MARKET HIGHLIGHT, APRIL 2006
PITTSBURGH MARKET HIGHLIGHT
Pittsburgh Industrial Market
Pittsburgh’s industrial real estate market, which consists of approximately 100 million square feet of warehouse, flex and industrial space, is showing encouraging growth and moving towards expansion. With positive absorption and low availability in the Pittsburgh region, the industrial market is on an upswing. Investor and tenant demand for industrial property continues to be very positive. The sale/leaseback market and built-to-suit market remain strong. These projects involve a lower risk factor for a developer/investor. Rising construction costs and a diminishing supply of prime, developable land will have a dramatic effect on property values. Cap rates seem to push lower every day for investment grade properties, and we should see a pricing peak in 2006 with values leveling off. The Pittsburgh region will breed and demand creative real estate solutions as opportunities present themselves; the day and age of meeting consumer expectations is critical and is here to stay.
Expanding infrastructure funded by public money in the Airport Corridor, a major new highway within close proximity to the Pittsburgh International Airport, has encouraged developers to start revisiting and building in the area. With hopes of new jobs and greater tax revenue, developing the thousands of acres of land that surrounds the Pittsburgh International Airport has been at the top of the priority list for the Allegheny County Airport Authority.
One new development that has made headlines is the Clinton Commerce Park. The first of its kind in Findlay, Pennsylvania, Clinton Commerce Park is being developed by a local developer, Buncher Company, on land owned by the Allegheny County Airport Authority. One hundred acres will hold approximately 1.5 million square feet of building space. Construction has started on the first speculative building, a 200,000-square-foot warehouse.
In the same area, Chapman Properties recently purchased land for a 300-acre development to be named Chapman Commerce Center. The 3 million-square-foot business park will include industrial, flex and office space. Construction is expected to start in 2007 after water and sewage lines have been placed.
It has been difficult for tenants who are looking for large blocks of quality warehouse space with 30-foot clear ceiling heights to fill their needs. There is limited space readily available for tenants with these requirements. This has been the main argument to develop the land around the airport into industrial, warehouse and distribution centers. With the ideal location Clinton Commerce Center and Chapman Commerce Center offer (off of Route 60), you can be in either West Virginia or Ohio in 30 minutes.
George Moving and Storage took residence in Beaver County early this year in two new buildings in Tri-County Commerce Park. The 170,000-plus-square-foot deal was one of the largest industrial leases in the Pittsburgh area. To accommodate its rapid expansion and acquisition of Galyan’s Trading Company, Dick’s Sporting Goods, the country’s largest sporting goods retailer, added 214,000 square feet to its 388,000-square-foot warehouse in Smithton, Pennsylvania. Along with that development, Dick’s constructed a new headquarters office building in the Pittsburgh’s Western office submarket.
The Interstate 79 corridor, north and south, continues to tighten at a steady pace. With vacancy down and absorption remaining positive, the Pittsburgh industrial market should continue down a steady path as long as the speculative construction that is being built will be filled with new and expanding tenants. These variables are impossible to predict.
— Kristyn L. Huber, director of Research & Marketing Communications with GVA Oxford.
Pittsburgh Multifamily Market
Pittsburgh is in the recovery phase of the multifamily market cycle. Decreasing vacancies, low new construction, moderate absorption and low to moderate employment growth define the market.
Without a major growth sector able to attract new business, the driving force for the recovery has been the recent increase in historically low mortgage rates. Rising mortgage interest rates have priced some potential first-time buyers out of the single-family home market and forced people towards apartment living. If permanent mortgage rates and cap rate requirements rise notably as the year progresses, property values potentially could decline. However, better incomes from rising rents and declining vacancies should cushion the downward pressure on property values. In addition, we should once again have plenty of capital chasing apartment deals.
According to the results of a recent survey conducted by CB Richard Ellis/Pittsburgh, the overall occupancy rate for 14,326 rental units in the Greater Pittsburgh market in 2005 was 94.52 percent, representing a 1.7 percent increase over 2004. The strongest submarkets continue to be the city, the south hills and the eastern suburbs.
Net absorption, which represents the net change in occupied units, resulted in 885 units being absorbed in 2005. Reis has projected a net absorption of 557 units for the upcoming year in its apartment market report.
Along with occupancy rates, rental rates also increased in 2005. The average asking rental rate reported by Reis was $768 per month, which is a 1.9 percent increase over last year. The average effective rental rate was $722 per month, which represents a 2.4 percent increase over 2004. Experts predict that markets like Pittsburgh that are in the recovery phase most likely will see rents grow about 3 percent or 4 percent in 2006.
New construction for apartment communities continues to slow. The census bureau reported 689 building permits issued for apartment buildings in 2005. This is a 19 percent decrease over last year. Most of the new residential development projects are located in the city. The Encore at 7th, a 16-story, 151-unit luxury apartment community located on Seventh Street developed by Lincoln Property Company, begins lease up this spring. The redevelopment of the former Armstrong Cork Plant into 292 luxury apartments in the Strip District also should be ready for leasing in 2006. In Shadyside, 54 units are planned above a new 70,000-square-foot Giant Eagle located on the corner of Negley and Centre. Without population growth and an influx of new business, growth in the development of large apartment communities should continue to slow over the next 5 years.
Trading volume in 2005 totaled $68.06 million, which represents a 43.2 percent decrease from 2004. The largest reported transaction was the sale of the Alder Ridge Apartments, a 234-unit community in the North Hills, Pennsylvania, which traded for $13.4 million. Integrity Realty Resources, Inc. reported the average going-in historical cap rate for urban multifamily and suburban multifamily properties in the Pittsburgh market to be 6.5 percent and 7.0 percent, respectively.
— Cynthia Kamin, senior vice president with CB Richard Ellis | Pittsburgh-Investment Properties Group
Pittsburgh Office Market
Pittsburgh’s Central Business District (CBD) remained fairly stable in 2005 with an overall availability of 18.2 percent to end the year. Rents also stayed secure at $20.21 per square foot. The Class A CBD submarket saw negative absorption for the quarter as well as year-to-date. Mellon Bank is currently in the midst of restructuring their floors in One Mellon Center, resulting in some open space becoming available that helped sway absorption to the negative side. The overall availability for the Class A CBD submarket stands at 19.6 percent with an average asking weighted rent of $23.24 per square foot.
For the first time in years, Pittsburgh’s CBD will see a new high-rise office building being built. In December, PNC announced its plans to build Three PNC Plaza. The project will function as a multi-use building. Over the past 20 years, PNC has purchased properties along the Fifth and Forbes corridor, and it will demolish 13 of those properties along Fifth Avenue between Wood and Liberty for this project, which is expected to cost approximately $170 million. The building will be between 23 and 25 stories, will contain a 150-room hotel, 32 top-floor residential condominiums and approximately 360,000 square feet of office space. Reed Smith LLP, currently headquartered in the James H. Reed building occupying approximately 161,000 square feet and leases additional office space in the Federated Building, will occupy about half of the office space in the new Three PNC Plaza.
American Eagle Outfitters is making the move from the suburbs to the trendy SouthSide Works. A long-time tenant of the RIDC Thorn Hill Industrial Park, north of the city of Pittsburgh, American Eagle Outfitters has found itself outgrowing its current location. After a lengthy search for a compatible setting, the SouthSide Works, a trendy new development in the Greater CBD of Pittsburgh, was determined to be the best place for the clothing stores’ headquarters location. Along with a retail store in the same development, the company will take the entire Quantum II Building, consisting of 186,000 square feet of office space, and will take additional space in a second building, ultimately occupying nearly 300,000 square feet of office space on the South Side. The company will continue its warehouse distribution facility in the RIDC Thorn Hill, and there are plans to construct a 45,000-square-foot call center space in the park as well.
The overall suburban market performed well in 2005. With an overall positive absorption for the year end and a slight drop in availability, the Pittsburgh suburbs outshined the CBD and Greater CBD. The overall suburban market showed 19.9 percent available at year end and a positive absorption of 371,000 square feet compared to the same quarter in 2004, when the suburban market showed an availability of 21.7 percent.
With the year end trends in availability dropping ever so slightly, the expectation for the market to stabilize seems to be developing into a reality. The CBD will see more interest in the upcoming months due to the newly announced office and residential developments. With the ground breaking at Tech 21 Research Park in the Northern submarket, speculative, build-to-suit and owner-occupied construction will start to rise again, therefore making the availability in the Northern and Western submarkets rise even further.
— Kristyn L. Huber, director of Research & Marketing Communications with GVA Oxford.
Pittsburgh Retail Market
In 2005, the Pittsburgh retail market was faced with unprecedented suburban growth and a withering retail presence in the central business district. The outlook for 2006 not only predicts rapid growth in the suburban markets but also is hopeful for renewed growth and interest in Pittsburgh’s urban core.
Suburban developments like the Pittsburgh Mills, which were stars in 2005, will continue to thrive in 2006 with the addition of satellite developments and new tenants. New suburban developments slated for 2006/2007 include Settlers Landing in Robinson Township, Pennsylvania (750,000 square feet); Phillipsburg Center in Monaca, Pennsylvania (250,000 square feet); The Streets at Cranberry, a 100,000-square-foot lifestyle center in Cranberry Township, Pennsylvania; South Strabane Center in Washington, Pennsylvania (625,000 square feet); Grandview Crossing (250,000 square feet); Mt. Nebo Pointe off of Interstate 279 North (275,000 square feet); The Shoppes at Pine (125,000 square feet) and Butler Crossing (250,000 square feet) in Butler, Pennsylvania. This growth is sprinkled throughout the Pittsburgh MSA and reflects the health of the overall market. The only dark spot in Pittsburgh’s suburban retail market is the closing in 2006 of Kaufmann’s department stores at three regional malls. The stores will be leaving their locations in Monroeville Mall, Ross Park Mall and South Hills Village as a result of the May/Federated merger in 2005. However, this can be seen as an opportunity for property owners to fill those gaps with fresh, non-traditional tenants such as Boscov’s and Nordstrom. Boscov’s has purchased two Kaufmann’s stores at Monroeville Mall and South Hills Village. Seattle-based Nordstrom has tentative plans to move into the vacant location at Ross Park Mall.
Development on the fringes of the Pittsburgh central business district also continues to see success. Continental’s Waterfront in Homestead is still growing and saw the addition of a strip center, steakhouse and hotel in 2005, and a planned Costco will take shape late this year. Growth at SouthSide Works also continues with the addition of several high profile tenants – most notably REI, McCormick & Schmick’s, H&M, and American Eagle Outfitters. In 2006, American Eagle Outfitters will move its corporate headquarters to a 186,000-square-foot building in SouthSide Works.
In recent years, the state of Downtown Pittsburgh’s retail has seemed a hopeless case. In 2005 two major department stores, Lazarus-Macy’s and Lord & Taylor, decided to vacate their stores, leaving behind a significant gap in the retail market as well as a sizeable quantity of retail space. In addition to fleeing retailers, Downtown Pittsburgh also has been plagued by a number of failed plans to revitalize the district. However, there is new hope for downtown in the form of several new mixed-use developments which promise to bring not only shoppers, but residents to the area. Most exciting of these proposed developments is the transformation of the former Lazarus-Macy’s building into Piatt Place, a high-end mixed-use facility which proposes a unique blend of luxury living units, class A+ office space and specialty retail boutiques. J. J. Gumberg Co. plans to redevelop the former downtown Lord & Taylor department store into a space for one or several new tenants. PNC Financial Services Group Inc. has plans to build a new $170 million high-rise office-condominium-hotel tower in downtown Pittsburgh.
In all, the outlook for Pittsburgh retail in 2006 is positive due to an increased interest in downtown and the continued success and growth of suburban markets.
— Herky Pollock, executive vice president for CB Richard Ellis.
Riverfront Developments Thrive in Pennsylvania
Waterfront properties have always been highly attractive. Office, retail and residential properties all seek out waterfront space and are usually successful once they occupy it. In Pittsburgh and Philadelphia, former waterfront industrial sites are being cleaned up, revamped and readied for the new wave of developments.
Many of the available industrial sites along rivers were environmentally challenged. According to Jim Ettelson, a partner in the Philadelphia law office of Thorp Reed & Armstrong, these brownfield sites were attractive from a geographical standpoint, but developers and investors had difficulty obtaining financing due to the condition of the sites. “[Many of the sites] had environmental problems [and there was] liability associated with them,” Ettelson says. Much of that changed when the state of Pennsylvania passed the Pennsylvania Land Recycling Act in 1995. To some degree, the act freed developers and builders from much of the liability that was associated with cleaning up brownfield sites. The act also served to stimulate development of already existing available land instead of seeking out new sites such as farmland and open space. Local municipalities also got involved. “Local municipalities are always looking for [ways to] attract smart growth type of development,” Ettelson says. Attracting new development is not a simple process, but the Land Recycling Act has accomplished “the kinds of reuse of land that we want,” Ettelson notes.
Although not all are new projects, there have been approximately 1,300 to 1,400 notices of intent filed with the state of Pennsylvania for existing properties. Several grants and loans have been made available for these types of projects, most of which are used for clean-up purposes. These sites are all over the state, and significant redevelopment has taken place in Pittsburgh’s Cultural District. The redevelopment of the 14-square-block area was stimulated by the late Senator John Heinz who was instrumental in the establishment of a cultural trust. “Pittsburgh is a river town, and much of its growth was centered around [three rivers],” Ettelson explains. In the Philadelphia area, Brian O’Neill of O’Neill Properties Group is one developer who is at the forefront of this effort. O’Neill has become successful in locating what Ettelson calls “areas that no one else wants” and builds them up, restores and adaptively reuses them, in part with help from various legislation. O’Neill is currently involved with five projects along the Schuykill River and is contributing to the creation of new neighborhoods. “What’s happening along the rivers [is that] they’re attracting the younger people. [They] are able to find excellent living along the river. They bring an urban mentality to a suburban area,” Ettelson says. Developer Carl Dranoff’s Venice Lofts condominium development in the Philadelphia suburb of Manayunk is another example of a popular project that brings urban-style living to the suburbs.
In 1993, just prior to the passage of the Land Recycling Act, an approximately 125-acre former steel plant was purchased by a Pittsburgh redevelopment authority and soon, several of Pittsburgh’s major buildings, including the University of Pittsburgh Medical Center, were built on the site. A townhouse project was also constructed on the site and soon, people wanted to be in the area. As a result, mixed-use projects popped up. “None of [these major commercial developments] are successful without having some base of residential occupancy,” Ettelson notes. “It’s an extremely important component.” The O’Neill Property Group’s Riverwalk at Millennium residential community in Conshohocken, Pennsylvania, followed the success of the Millennium Corporate Center office.
O’Neill Development is building Riverwalk at Millennium in Conshohocken, Pennsylvania. The 375-unit apartment complex is part of the 60-acre Millennium Complex, a live-work-play environment along the east bank of the Schuykill River.
Riverfront development clean-ups are not only advantageous to the developers, but also to the river itself. “Some of these processes for clean-up not only bring the site back but also help to save the river,” Ettelson explains. He cites the Schuykill River as an example of this river renaissance. “Instead of something you used to hold your nose going near, [the Schuykill River] is becoming a born again recreational vehicle for future generations.”
Since the residential component of riverfront developments is so important, amenities and features must keep within the lifestyle of the people living there. Ettelson likens it to “Disneyland for the older breed.” He notes that aside from the younger professionals, riverfront residential projects also tend to attract another, perhaps unexpected, demographic. “The people [who are now] grandparents with children who have moved away…these people are faced with not wanting to leave the area. [They’re] not retirement-type people, they’re people who are looking to get rid of some of the responsibility [of living in a single-family house].” This older demographic is very compatible with the younger residents, as neither have children. “It also has an interesting dynamic,” Ettelson says. “Development within a local municipality [that] brings in more density without really burdening the tax base because you don’t have children going to the schools — it’s an interesting dynamic to watch, and I’ve seen it work.”
— Nina Glickman
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