MARKET HIGHLIGHT, DECEMBER 2011
PITTSBURGH MARKET HIGHLIGHT
Pittsburgh has been incredibly lucky in that the area has avoided the havoc wreaked on the national economy during the last couple of years. The education and medical sectors bolstered the area during the recession, and the region is fast-becoming the ‘Energy Capital’ of the Northeast, with Pittsburgh as its epicenter. These factors have allowed the region to maintain its traditional path of steady growth, which has bucked the national trend and provided a safe haven for the local industrial real estate investment community.
The market continues to operate in a supply-demand imbalance with weight tipping towards demand for industrial product. This has supported irrational pricing, with a number of recent sales of industrial facilities trading higher than traditional prices.
The Pittsburgh industrial real estate market comprises less than 170 million square feet. With limited new construction and virtually no impact from loan defaults, the prices for industrial assets have held value. On the flipside, the market does not provide cash-rich buyers with many opportunities to purchase assets at bargain prices.
The region’s overall industrial vacancy rate is hovering at 7.5 percent, falling by 0.4 percent from the fourth quarter of 2010. This is 2.2 percent below the overall U.S. industrial market vacancy of 9.7 percent as tracked by Jones Lang LaSalle. The occupancy rate has held above 92 percent for the second consecutive quarter. Meanwhile the vacancy rate registers 7.4 percent, which is directly linked to robust average rents of $4.99 per square foot as reported by CoStar. This is a 3-cent-per-square-foot increase over the previous quarter, showing evidence of a robust market. The warehouse vacancy rate resides at 7.1 percent with rental rates ranging from $3.75 to $5.50 per square foot. The flex market has remained healthy too, with occupancy levels reported at 90 percent across the region.
The supply-demand imbalance has created a competitive environment for investors looking to purchase well-located assets. This dynamic has also filtered into the leasing market with tenants vying for the best space. Industrial rents have been maintained in Class A assets but some Class B building occupants are paying close to Class A rents too. With limited space options for occupiers to expand or move, the building owners are enjoying lucrative rents. It’s a truly landlord-favorable environment.
The lack of inventory and strength of the market create a great opportunity for national developers. We expect to see them enter the market and correct the current inventory dearth before long.
The Pittsburgh region continues to build on its traditional strengths within manufacturing, finance and business services while developing a new energy sector and capitalizing on the abundance of intellectual capacity within the local academic communities. This has created a dynamic and balanced economy. And the Pittsburgh industrial real estate market will see a significant boost as the new industry stars search for buildings to support their contribution to Pittsburgh’s thriving business community.
— Rick O’Brien, senior vice president, Industrial Real Estate Services and Supply Chain and Logistics Solutions at Jones Lang LaSalle
These are exciting times for Pittsburgh’s Central Business District’s (CBD) office market. Pittsburgh’s CBD Class A office market is experiencing a very favorable vacancy rate of 7 percent. The high levels of occupancy have been driven by strong growth within the banking, medical, energy and technology sectors, along with nearby abundant natural resources such as Marcellus Shale. PNC Corporation is breaking ground for its second $400 million office building in recent years, which is touted to become the “greenest building in the world.” PNC’s new building will be a true complement to the historic and evolving Market Square District, which has undergone a major landscape renovation, creating a beautiful area for outdoor dining, music and green space for people to enjoy.
Accompanying PNC’s new office buildings, Millcraft Industry has begun the transformation of the former State Office building into a 218-unit luxury apartment building. This is their second major CBD project in recent years, having completed and leased a 180,000-square-foot office building known as Piatt Place. Plans are currently evolving within Pittsburgh’s development community to retrofit the historic Henry W. Oliver Building. Additional CBD developments include a mixed-use project comprising a 175-room Hilton Garden Inn, 100,000 square feet of new office space and 35,000 square feet of new retail space along Forbes Avenue.
Elmhurst Group, which owns 2.5 million square feet of space in western Pennsylvania, is planning several new developments throughout the Pittsburgh region. As Bruce Longenecker, vice president of the Elmhurst Group, says, “The Pittsburgh market continues to buck the trend.”
At present, Pittsburgh’s CBD is comprises approximately 41 million square feet of office space. Year to date, the market has absorbed 1.2 million square feet of space, at an average rental rate of $20.50 per square foot. The continued strong demand for Class A office space has driven some tenants to consider retrofitted Class B buildings.
Major investment sales have been very strong. Pittsburgh is now being viewed as a primary investment market by national and international investors. Recent sales include:
|| $179.4 million
|30 Isabella Street
|11 Stanwix Street
|US Steel Tower
Leading institutions contributing to the strength of Pittsburgh’s market include Carnegie Mellon University, The University of Pittsburgh and a strong Foundation Community. The University of Pittsburgh Medical Center (UPMC), a recognized leader in transplant surgery and cancer research and treatment, has leased 500,000 square feet of office space at US Steel Tower and announced the creation of a new $394 million cancer research center next to the Hillman Cancer Center in Pittsburgh’s exploding East End.
Despite the national real estate trend, Pittsburgh continues to thrive with strong demand and continued optimism for the future.
— Paul Horan is a founding principal of Colliers International | Pittsburgh.
The Pittsburgh retail market remained tight throughout the third quarter of 2011, maintaining a vacancy rate at just over 5 percent. Absorption within the market edged close to 200,000 square feet, with new big box and specialty retailers entering the region.
The influx of grocery and discount chains continued with the opening of Trader Joe’s in Pittsburgh’s South Route 19 submarket. The 12,000-square-foot specialty market is the company’s second location in the area. In addition, Fresh Market confirmed its entrance in the Pittsburgh region just down the street from Trader Joe’s. The high-end specialty grocer has purchased a former Roth Carpet site and plans to demolish the existing building in preparation for a new 18,000-square-foot store. Construction is scheduled to commence in the spring of 2012. Big box retailers ALDI, Bottom Dollar, Walmart and BJ’s Wholesale Club are scouting the area for additional locations as well.
Bottom Dollar Foods has taken occupancy of more than 60,000 square feet year-to-date and has approximately 40,000 square feet in two new locations scheduled to open in early 2012. The discount food chain prefers to anchor strip centers or neighborhood shopping centers within the area’s suburban submarkets.
Though development activity has been largely focused on the suburban markets to the north and south of Pittsburgh, the central business district has seen a dramatic evolution in its main retail corridor. The Fifth-Forbes Corridor once was anchored by major department stores, including Kaufmann’s (now Macy’s), Lazarus and Saks Fifth Avenue. Within the past few months, Macy’s announced that it was right-sizing and restacking its Pittsburgh flagship and Saks Fifth Avenue announced that it would close its only Pittsburgh-area store at lease expiration in the fall of 2012.
However, these changes have produced creative redevelopment opportunities through partnerships with local investors and economic development agencies. The Lazarus Building, renamed the Millcraft Building, has been redeveloped for office use with rooftop residential units and street-level retail. Among its current tenants are The Capital Grille and McCormick and Schmick’s. The construction of Three PNC Plaza at the western end of Fifth Avenue prompted the redevelopment of adjacent Market Square.
The $5 million renovation of Market Square was completed in the fall of 2010 and since then the Square has welcomed 12 restaurants and two retailers with an additional six restaurants scheduled to open in 2012. Among the newcomers are Vallozzi’s, Il Pizziaolo, Las Velas, NOLA, Winghart’s Burgers and Whiskey, Sinobi2Go Sushi and Diamond Market Bar & Grill. Market Square is uniquely situated among several of Pittsburgh’s most prominent office towers, including PPG Place, Fifth Avenue Place and Three PNC Plaza.
In September, PNC Corp. revealed plans for PNC Tower, the financial institution’s fourth high-rise office building to be built in the CBD. This 800,000-square-foot building will border Wood Street between Fifth and Forbes and will offer street-level retail, further transforming the downtown area.
Notable construction deliveries within the third quarter include the 154,000-square-foot Target in East Liberty and the second phase of Settler’s Ridge, a 90,229-square-foot retail building that currently is 60 percent occupied. In addition, L.A. Fitness took occupancy of a 45,000-square-foot build-to-suit property at McCandless Crossing in the North Route 19 submarket.
Walnut Capital Group announced plans to expand its Bakery Square development with the purchase of the former Reizenstein School located adjacent to the Bakery Square campus. The $119 million project called Bakery Square 2.0 will consist of single-family and townhomes with 400,000 square feet of office and retail space.
Development is progressing throughout the region’s submarkets with groundbreaking at Newbury Market in Pittsburgh’s South Interstate 79 occurring last quarter. The development landed two of the region’s largest retailers: Giant Eagle and 84 Lumber. The supermarket chain plans to open a 96,000-square-foot store while the lumber company plans to close a nearby location and reopen within the development. In addition, construction of a 120,000-square-foot office building and 125-room Courtyard by Marriott are underway.
As the look and feel of the Pittsburgh retail market continues to evolve, moving away from traditional mall development in favor of main street and neighborhood mixed-use developments, it is expected to continue to flourish as the region’s economy improves.
— Jared S. Imperatore, retail leasing manager with Cushman & Wakefield | Grant Street Associates, Inc. in Pittsburgh.
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