August, 2019 - Sachse Construction - Page 2

Renewables Creating Significant Savings for Commercial and Public Facilities

The U.S. Department of Energy says that facilities that install renewable energy systems are reaping considerable savings.

Examples include:

• Retailer Best Buy installed solar panels and upgraded energy conservation to realize a cost savings of 25% over the course of four years at a site in Richfield, Minnesota.

• A rooftop solar unit at a Super 8 motel in Ukiah, California provides 60% of the electric power and 100% of the hotel’s hot water production for guestrooms and the hot tub.

• Discovery Elementary School, in Arlington County, Virginia, reports that the 97,588 sf facility operates at a 66% lower energy use intensity (EUI) compared to the district’s average.

• Suncoast Credit Union in Bushnell, Florida, upgraded its service center with solar electric systems. After its first year, the facility delivered more than 31 megawatt-hours (MWh) to the grid and used 25 MWh to become a zero-energy building.

The payback on renewables for public and institutional clients is usually 15 years or shorter. In the private sector, typical paybacks are five to seven years.

Slower Speed Limits in Urban Areas Offer Multiple Benefits

The most obvious benefit to slower speed limits in cities is improved safety. Fewer crashes and injuries including collisions with bicycles can be expected.

But there are other several other possible gains that can be realized by forcing drivers to slow down on congested city streets, according to a recent CityLab article. Ironically, one might be to enable people to get around faster.

If separated but narrower travel lanes with 15 mph speed limits that prioritize non-cars are created, more people might opt for electric scooters and bicycles, which can outpace cars in the most congested streets. (The average car in midtown Manhattan creeps along at just 4.7 mph.)

Slower speeds would also make it safer and more practical to deploy autonomous vehicles. Several U.S. cities have reduced speed limits and New York has revived its program to enforce speed limits by cameras in school zones.

Pop-up Parks Revitalize Empty Lots

Pop-up parks that provide instant open areas for public use and programming can revitalize under-utilized spaces and add vibrancy to neighborhoods.

Some of these spaces may have originally been used as parking lots or become abandoned after a fire destroyed a structure on the property.

These repurposed public spaces can accelerate real estate development, spur more vitality in emerging neighborhoods, support businesses, and foster safe pedestrian zones.

Some developers have used these spaces to their advantage. For example, a 10,000-sf pop-up park in The Boro in Tysons, Va., attracted neighbors to learn more about The Boro and Tyson’s rapid growth.

Regular visitors to the park include nearby employees, children’s day care centers, and dogs. The park has hosted farmers markets, yoga, and social events.

ABC Provides Mid-Year Economic Outlook for Nonresidential Construction

More than 10 years after the end of the most severe financial crisis since the Great Depression, the U.S. economy is again making history by continuing its longest-ever expansion. Nevertheless, emerging weakness in business investment has been hinting at softening outlays, giving commercial and industrial construction contractors cause for concern, according to a mid-year economic outlook by Anirban Basu, chief economist of Associated Builders and Contractors.

“Given that every expansion in U.S. history has ended in recession, leaders of construction firms are rightly wondering when the record-setting expansion will end,” said Basu. “Looking at conditions on the ground, it likely won’t be in 2019, but 2020 could be problematic for the broader economy and 2021 for a significant number of contractors.”

Basu cites numerous vulnerabilities that could trigger a recession in 2020, including:

  • Trade wars
  • Softening corporate earnings
  • Slowing job growth
  • Elevated levels of household, corporate and government debt
  • Election 2020

But there are plenty of reasons to remain optimistic. “For the most part, the economy has held up better than anticipated,” said Basu. “During the first quarter of 2019, gross domestic product expanded at a smart 3.1% annualized rate. The U.S. Bureau of Economic Analysis’ initial estimate suggests that the economy slowed to 2.1% growth during the second quarter, but that neatly beat economists’ expectation that that growth had fallen below 2%.”

“The economy could continue to prove resilient,” says Basu. “To date, the economy has navigated ongoing trade disputes and associated tariffs with aplomb. It has also withstood serial interest rate hikes, the longest federal government shutdown in history, extreme weather, shifting immigration policy, ongoing labor market shortages and a lengthy investigation regarding foreign influence in U.S. elections.”

Optimism High Amid Uncertainty

The Associated Builders and Contractors (ABC) released its June 2019 Contractor Confidence Index (CCI) report last week and found that the level of confidence among the nonresidential contractors it surveyed has slipped slightly from May to June, but most construction companies polled still remain optimistic about the future.

The CCI tracks three metrics — expectations in sales; profits; and staffing for the next six months. The score for anticipated sales fell from 70 to 65.3, while the CCI for profit margins and staffing levels decreased from 62.8 to 61.3 and from 66.8 to 64.6, respectively. Any score above 50 means growth. Still, 67% of contractors surveyed predicted that sales would increase during the next six months, 54% thought profits would and 59% thought the same of staffing levels.

The U.S. trade war with China, geopolitical concerns, growing U.S. debt and some uncertain economic metrics have given some players reason to believe that a recession is in store for the U.S. within the next two years. However, Anirban Basu, the ABC’s chief economist, said that the continuing level of confidence among contractors, particularly when it comes to projected profits, is a sign that the nonresidential construction industry will continue to help drive growth.

The ABC’s confidence report is in line with other such surveys, like USG Corp.’s and the U.S. Chamber of Commerce’s second-quarter Commercial Construction Index. Those surveys revealed that contractor project backlogs were at record highs and that a healthy confidence had taken over contractors’ attitudes about their ability to win new work in the coming year.

So, are contractors around the country experiencing this level of confidence as well? Pretty much.

Sandra Roche, vice president and general counsel with commercial contractor Roche Constructors Inc., which has offices in Colorado, Nevada and Indiana, said the company is as busy as ever and that there are no signs of a slowdown at any of its locations. As far as the trade war with China, it’s not even a point of discussion and hasn’t impacted any of Roche’s projects.

Momentum is also high at Branch Builds, based in Herndon, Virginia. The general contractor, which also has offices throughout Virginia and in Charlotte, North Carolina, counts higher education, K-12 and multifamily projects in its core portfolio but performs other commercial work as well. George Nash, business unit leader in the company’s Herndon office, estimated that the company will see $400 million in new contracts in 2019. And the opportunities continue to flow, he said, with no signs of slowing.

He has noticed, though, a slight shift in bid trends, at least as far as the number of general contractors is concerned. Starting about six months ago, Nash said, jobs that used to see two or three GCs in competition with each other now see six or seven.

“Interest level on the general contractor side has picked up,” he said, “but we’re not seeing more interest from [subcontractors].”

Nash said this is a direct result of the persistent shortage of skilled labor. Some projects are having trouble getting started because those subs are struggling to find enough workers to staff them. This dearth of qualified labor, he said, is Branch’s primary concern in the coming year or so.

Nash said tariffs haven’t had much of an impact on Branch’s business directly but have created some instability for its trade partners, whose material purchases are affected by changes — anticipated or actual — in pricing.  Two of its major steel manufacturers, though, have dropped their prices by $60 per ton, he said, so it leaves some wondering how much of the material cost increases are reality or opportunity.

Even though business opportunities have not slowed down at New South Construction in Atlanta, CFO Dan Smith said the company is anticipating a possible softening of the market — and a possible tightening of construction lending — in 2020, but this would depend on how political and financial events play out. The trade war has not really impacted the company either.

“We do, however, try to make clients aware of materials and products that could specifically impact their project’s timeline and budget,” he said.

Finfrock in Apopka, Florida, near Orlando, is in the enviable position of not having to bid on work, but instead just cultivating relationships with large clients at the design phase and then negotiating contracts for its prestressed concrete and precast construction building systems.

“As a result,” said William Finfrock, company president, “we have developed the healthiest pipeline in our company’s 75-year history.”

However, he said, Finfrock has been impacted by higher, tariff-driven material prices, which must be passed on to the customer.

“My biggest concern for the next 12 to 18 months, Finfrock said, “is getting this trade war issue resolved so we can get back on track as an industry without further disruption. “Otherwise, I feel the economy is generally healthy,” he said.

 

Construction Employment Increases in 40 States, D.C. from July 2018 to July 2019

Forty states added construction jobs between July 2018 and July 2019, while construction employment increased in 25 states from June to July, according to an analysis by the Associated General Contractors of America of Labor Department data. Association officials said the new jobs totals indicate there is a need for new federal investments in career and technical education programs, along with immigration reform.

“Demand for projects, and the workers to build them, shows no sign of letting up in most states, and contractors continue to increase headcount when they can find qualified workers,” stated chief economist Ken Simonson. “But job openings at the end of June were the highest ever for June, suggesting that contractors are struggling to find all the workers they need in many states.”

Texas added the most construction jobs over the year (48,400 jobs, 6.6%), followed by California (37,100 jobs, 4.3%), Florida (21,300 jobs, 3.9%) and Arizona (17,400 jobs, 11%). Wyoming added the highest percentage of construction jobs over 12 months (13.1%, 2,600 jobs), followed by West Virginia (11.7%, 5,000 jobs), North Dakota (11.6%, 3,000 jobs) and Arizona. Construction employment reached a record high in Nebraska, Oklahoma, Oregon, Texas, Utah and Washington.

Ten states shed construction jobs over the latest 12 months. Louisiana lost the largest number and percentage of construction jobs (-12,100 jobs, -7.9%). Other states with large job losses include Ohio (-2,900 jobs, -1.3%), South Carolina (-2,800 jobs, -2.7%) and Massachusetts (-2,500 jobs, -1.6%). Other states with a substantial percentage decline include Vermont (-3.3%, -500 jobs), South Carolina, Connecticut (-2.6%, -1,500 jobs) and Massachusetts.

Texas added the most construction jobs between June and July (6,300 jobs, 0.8%), followed by Utah (2,700 jobs, 2.5%), Washington (1,900 jobs, 0.9%), Virginia (1,700 jobs, 0.8%) and Minnesota (1,600 jobs, 1.2%). Utah added the highest percentage of construction jobs for the month, followed by Montana (2.1%, 600 jobs), Minnesota and North Dakota (1.1%, 300 jobs).

Construction employment decreased from June to July in 22 states and was flat in Kentucky, Idaho, D.C., and Vermont. Ohio lost the largest number of construction jobs for the month (-1,900 jobs, -0.9%), followed by South Carolina (-1,500 jobs, -1.5%), Florida (-1,400 jobs, -0.2%), Missouri (-1,400 jobs, -1.1%) and Illinois (-1,100 jobs, -0.9%). Other states with a substantial percentage decline for the month included Alaska (-1.8%, -300 jobs), South Carolina, West Virginia (-1.40%, -700 jobs) and Missouri.

Association officials said that with overall unemployment rates at all-time lows in many states, there is a pressing need for Congress and the Trump administration to adequately fund career and technical education programs and enact immigration reforms. These measures would enable schools to more easily establish construction-focused programs. In addition, immigration reform is needed that would allow more people with construction skills to enter the country legally.

“Contractors would gladly add even more high-paying middle-class jobs if they could only find more qualified workers to bring on board,” said Stephen E. Sandherr, the association’s CEO. “The federal government should do more to build awareness of the opportunities and make it easier to prepare and attract more people into construction. Such steps will provide significant benefits to the broader economy.”

Economic Momentum, Monetary Policy Sustain Commercial Real Estate Pricing in U.S.

According to global property advisor CBRE, an advantageous balance of moderate growth, low inflation, and falling long-term interest rates in the U.S. kept capitalization rates for commercial real estate assets broadly stable in the first half of 2019.

The CBRE North America Cap Rate Survey found that multifamily and industrial cap rates tightened the most in H1 2019, while office, retail and hotel cap rate movements were more modest. Continued cap rate stability is expected in the remainder of 2019, with the hotel sector experiencing the most mixed sentiment.

“While the fortunes of the global economy should be watched closely due to increased tensions over trade with China, Persian Gulf hostilities, and the prospect of a hard Brexit, there seems to be sufficient economic momentum and monetary policy flexibility in the U.S. to sustain real estate prices. While concerns are heightened, we have seen no evidence of investors ‘hitting the pause button’; indeed, the appetite for real estate from debt and equity capital remains very strong,” said Richard Barkham, Global Chief Economist, CBRE.

Office cap rates for stabilized CBD properties decreased slightly to 6.67% in H1 2019, with Class AA properties in Tier II markets registering the largest decrease (-12 bps), likely reflecting a shift by investors into high-quality properties in secondary markets. Stabilized suburban office cap rates remained at 7.91%, supported by improving market fundamentals, but spreads to CBD cap rates are near their highest levels this cycle.

“Office cap rates should remain stable for both CBD and suburban properties over the next six months, supported by strong tenant demand for space, favorable investment sentiment, and expectations for stable or decreasing interest rates,” said Chris Ludeman, CBRE’s Global President of Capital Markets.

Industrial and logistics cap rates and returns on cost remained at historically low levels in H1 2019. The average rate for acquisitions of stabilized industrial assets for all tiers and classes fell by 5 bps to 6.27%. Class A cap rates declined 5 bps to 5.00%, the lowest level since CBRE’s Cap Rate Survey began in 2009. Although cap rate decreases by class were modest on average, they confirm investor preferences for Class B assets in Tier II and Tier III markets where the largest cap rate compression occurred.

“Strong market fundamentals–low vacancy, robust e-commerce driven tenant demand and rent growth–continue to attract investors to industrial assets, increasing values and leading to sustained cap rate compression. Due to high competition for core properties, investors remain interested in assets with a higher risk profile. Investors are looking beyond year-one cap rates and to the increasing returns provided by predictable rental rate growth throughout the life of the deal,” said Jack Fraker, CBRE’s Global Head of Industrial & Logistics.

Retail cap rates for stabilized grocery-anchored neighborhood/community centers remained stable at 7.48% in H1 2019, confirming firm pricing trends and strong investor interest. Big-box and other retailer closures continued to influence the perceived risk profile for power centers, with average cap rates increasing by 6 bps to 8.45%. High-street cap rates were relatively stable and remained the lowest of all retail property categories at 4.76%. Demand for high-quality retail assets was strong, with Class A product in all three retail sectors the lowest, ranging from 4.76% to 7.16%. Expectations for cap rate movement across retail segments is relatively uniform over the next six months

“High street retail continues to be attractive due to demographic trends as the U.S. population migrates towards urban areas, both downtown and suburban, and as retailers focus on quality over quantity, preferring to locate in densely trafficked locations with higher incomes. All retail segments are benefiting from the very low rates of new construction, which is raising demand at core properties in prime locations. From a pricing standpoint, there is a growing gap between the perceived “haves” and the “have-nots”; this creates opportunities for retail assets that are underpriced relative to their current yield and because of the returns that can be generated from repositioning, remerchandising, and/or redeveloping,” said Melina Cordero, leader of CBRE’s retail capital markets business for the Americas

Multifamily cap rates and expected returns on cost remained at historically low levels in H1 2019. Cap rates for urban infill stabilized assets averaged 5.20% and expected returns on cost for infill value-add acquisitions averaged 5.95%. Suburban stabilized assets priced at 5.49% on average, while expected returns on costs averaged 6.23%.

“Multifamily cap rates are at historically low levels, confirming positive pricing trends and sustained investor interest in the sector, and a willingness to acquire assets at low cap rates. Cap rate spreads between Class A and Class B, and between Tier I and Tier II markets remained tight, indicating that many investors are finding better opportunities in lower-quality assets and in secondary and tertiary markets,” said Brian McAuliffe, leader of CBRE’s multifamily capital markets business for the Americas.

Hotel cap rates remained stable in H1 2019 at 8.28%. The most dramatic increases occurred among full-service and economy segments in Tier I cities. Cap rates in Tier I suburban locations for full-service hotels increased by 20 bps to 8.02%. Every market segment in Tier III cities recorded declines in hotel cap rates, led by a 10 bps drop in the economy segment.

“Late cycle operating fundamentals continue to place downward pressure on investment activity which is down almost 50% from 2018; however, cap rate volatility between markets should not be viewed as indicative as it is being driven by changes in sales composition rather than actual movements in capitalization rates,” said Kevin Mallory, Global Head of CBRE Hotels.

Target on Track to Remodel 1,000 Stores by End of 2020

Target Corp. has passed two big store milestones.

The discounter recently cut the ribbon on its 100th small-format store, and also surpassed its 500th store remodel. And it’s not done yet: Target said it’s on track to remodel 1,000 stores by the end of 2020.

It also plans to keep expanding its small-format stores. After opening 30 small-format locations in 2017, 2018 and 2019, Target said it plans to open nearly 30 more each year for the foreseeable future.

Target’s store initiative is part of a $7 billion investment plan the chain announced in 2017.

“In 2017, we made a big bet on putting our stores at the center of how we serve our guests,” says Target COO John Mulligan. “Fast forward to today, and our investments in small formats and remodels have allowed us to reach more guests than ever before with an easy and inspiring shopping experience, while offering industry-leading same-day services like order pickup and drive up around the country.”

Analyst Neil Saunders, managing director of GlobalData Retail, commented that while many in the investment community were skeptical when Target announced its store investment plan, Target “rightly understood the importance of the store to the health of its whole operation.” He said that this is why store remodels have been such a vital component of Target’s success.

“Our own data show that refurbishment has a positive impact on visit frequency, conversion and average ticket – and that this outpacing effect does not disappear after the first year,” Saunders said. “This is one of the reasons why we are confident about Target’s future performance: The combined contribution from already completed remodels and new remodels coming on stream should provide a nice upside to the revenue numbers.”

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