Category Archives: Regional construction

WeWork and Pittsburgh’s Construction Economy

The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.

The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.

There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)

What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.

The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.

That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.

(Left-right) Rich Yohe, Bernie Kobosky and Scott Poillock at the MBA’s golf outing.

In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.

RACP Grants Help Fill Pittsburgh’s Construction Pipeline

Let’s start with some project news first: There was a groundbreaking held last week for Light of Life’s $5 million new facility on the North Side. Sota Construction is the contractor. Sota is also the CM for the $3 million UPMC Graham Field project in Wilkinsburg. H H & H started construction on the new $3.7 million Sheetz at Bursca Retail in South Fayette. Massaro Corp. is starting construction on $5 million Best of the Batch facility and $7 million bathroom renovation program at Pitt-Johnstown. A. Martini & Co. was awarded the $2.8 million Ernst & Young renovation. Rycon Construction started work on the new 19,000 square foot office TI for Microsoft and a $2.2 million pharmacy renovationat AHN Wexford Wellness Pavilion. Developers EPC Real Estate Group announced the 251-unit, $50 million Waterfront Apartments. EPC has been working with Continental Building Co. on the project. Continental is also building a 23,000 square foot retail center in Uniontown, called Beesontown Shops, which Herky Pollock and partners are developing.

Pennsylvania’s DCED recently announced the projects which received grants under the Redevelopment Assistance Capital Program (RACP). RACP grants are given to help bridge the gap in funding a difficult project or help an owner that will struggle with funding of a major capital need that serves the public good. Often these are commercial real estate deals or even industrial projects where the justification is the job creation that follows. Some are just public benefit projects, like the awarding of $1 million to the URA to do traffic improvements at the Highmark Riverhounds Stadium at Station Square, part of an $8 million expansion the Riverhounds want to undertake. Some of the projects that received awards that might be of interest:

 

 

The awards included millions for projects that are already underway or received other grants in previous years. These include the Terminal Building in the Strip and Hazelwood Green, aomong others.  You can view the lists of submissions and awards.

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.

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.

Big Pittsburgh Industrial Construction News

This morning’s headlines seemed like a blast from the past. US Steel announced it was investing more $900 million in a new continuous caster at the Edgar Thompson Works in Braddock and $150 million for a co-generation plant at the Clairton Works. The project is the first major project at a Pittsburgh-area steel-making facility by US Steel in decades.

Another multi-billion project is moving forward on the Ohio River. Bids have gone out for a site work package at PTT’s proposed $6 billion ethane cracker in Dilles Bottom, OH. No final investment decision has been announced for the plant and the project is without an EPC contractor, but taking bids on site work is a major step towards construction.

Image courtesy RDC Design + Build

Braddock is also going to be home for a new industrial facility of sorts for Robotany. RDC Design + Build started construction on a 58,000 square foot warehouse for the high-tech vertical farming company that grows and sells produce under the Sky Farms brand.

Pitt issued an RFP for CM services for its new Human Performance Center, Chilled Water Plant and Parking Garage to PJ Dick, Massaro/Gilbane, Mosites, Turner, Walsh and Whiting-Turner. The proposal covers three elements of Pitt’s ambitious new master plan. The chilled water plant and adjacent garage are integral to Pitt’s expansion, making this project more likely to start in 2019. The cost of the combined projects approaches or exceeds $200 million.

In other project news, UPMC took proposals from PJ Dick, Mascaro, Rycon and Turner for the $40-45 million UPMC Mercy Hospital 3rd Floor renovation last week. AIMS Construction was awarded the contract for the $4.6 million Palumbo Science Center renovation at LaRoche. A. Martini & Company was selected as CM for the $1.3 million renovation to 947 Penn Avenue by the Pittsburgh Cultural Trust.

3 Crossings Phase 2 (And other office news)

Oxford Development recently announced that it was going to move its office later this year to 25,000 square feet in the Riverfront West Building at 3 Crossings, almost coincidental to the news that Honeywell was taking 25,000 square feet of the former Bosch leasehold at 2555 Smallman Street. Today, Oxford made the first of what may be several big announcements on the second phase of 3 Crossings, confirming that Smith & Nephew was taking 45,000 square feet of the Stacks at 3 Crossings building. The $16.5 million Stacks core and shell is under construction by Rycon.

UPDATED INDUSTRY STREET VIEW-Revised (1)

Rendering by Perkins Eastman.

Oxford also released more information about the full next phase of 3 Crossings, which will be located along Smallman Street and AVRR, between 28th and 29th Street. A design/build team of Mascaro Construction and Indovina Associates will be delivering a $16 million multi-modal center with more than 600 parking spaces. Including the two-building Stacks project (which is a rebuilding of the Packaging Corporation of America’s former buildings), 3 Crossings Phase 2 will have six office buildings totaling 600,000 square feet. Rycon Construction will also be building the 178,000 square foot 2 Hopper Place office building, which is being designed by WTW Architects for construction later this year.

Steve Guy, Oxford’s CEO, said that the heightened demand from users had surprised them, even though Oxford expected the project to move quickly. Guy suggested that another two or three office buildings, plus the multi-modal center, could be under construction by early 2020.

3 Crossings was developed in anticipation of the growth of the AI/robotics/autonomous vehicle industries in Pittsburgh and the landing of Petuum, Argo AI and Bosch proved that concept correct. The Smith & Nephew lease shows that trend still has legs.

Oxford’s announcement came 24 hours after Carlow University and Elmhurst Group broke the news that they had come to an agreement on the development of a 225,000 square foot office building in Oakland on Fifth Avenue at Craft Place. Elmhurst’s Bill Hunt explained that the rapid expansion of technology and medical innovation in Oakland drove the decision to proceed with the building, which will be directly across Fifth Avenue from the 10-story Innovation Research Tower being developed by Walnut Capital.

In construction news, F. J. Busse was awarded the $3.5 million renovation of the 20th floor of the Federated Investors Tower. A. Martini & Co. has started work on the $12 million Buchanan Ingersoll TI at the Union Trust Building. Wildwood Country Club chose the team of R. A. Glancy and HHSDR Architects & Engineers to design/build its $4 million expansion/renovation. Franjo Construction broke ground on the $2.5 million new Jaguar dealership for A & L Motors in Monroeville. MBM Contracting started work on the $3 million-plus renovation of the Asbury Heights patient wing in Mt. Lebanon.