When the Halloween decorations start showing up at Giant Eagle, the contracting season is usually wrapping up for the year. This year, however, there are a number of big projects on the street (and in the pipeline) that the market is making up for the lower number of projects with a much bigger dollar volume.
Part of this is the result of the lag from announcement to construction for some of the big projects that have been in the news over the past year or so. Mascaro took bids recently on the 410,000 square foot, $350 million UPMC Mercy Vision & Rehabilitation Hospital and the 96,000 square foot TCS Building at CMU. PJ Dick has been bidding the 300,000 square foot Bakery Square 3 office building.
Rendering of the new UPMC Mercy Vision & Rehabilitation Hospital by HOK. Image from UPMC.
There’s also been a flurry of activity on large projects at the early stages of development. Hanna Langholz Wilson Ellis is marketing the 1,200-acre Zediker Station site, which sits along I-70 just east of I-79. It’s the largest development site in PA and may be the only one served by both CSX and Norfolk Southern. The Hazelwood Green project has been advertised for developer proposals. Over the long haul, that’s a project that could lead to more than $1 billion in construction. The developer currently on site, RIDC, has reportedly locked up autonomous vehicle company Aptiv for 70,000 square feet to occupy most of the 2nd building in its Mill 19 project. That would trigger the start of the third 90,000 +/- square foot final phase. In the Strip District, Facebook confirmed that it was leasing most or all of District 15, a 105,000 square foot building being developed by RDC on Smallman Street. According to a recent story by Tim Schooley in the Business Times Facebook’s lease is the tip of the iceberg. Schooley quotes JLL’s Dan Adamski estimating that there are 900,000 square feet of user requirements being shopped in the Strip now. That would make for another explosion of office projects. One of those may be JMC Holdings’s proposed adaptation of the Wholey cold storage building on 15th Street. The developer has engaged Desmone Architects to work on a 350,000 square foot re-use but is reported to be looking at hiring an architect to design a new 17-story, 500,000 square foot building on the site.
As intriguing as this tech demand is, it’s worth noting that most, if not all, of it is new in 2018. It was only last year that occupants like Apple and Argo AI were snatching up big chunks of 3 Crossings. When someone says that the emerging technology sector is growing faster than you can understand, this is what they mean.
To be clear from the outset, multi-family construction in Pittsburgh pales in comparison to most major cities (or even Columbus). Our boom of 3,227 units started in 2013 would be an average month in Houston or LA. But, compared to an average of 731 units annually for the previous 15 years, 2013 (and the last three years) have seen a surge in apartment construction.
Like in the rest of the country, lending and investing appetite for multi-family has cooled in Pittsburgh. Rents have stopped growing. Vacancies are rising. This is very normal following a time of increased construction and, in fact, the occupancy levels have been ticking up again in recent months. What is interesting is that senior living is picking up where apartment development dropped off. Since the start of 2016, almost $300 million in new senior living projects (representing about 900 units) are under construction.
Graziano has started construction on the 128-unit Residence at Whitehall project (pictured below) and Lecesse Construction is building the $30 million expansion of the Friendship Village campus in Upper St. Clair. Work is well underway on Continental’s project, The Waters in Marshall (plans are moving for one in Peters as well). Approvals have been received to start the $23 million Stonecrest of Pittsburgh in McCandless, which will be built by BRIDGES & Co.
Rendering by Graziano Development & Construction
In project news, CORE Realty is taking bids from subcontractors on the 174-unit apartment, The Chatham Center, a $20 million-plus conversion of eight floors of One Chatham Center. DGS selected Mascaro Construction, Renick Brothers, Shipley Plumbing and Westmoreland Electric as the best-value team for the $43.8 million Tippin Gym project at Clarion University. A. Martini & Co. landed the $3 million Fogo de Chao restaurant in the Oliver Building. Turner was selected for the $5 million Bio-Tech Vivarium renovation at Pitt’s Second Avenue research facility. UPMC is in talks with CMs for its major projects at South Fayette, Jefferson Hills and UPMC Mercy and Children’s campuses. Construction manager J. E. Dunn is in the process of qualifying contractors for the trade packages on Trinity Hospital’s $60 million new bed tower in Steubenville.
Thursday the Parking Authority chose the Davis Companies’ team for the development of the 9th and Penn corner Downtown. The plan is for 185 condos and commercial/retail integrated into a 900-plus-car garage. The Authority chose Davis over competing proposals from Millcraft and Oxford Development. The proposal from the latter apparently involved an mid-rise office tower similar to the one Oxford had proposed for 350 Fifth Avenue and involved a 250,000 square foot tenant that needed construction to start immediately.
Rendering by AE7 Architects
AHN short-listed the competitors for construction management of the $25 million cancer institute at AGH to Mascaro, Massaro, PJ Dick and Rycon. Mid-Atlantic Capital is taking final bids from P2 Contracting and Franjo Construction for the build-out of Stonehaven Brewing & Restaurant, a $4 million renovation of the former Spaghetti Warehouse. CDC is reporting that Dinsmore & Shohl picked A. Martini & Company for its $2 million tenant improvement at 6 PPG Place.
The bidding activity to kick off 2017 has not been spectacular but there are more projects going out than at this time last year. More importantly, there are more projects getting underway or being awarded than at the same time in 2016. Without any building permit research for 2017 yet there are already nearly $200 million in starts or contracts awarded, an indication that January’s volume will far exceed that of the past few years. The key to a strong 2017 will be that owners maintain this newfound level of economic confidence and keep the flow of projects coming. The stop-and-start nature of 2016 – particularly the lull in late spring and post-Labor Day – played havoc with contracting businesses last year.
The industrial sector of the market continues to shine. Construction has started on an 80,000 sq. ft. warehouse that Buncher is building in Findlay Industrial Park. Chapman Properties is starting work in its 74,000 sq. ft. flex building at 110 South Campus Drive at Chapman Westport. Al Neyer Inc. is close to a deal for a 200,000 sq. ft. warehouse in Jackson Township, north of Cranberry. Castlebrook Development is edging forward with plans for 900,000 sq. ft. of distribution near the I-376 and PA Turnpike interchange in Beaver County. Much of this spec activity is being driven by the expansion of retail fulfillment services (e.g. Amazon, Zappos, etc.) into the Pittsburgh market.
There is real momentum for healthcare construction also. UPMC has asked for architectural proposals for its proposed 200,000 sq. ft. ophthalmology building at the UPMC Mercy campus. The hospital has not announced its decision about its South Hills expansion but is reported to be looking at two separate developments, one near the site announced earlier in the Pleasant Hills/Route 51 corridor and one near its Children’s Hospital south satellite in South Fayette. Most of the hospital projects being contemplated will have little construction impact in 2017, although contracting in the fourth quarter should be robust.
Rendering of the $51.5 million, 221-room hotel proposed by the Rivers Casino. Image by Stantec Architecture Inc.
And the news in the Downtown office market continues to be good. Citizens Bank announced that it will be staying put in 525 William Penn Place and sees the location as a growth driver. The company’s 150,000 sq. ft. lease was seen as a source of anxiety by the commercial real estate community as recently as last year. Cleveland-based Stark Enterprises announced that it had agreed to buy the former Frank & Seder store building (AKA 441 Smithfield Street) from Oxford Development, thus ending the plans for a 28-story new office at 350 Fifth Ave. The transaction continues the trend of purchases in the Central Business District by companies from outside Pittsburgh.
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.
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.
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.
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.
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.
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.