency will improve by up to 3 times.

 

 

What does all of this mean? Lightning fast speed coupled with the horsepower to download, upload, stream, and everything in between to keep up with modern consumer and business demands. 

 

How CRE is Preparing for 5G

Commercial real estate will have to adopt 5G in one form or another. Whether that means planning construction around 5G hotspots or understanding how smart car technology will impact travel times, this new technology will be a disruptive force in the CRE industry. Here are some of the ways that CRE professionals can prepare for 5G in the coming years.

 

The Importance of Understanding 5G Fundamentals for CRE

The Importance of Understanding 5G Fundamentals for CRE

Before we take a look at any of the details of 5G preparation when it comes to commercial real estate, it is important for all industry professionals to have a baseline understanding of what 5G is and how it differs from your existing 4G tech. For example, many CRE investors, owners, and managers, punt all technology related issues to their IT staff. This makes perfect sense for the vast majority of situations. However, with new and disruptive technology, having an understanding of your current properties 5G preparedness and what improvements can and should be made is a great place to start. This begins with understanding how 5G works and how you can optimize your buildings to accommodate the technology.

 

Data Needs Will Continue to Increase Exponentially

Statistics on data usage on technological devices is staggering. Multiples quintillions of bytes of data are created each day from billions of users around the globe. Each year, the amount of data we collectively produce goes up exponentially as more users create more data with higher detail, density, and regularity. It is estimated that the world produced 18 zettabytes of data as of 2018. That number is expected to grow to 175 zettabytes per year by 2025. The ludicrous amount of data stored within a zettabyte is not the point here — the larger point is that data production and demand is expected to grow by ~1,000 percent in less than a decade. Building owners must take this into account when planning their IT infrastructure, staffing, and so forth.

 

5G Will Continue the Trend of Tenants Wanting an Improved IT Experience

5G Will Continue the Trend of Tenants Wanting an Improved IT Experience

Current renters, office space lessees, and hotel guests all expect a certain standard of connectivity from their spaces. As commercial real estate investors, owners, and managers, it is our responsibility to keep our eyes on the horizon for incoming technology. When 5G hits its stride a few years from now (estimates vary), individuals will expect their 5G compatible devices to work seamlessly at their workspaces, homes, or hotel rooms. By keeping up with 5G news and working with IT professionals, providing 5G connectivity can be seen as an opportunity for CRE investors rather than a potential weakness.

 

Going Forward

5G is not a matter of if, but when. Someday soon your phone will be able to stream high quality video with virtually zero load times, latency, or interruption. Smart cars and smart transportation systems will depend on this next generation technology to keep them connected. Commercial real estate investors will need to adjust to this new reality or be left behind by those who do. The real question will become how best to feasibly adopt 5G technology in a way that is cost efficient and maximally beneficial to tenants. As the technology continues to develop, the answer to this question will reveal itself more and more.

Construction Heating Up on I-70

The January/February BreakingGround will feature a look at how long the construction boom is going to last. (That’s a boom that fizzled a bit due to indecision in 2019.) During the research on the activity in Westmoreland and Washington County, it became clear that the logistics market was driving new development along the I-70 corridor.

In Westmoreland County, Al. Neyer has agreed to two major projects. First is a 150,000 spec warehouse in the Westmoreland Technology Park II, in Hempfield Township outside New Stanton. The larger project is the Commerce Crossings at I-70 in Sewickley Township. There, Al. Neyer intends to build two Class A industrial buildings totaling 480,000 square feet.

Mon Valley Alliance CEO Ben Brown talked about the heightened activity at MVA’s Alta Vista Business Park along I-70 in Fallowfield Township in Washington County. Below is an excerpt from the article:

“We should have five buildings rising in Alta Vista in 2020, which will essentially double the size of the park,” Brown says. “We sold a lot last year to Apex North America. They are working through their financing, which was just approved. That will be about 100,000 square foot facility. Earlier in 2019, in February, we sold lot 10B to Frontier Railroad Services, which is based in New Stanton. They will be a smaller facility for Alta Vista, about 20,000 square feet with a 2 acre yard. That site will be adjacent to the 35,000 square foot spec building that Mon Valley Alliance will put out to bid in February. Recently we sold a lot to Fratelli Partners. They are building a 50,000 square foot spec building.”

TBI Contracting is building the Frontier Railroad Systems building. New-Belle Construction will build the Fratelli Partners project.

Brown could not comment on two other projects on which the authority is reported to be performing due diligence. One is a 100,000 square foot office and light manufacturing building. The other is a 240,000 square foot industrial building that Suncap Property Group is reported to be developing. Suncap was one of the developers pursuing a similar building that was on the streets earlier in 2019 for Komatsu Mining Corp.

In other construction news, FNB made a big announcement that it will anchor the $450 million Civic Arena site in a 24-story office tower. The PJ Dick/Mascaro/Massaro joint venture will build the new development. Highmark selected Turner Construction for its $25 million lobby and exterior renovation at Fifth Avenue Place. The Woodland Hills School District has its $30 million 2nd phase out to bid due Jan. 23. PSU has short-listed Jendoco, PJ Dick, and Rycon on the $6 million Forker Lab Building at its Shenango Campus in Sharon. TEDCO Construction is building a $10 million private residence at Deep Creek Lake. PJ Dick has started construction on the $15 million Western Pennsylvania Surgery Center near the Center Township exit of I-376 in Beaver County.