MARKET HIGHLIGHT, APRIL 2008

PITTSBURGH MARKET HIGHLIGHTS

Multifamily Market

Apartment investors are poised to continue their attraction to Pittsburgh due to the relative stability of the market, the ability to find properties with relatively higher returns and the difficulties likely to be incurred with new construction due to the hilly topography of the region.

Affordability of for-sale housing and lack of population growth are the defining characteristics of the Pittsburgh multifamily market.

Pittsburgh’s residential market was recently found to be the 28th most affordable in the country. The difference in the average monthly mortgage payment and average monthly rent in the area is $242, compared to a national average of $457.

Few areas of the country have seen population loss comparable to Pittsburgh’s. The region has seen a net migration of 1.5 percent of its population since 2000. 

Pittsburgh has nine 4-year colleges and universities. In spite of this, Pittsburgh’s population of 25 to 34 year olds declined by 29.02 percent from 2000 to 2006, from 48,860 to 34,679, according to the U.S. Census Bureau’s American Community Survey. These facts lead to very little new development and insulate apartment owners from oversupply. 

In recent years, the majority of new multifamily developments have been in Pittsburgh’s Central Business District. This trend looks to continue in 2008 as the region and developers look to attract young professionals.  The main difference in 2008 from past years will be the focus on affordable housing and smaller projects.

The Pittsburgh Downtown Partnership’s “Vacant Upper Floors” program aims to provide gap financing for Downtown building owners who convert their vacant floors to residential space. The program aims to create 80 affordable housing units with rents for an 800-square-foot apartment averaging $1,000 monthly.

Millcraft Industries plans to build apartments as a part of their reuse of the old G.C. Murphy store. They are now looking to put upwards of 50 apartments in the store with rents priced to attract Downtown workers earning $40,000 to $50,000 a year.

Announced in September, affordable apartments are being planned by Trek Development Group in Downtown’s Century Building. The $16 million project will be made up of 60 units with rents ranging from $550 to $1,150 a month. Trek hopes to have the apartments available in early 2009. 

Overall, supply and demand in Pittsburgh’s multifamily market are in balance and this balance leads to stability that investor’s desire.

— David Poluszejko specializes in multifamily in Pittsburgh for Marcus & Millichap Real Estate Investment Services

Industrial Market

The Pittsburgh industrial market continued to tighten in 2007 with the demand for quality Class A warehouse space far outweighing the supply. However, major developers have committed to increasing overall industrial space availability within the next 5 years. Among these developers is Dallas-based Trammell-Crow Company, who plans to build up to seven warehouses on nearly 90 acres near the Pittsburgh International Airport.  This project could have a direct impact on Allegheny County’s efforts to build an “air silk road” for trade with China.

Also in the race to increase Pittsburgh’s industrial inventory is The Elmhurst Group, whose 70-acre McClaren Woods Business Park now has only 130,000 square feet of available space remaining for new construction, is nearing completion on its fourth building in the park. 

The West submarket, also known as the airport corridor, has been the center of industrial development in Pittsburgh for the past several years.  Public funding provided the infrastructure necessary to open new tracts of land for development, and several local developers, including Chapman Properties, Tartan Realty, Sampson Morris Group and the Buncher Company have yielded the opportunity.

Existing industrial properties, such as Tri-County Business Park and Leetsdale Industrial Park have run out of developable land driving the need for additional industrial space in the West submarket.  Developers have responded with Imperial Business Park and Clinton Commerce Park — two of the most significant projects in the region.  These new developments are attempting to meet tenant needs through the current trends in the market, including concrete tilt-up construction, 30-foot clearance, dock packages, hydraulic levelers and standard equipment.

Large lease transactions and sales of existing owner-occupied buildings dominated the Pittsburgh industrial market over the past year and contributed to a further decrease in vacancy rates to an all-time low of 7.9 percent for the fourth quarter 2007, and an average rental rate of $4.60.  Mitsubishi Electric Power Products Inc. completed a 100,000-square-foot expansion of its office/warehouse headquarters in Thorn Hill Industrial Park and expects to add 75 new jobs within the next 3 years.  Knepper Press completed a 29-year lease at Clinton Commerce Park to build a 100,000-square-foot printing shop on 11.5 acres there. With new companies emerging and existing companies experiencing growth, the Pittsburgh industrial market is poised for another record year in 2008. 

— John Lisowski is the industrial brokerage and leasing manager at Grant Street Associates in Pittsburgh

Office Market

Pittsburgh is experiencing another Renaissance. The first Renaissance, in the 1950s, witnessed a major revitalization of the CBD. The second Renaissance followed 30 years later with the construction of numerous new Class A buildings in the CBD.  Now, with new tenants and some larger firms moving within the CBD, the market has changed considerably in the last 12 months. 

The Pittsburgh office market is robust. Some significant leases were signed in 2007.  UPMC leased more than 250,000 square feet in U.S. Steel Tower, with an option on almost as much space. K&L Gates is moving from its present location of more than 60 years to One Oliver Plaza, which will be renamed for this 200,000-square-foot law firm. Another 200,000-square-foot law firm, Reed Smith, will also have their name on PNC’s new 23-story building, which is under construction and will be completed soon. And, recently, Carmeuse Lime elected to keep its North American  headquarters in the CBD.

These leases have shifted the market from the tenant’s favor to the landlord’s.  The net absorption in the Class A properties was about 1 million square feet or 5 percent of the Class A market. Class B building owners are now able to charge more, yet still be a bargain, due to the increase in the Class A rental rates.

The increase in the occupancy of the CBD is a cause of concern for firms in need of Class A space that need 80,000 square feet. Those tenants will need to start their site search well in advance of their lease expiration date (a minimum of 24 months is suggested) in order to position themselves in the market and create as many opportunities as possible.  

With the exception of the eastern suburban market, the other suburban markets are very strong. The most active by any measure is the Cranberry area, just north of the Allegheny County (Pittsburgh) line. Westinghouse is awaiting a new 750,000-square-foot complex to be completed in Cranberry Woods. In Washington County, south of Pittsburgh, Consol Energy is looking forward to moving into its new 325,000-square-foot headquarters. On the Parkway West, close to the airport, Dick’s Sporting Goods is building a new campus that will provide up to 1 million square feet to accommodate its growth.

New firms are also moving into the area. Flour Corp. is looking to open an office to accommodate 200 engineers, and Pepperweed, an IT consulting firm, is moving its HQ from Indianapolis to Pittsburgh. The Renaissance continues.

— Dick Cassetti is the managing principal for CresaPartners•Pittsburgh

Pittsburgh Retail Market

The Pittsburgh MSA shopping center retail market has more than 50 million square feet of gross leaseable area.  The current vacancy rate has been reported as low as 7 percent and as high as 8.2 percent by various market research observers, which is historically better than the average 9 percent average over the 3 prior years. During calendar 2007, Pittsburgh shopping centers experienced a positive absorption of nearly 800,000 square feet with the third quarter alone estimated at nearly 450,000 square feet.

Some of the new tenants entering the marketplace with grand openings included Trader Joe’s in the Village at East Side, Ross Dress For Less, Steve & Barry’s at Hillcrest Shopping Center, Capital Grill in Downtown Pittsburgh, Dunkin Donuts in Wexford, and Chipotle in Oakland.  JC Penney opened their new one-story concept store at The Foundry in Washington.  New retailer lease signings and announcements will excite the Pittsburgh landscape in 2008 with first-time locations for Nordstrom’s, Tiffany’s, LA Fitness, Books a Million, Shoe Carnival, Hobby Lobby, Hofbrau House, Sonic-America’s Drive In, Urban Active and Gold’s Gym.

Existing tenants in the marketplace that continue to expand include Giant Eagle with the announcement of its Market District concept at Settler’s Ridge, Office Depot opening in Downtown Pittsburgh, Aldi’s, GFS-Gordon Food Service, Chick-fil-A, Houlihan’s Restaurants, Aspen Dental, Starbucks, Staples, and Kohl’s.  The competition for the favored street corner location heated up amongst the drug stores as Walgreen’s aggressive expansion push has been countered with new store locations for both CVS and Rite Aid. First Commonwealth Bank, Fifth Third Bank and Dollar Bank were clearly positioning themselves with new locations, while Huntington Bank’s acquisition of SkyBank adds a new name to retail branch banking.

New shopping center developments opening in 2007 included phase one of The Foundry, a 300,000-square-foot GLA in Washington, Pa., by Premiere Properties USA; The Streets of Cranberry, a 110,000-square-foot GLA lifestyle center by Continental Real Estate in Cranberry Township; and Grandview Crossing, a 285,000-square-foot GLA in Gibsonia by Echo Development. Recently announced 2009 projects include a 500,000-square-foot GLA at Settler’s Ridge in Robinson by Faison and CBL — a joint venture; Centre Pointe by Cullom Properties at I-79 and Rt. 519 in North Strabane is set to open fall 2009; Bakery Square in Eastside and Lincoln Place in Westmoreland County, both by Walnut Capital; and the final phase of Butler Crossing, a 245,000-square-foot GLA by Cedarwood in Butler.  Phase one of Tanger Outlets, a 370,000-square-foot GLA, is under construction at I-79 and Racetrack Road in Washington County and is slated to open September 2008.

— Kevin Langholz is the president and principal of Langholz Wilson Ellis, Inc./CORFAC International

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