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Coal Country, Alternative Energy Infrastructure, and Energy-Related Construction Projects

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“Coal country” can refer to any areas where coal has historically been a major business. For those of us from the American Northeast, coal country usually refers to the Appalachian areas of Pennsylvania, West Virginia, Ohio, Kentucky, reaching southwest all the way to Mississippi. This corridor has been a staple of American industry for well over a century. Yet modern energy infrastructure upgrades and a shifting view on fossil fuels have changed the landscape of coal country. 

 

With all of this in mind, today we will take a look at how coal country is modernizing, how alternative energy infrastructure is taking root across American, and examine current and future energy construction projects are impacting the commercial real estate market. 

 

Climate Change’s Impact on Coal Country

Climate Change’s Impact on Coal Country

Politics aside, there is irrefutable evidence that the side effects of coal mining and using coal as an energy source do have a material impact on our environment. According to the U.S. Energy Information Administration (a federal agency), coal emissions include sulfur dioxide, nitrogen oxides, particulates, carbon dioxide, mercury, heavy metals, fly ash, and bottom ash. It should also be stated that many modern efforts within the coal industry have been made to burn “clean” coal, which reduces, but does not eliminate, many of these emissions. 

 

As federal and state regulations tighten on coal and other fossil fuel emissions, where does that leave the businesses, employees, and economies of coal country? Thankfully, where there are alternatives to coal, there are also alternative economic opportunities. For example, New York State has recently doubled down on their commitment to clean energy, a decision that is “expected to create $3.2 billion in economic activity and more than 1,600 jobs.” 

 

While such a massive change may take longer to implement in states like Pennsylvania and Kentucky, the impact such a paradigm shift would have on energy infrastructure and energy jobs in coal country would be significant. The workforce that previously made their living in the coal industry might have opportunities in new, renewable energy sectors.

 

Renewable Energy Infrastructure and Commercial Real Estate

So far we have mostly been talking broad strokes and how coal transitioning into alternative fuel sources might affect the working men and women in coal country. From the perspective of commercial real estate, the shift from traditional fossil fuels to alternative fuel sources could be similarly significant. Let’s take a look at how shifting regulations and public perception on alternative fuel sources might influence the commercial real estate in Western PA and across the country in the years to come:

 

Energy infrastructure will need massive updates

Energy infrastructure will need massive updates

It is no great secret that America’s infrastructure is aging. Our energy sector is certainly no exception to this rule. Upgrading America’s energy infrastructure is an effort which is/will be necessary regardless of the debate between coal and alternative fuel sources. From a CRE angle, this means that infrastructures will either require massive updates, new construction, or most likely, both. It should also be noted that the energy sector is just one area of our infrastructure in need of updating. Government buildings, roads, bridges, schools, and many other government funded expenditures must compete for limited funding. 

 

Energy megaprojects likely to continue in 2020 and beyond

Oil, gas, coal, and alternative fuel technology have advanced to the point that facilities must adapt to keep up. Due to this and many other reasons, constructiondive.com states: “energy-related megaprojects are expected to make up a big part of the U.S. construction industry in coming years.” With a governmental commitment to revamping our infrastructure and an emphasis on adapting to new technologies, the CRE market for energy related construction and renovation efforts should remain robust for years to come.

 

Education and other resources are available for sustainable infrastructure

Education and other resources are available for sustainable infrastructure

A sign of things to come begins with many colleges, universities, and trade schools offering programs for students interested in working in the renewable energy construction fields. For example, The University of Washington offers a master’s program titled: “Construction, Energy, and Sustainable Infrastructure” through their Civil & Environmental Engineering school. Like many similar programs, it is available on-campus or through online courses. 

 

While a master’s program might not be for everyone, these types of opportunities will likely play a huge role in transitioning the workforce in American towns across coal country from their experiences in the coal industry to a new field working in renewable energy or sustainable infrastructure construction. A qualified workforce will then create greater opportunities to improve our nation’s infrastructure, greater opportunities for commercial real estate investors, and ultimately will benefit our region’s economy.

 

Going Forward

Again trying to avoid politics or any other contentious topics, it is very likely that a transition away from fossil fuels in favor of renewable energy sources is a matter of when, not if. For those of us living in coal country, this can be viewed as an opportunity to invest in our future. With the right planning, changing our local energy infrastructure can lead to economic growth, more jobs, and of course commercial real estate opportunities.

5 Reasons Why Hotel Investments Remain a Risky Bet Moving Forward

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Like many industries, the hospitality business has been steadily regaining its footing since the end of the Great Recession around 2009. Many recent estimates project a flattening or even reverting trend of hospitality growth in the US. There are also industry disruptors to contend with including Airbnb and other home sharing services. At the end of the day, the hospitality industry has endured — but investing in hotels has always been a risky bet. Today, we will review some of the biggest reasons why investing in commercial real estate within the hospitality market remains a high risk endeavour.

 

The Problems with Hotels as Investment Properties

1. Hotel/hospitality industry growth is expected to slow

Hotelhospitality industry growth is expected to slow

As mentioned in the introduction, the hotel business has had a very solid decade. All major metrics have risen steadily thanks to a resurging economy and an industry that learned many lessons after the Great Recession. The past few years have painted a slightly different picture. Growth has slowed, and the projected fallout is likely to result in lower occupancy rates, and lower nightly rates. 

 

CBRE points to “growth in local market supply, low inflation, competition from the sharing economy and the expansion of intermediaries in the sales process” as major reasons for this decline. It should also be noted that the stalling within the hospitality industry may be a sign of a looming recession (more on this below). 

 

2. Hotel investment can be prohibitively expensive

While the majority of commercial real estate construction projects tend to come with high price tags, hotel construction costs should not be overlooked. Hotel construction costs can vary dramatically from a few million to hundreds of millions of dollars. Fixr.com puts the median hotel construction bill at approximately $22.2 million not including land acquisition or demolition costs. For CRE veterans, that number may not ruffle many feathers. Yet in conjunction with some of the other risk factors we are discussing today, an investment of that size can be a tough sell to investors.

 

3. The hospitality business is seasonal and volatile

The hospitality business is seasonal and volatile

A well known risk of the hospitality business is the seasonal, volatile nature of occupancy and room rates. This is particularly true for “tourist” hotels in areas near ski resorts or beaches. For investors, the word “volatility” does not often inspire great faith. For an even more extreme example, consider a traditional hotel powerhouse: New York City. In the wake of the 9/11 tragedy, the usually rock solid hotel business in NYC plummeted. Vacancy rates were high and nightly rates were low. Experienced, well-equipped investors stayed pat and waited for the regional economy to bounce back. Yet this is a cautionary tale that investors should be prepared to take losses on the path towards a return on their investment.

 

As a brief counterpoint, investing in hotel REITs is an appealing alternative for investors who believe in the profitability of the hospitality industry without risking large dollar amounts on single hotels. REITs work in a similar fashion to mutual funds or ETFs, where investors can buy shares in commercial real estate collectives.  

 

4. Estimating ROI for hotels is more difficult than many other commercial real estate properties

Estimating returns on investment is not an exact science. Yet some investments are easier to project than others. For example, if a young couple buys a starter home for $100k in a neighborhood where most houses are selling for $200k, they can feel relatively confident that some renovations will net them a solid return when they sell. When it comes to investing $20 million for a hotel, that calculation is significantly more intricate. Factors which remain fluid include: occupancy rates, taxes, room rates, inflation, other hotels opening or closing in the area, staff turnover, overhead costs, and much more. 

 

5. Hotels are notoriously susceptible to recessions

Hotels are notoriously susceptible to recessions

Recessions are a part of any free economy. Our last true recession began in late 2007 and the effects lasted for three solid years. Many economics experts believe that our next recession will hit sometime between now and 2022. That being said, no matter when the next recession comes, it will almost certainly hit the hospitality industry hard. Travel is amongst the first “luxury” expenses that individuals and businesses cut when the economy slows. Much like seasonality and day-to-day volatility, hotel investors should plan to absorb recession hits with some regularity. 

 

Going Forward

Hotels can be profitable real estate investments when handled properly. There will always be a demand for lodging from economy motels to luxury suites. The hotel business has been growing at a steady pace since the economic crisis in the late 2000’s. Yet many commercial real estate investors believe that the risks outweigh the potential benefits due to slowing hospitality industry metrics, industry volatility, high upfront costs, difficult to calculate ROI, and going into a business that is susceptible to recessions. 

 

Going forward, it is likely that the hotel business will stall or even backtrack for a short period of time. Political and economic uncertainty may have a heavy influence on this volatile market. The key to investing in hotels is understanding the risks involved and planning accordingly. As with all commercial real estate ventures, there is certainly money to be made in hotels.

 

Short Term Rentals for Multi-Family Property Owners

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Short term rentals have gained popularity due to the rise of companies like AirBNB, Tripping.com, FlipKey, and others. Multi-family properties have long been a staple of residential real estate investment or larger commercial real estate groups where single buildings are built or transformed to accommodate two or more units. When this new real estate trend met a stalwart in the CRE world, the results have been mixed. As we will review today, short term rentals of multi-family properties do offer a lucrative opportunity, but one that comes with a number of practical, legal, and financial risks.

 

With all of this in mind, we will be discussing the potential benefits of multi-family real estate investment, the potential benefit of short term rental agreements, and the pros and cons of combining these two concepts into a real estate management/investment plan.

 

Potential Benefits of Multi-Family Real Estate Investment

Multi-family real estate investment is well-known for paying solid dividends for investors. This has remained true for decades, centuries, and even beyond. There are three primary reasons why multi-family real estate investment remains appealing in 2020 and beyond:

 

 

  • Multi-family properties are easier to finance. According to investopedia.com: “In most cases, if not all, the cost to acquire an apartment building will be significantly higher than the cost to purchase a single-family home as an investment. A one-unit rental could cost an investor as little as $30,000 while the cost of a multi-family building can go well up in the millions.” The benefit? Multi-family units generate far greater returns on those investments with more regular and stronger cash flow. This means that lenders are more willing to provide larger loans for superior terms for multi-family financing agreements.
  • Multi-family investment is more efficient. Those in the commercial real estate market will understand that purchasing and renting 50 individual homes is far less efficient than building a portfolio of 50 rental units in one or two multi-family apartment complexes. 
  • Managing multi-family properties is more practical and cost-effective. Continuing the idea of efficiency, paying a small staff to manage an apartment complex is far more viable than a staff responsible for properties spread out all over town.

 

 

Potential Benefits of Short Term Rental Arrangements

Moving on to the other side of the conversation, what are the potential benefits of short term rental agreements? Here are just a few of the reasons why property owners are opting for short term rentals as a money-making operation:

 

Short term rentals can charge higher rates. This is perhaps the most obvious advantage of short term rentals. While $100 a night for a short term rental might seem reasonable for many areas, $3,000 per month in those same areas almost certainly would not. Rates are adjusted depending on the length of the rental, but the property owner typically makes more money per day/week than they would on a longer term arrangement.

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Short term rentals offer greatly flexibility. The other main advantage of short term rentals is the flexibility offered to both property owners and renters. Consider the construction of a new apartment building. Certain sections/units might be done at odd intervals. Short term agreements allow the property owner to fill those units more quickly and on a more varied timetable. 

 

Pros and Cons of Short Term Rentals for Multi-Family Property Owners

The concepts of multi-family rentals and short term rentals are time-tested. When combined, the results can be quite different. With this in mind, here are some pros and cons of multi-family property owners offering their spaces as short term rentals:

 

 

  • Con: restrictions on short term rentals for multi-family properties: Cities like Boston have recently implemented strict guidelines on what properties can be leased for short term rentals. CRE properties may be exempt entirely depending on local and state law.
  • Pro: closing the gap of vacancies: as mentioned in the previous section, even the largest apartment complexes may go through times of unforeseen occupancies. Short term rentals can be used as either a long term strategy or a stop-gap solution to keep cash flow coming in.

 

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  • Con: short term rentals for multi-family properties can harm cash flow: on the other hand, one of the main benefits of multi-family properties (regular, reliable cash flow) is directly negated by short term rental arrangements.
  • Pro: short term rentals can always be turned into long term rentals: last but not least, a real estate investor can easily transition a short term rental space into a long term arrangement. In other words, there is minimal risk in trying a short term strategy for a short period of time.

 

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Going Forward

Short term rental agreements aren’t going anywhere any time soon. Whether or not these types of arrangements will take a major market share of apartment complexes and other multi-family home units remains to be seen. It seems likely that governmental restrictions on short term rental agreements will continue to become more restrictive in coming years, which might also impact the viability of short term rentals moving forward. For now, CRE investors would be wise to consider all of their options when leasing their properties.

College Work Keeps Coming

The impending crisis for higher education is a real thing. There is a demographic cliff coming in the next five years that presents an existential threat to colleges and universities that aren’t prepared or positioned properly to deal with the shrinking enrollment. This problem is a major reason why you’re seeing Robert Morris proactively reorganize its colleges and curriculum. The good news for Pittsburgh is that the major higher ed institutions in the region are already well-positioned; and there capital spending belies the coming slowdown for colleges.

Pitt has issued an RFP for architectural service for its $100 million Center for Human Performance, part of the $400 million Victory Heights athletic complex. Pitt is also interviewing four finalists for its $100 million One Bigelow Square project and will put the $70 chilled water plant out for CM proposals soon. PJ Dick has started construction on the $30 million renovation/expansion of the Graduate School of Industrial Administration at Carnegie Mellon, one of six major projects in preconstruction or underway at the campus. Penn State has issued a request for letters of interest for A/E firms for its $92 million Liberal Arts Research & Teaching Building.

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Massaro Corp. is putting the new $5 million, 21,000 square foot Best of Batch Clubhouse out to bid. Massaro was also successful on a $1.5 million AHN neuro renovation at St. Vincent Hospital in Erie. MBM Contracting has started construction on the $9 million GI Lab at Allegheny General Hospital. MM Marra Construction is underway with the $2 million expansion of Pusadee’s Garden in Lawrenceville.  Turner Construction was awarded the $6 million Braskem USA lab renovations at the Pittsburgh Technology Center and a $3 million fit-out for Facebook at CMU. 

Check out the March/April BreakingGround to see what big data will mean for construction.

Office Prospects Remain Strong

This morning’s Employment Situation Summary showed that the U.S. labor market remained unusually strong in November. While the headline of 155,000 jobs was off from what economists were expecting, the overall data on the employment situation was positive. Wages grew at a 3.1 percent rate, although workers saw a slight decrease in hours. Workforce participation and total unemployed was even with October’s data. Unemployment was steady at 3.7 percent. Taken in concert with the November Job Openings and Labor Turnover Survey, the number of open positions still exceeds those looking for work by one million.

Forecasts of job growth have been off by about 40,000 jobs each of the last four months – both overestimating and underestimating every other month – which highlights the difficulty of predicting monthly changes in the economy, especially late in the business cycle. Other indicators show the economy starting to slow, and the lack of available workers should bring the average monthly growth in jobs down to between 120,000 and 140,000 in 2019. In Pittsburgh, there are fewer signals of a slowing economy. The race to replace retiring Baby Boomers will hold back the total number of employed persons in Pittsburgh but the sources of job growth remain robust.

Construction projects continue to advance in anticipation of continued growth. Developers continue to be optimistic about the office market. Earlier this week Oxford Development brought forward its plans for the first building in 3 Crossings 2.0, the $13.5 million, 110,000 square foot Stacks at 3 Crossings. Rycon Construction is the general contractor. Innovation Center Associates broke ground on a 90,000 square foot Class A spec office at Innovation Ridge, which will be designed and built by Al. Neyer.

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The new spec office at RIDC Innovation Ridge. Rendering by Al. Neyer.

Massaro Corp. was selected for the $11.8 million Greater Pittsburgh Food Bank project. Allegheny Construction Group has started on the $7 million first phase of the grower/processor facility for Penn Health Group in Lemont Furnace. Sunrise Assisted Living has put a $7 million expansion of its McCandless facility out to bid. According to the PBX the bidders are Burchick, PJ Dick, Rycon, Sota and Sun Coast.

Keeping an Eye on the Big Projects

Bidding activity is very slow as the kids get back to school. The $100 million Section 55A2 piece of the Southern Beltway is out to bid, due Sept. 26. Pitt’s $40 million Salk Hall has been extended again to Sept. 11. The activity after Labor Day will be a good indicator of how the year finishes out. If the pipeline is any indication, there should be a lot to bid in October/November.

Regardless of what projects owners put out after Labor Day, there will be bidding for some of the big projects that have been tracking for the past year or so.

AHN’s new $260 million Wexford hospital broke ground last week and additional bid packages from Massaro/Gilbane should bid through the fall. Likewise, packages for bid on the $190 million UPMC South Hills and $350 million UPMCY Mercy projects will be out. PJ Dick is bidding the 320,000 square foot, $40 million-plus Bakery Square 3.0 office building. CCAC’s new $60 million classroom at the Allegheny campus is expected to be ready to bid in November. The 90,000 square foot building will be bid in five prime packages.

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The Airport Authority’s $1.1 billion Terminal Modernization Program continues to quietly progress. The authority will issue an RFP for construction management services for the project in September, with the expectation of signing a contract in Feb. 2019. An RFP for additional A/E services specific to the $250 million-plus parking garage/lots and ground transportation center will also go out in Sept.

Some Project Follow-up

The busy construction season is upon us. The activity is really showing up in the number of $5-20 million projects getting underway around the region. There are also a few projects above $50 million being locked up.

RB VetCo is the general contractor for the $8 million ambulatory care and security improvements at the Louis Johnson VAMC in Clarksburg. Fox Chapel Area Schools awarded contracts for the $17.8 million Kerr Elementary School that bid last week. Hudson Construction is the general trades contractor. Turner Construction was selected as CM for the $72 million Henning Building replacement at Penn State and the $220 million UPMC Immune Transplant and Therapy Center in Shadyside. Turner is also the construction manager for an $8 million tenant improvement for McKesson in Moon Township and the $7 million Allegheny General Hospital ED Expansion. General Services Administration awarded Mascaro Construction a contract for CM services on the $80 million federal courthouse addition and renovation in Toledo, OH. Rycon Construction has started work on the $4.3 million Miller Library renovation at Washington & Jefferson College. A. Martini & Co. held a groundbreaking for the $32 million Bay Village Assisted Living & Memory Care facility for IntegraCare in Annapolis, MD. The University of Pittsburgh interviewed PJ Dick and Turner for CM services on the $80 million Scaife Hall expansion.
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Groundbreaking was held June 6 for the Bay Village community in Annapolis being built by A. Martini & Co.