NORTHEAST SNAPSHOT, NOVEMBER 2005
Pittsburgh Office Market
The majority of new developments in the Pittsburgh, Pennsylvania, office sector exist in the peripheral urban markets outside the Central Business District (CBD) core and in the suburban markets. Speculative product comprises less than 20 percent of the office space currently under construction as developers slowed the pace of speculative product in favor of build-to-suit product, which carries far less risk. The supply of existing office space stands near 20 percent, but absorption for newly constructed Class A product has trended positively, resulting in the emergence of new planned developments.
Vice President and Director of Research and Marketing Communications
Overall, the medical, research, and university presence in Pittsburgh is significant with university research spending near $1 billion annually. The demand for office product and lab space near the University of Pittsburgh Medical Center and the Carnegie Mellon and University of Pittsburgh campuses is growing; the Oakland Keystone Innovation Zone estimates that as much as 1 million square feet may be needed over the next decade to meet the demand. Research spending is expected to increase by $300 million to $500 million during this period as well.
In response, the Urban Redevelopment Authority (URA) of the City of Pittsburgh announced plans to expand the Pittsburgh Technology Center by 946,000 square feet with the addition of 11 new buildings and four parking garages. When originally developed in the late 1980s, the seven-building Pittsburgh Technology Center, located on the cusp of the Oakland and Greater Central Business District submarkets, transformed a former steel mill along the Monongahela River in to a high-tech office park. Currently at the site, the Madison Acquisition Company has an option agreement with the URA that calls for the purchase of 5.9 acres at $300,000 per acre and the development of a 160,000-square-foot office and lab building.
In the Oakland office submarket, construction concluded on the University of Pittsburgh's 10-story, 330,000-square-foot office and lab complex named Biomedical Science Tower 3. The building will serve as a state-of-the-art space for the development of new therapies, vaccines and related life-sciences products.
Alamo LP, a partnership funded by four Pittsburgh foundations (Benedum, Heinz, McCune and Mellon) has partnered with the Regional Industrial Development Corporation (RIDC) and proposed to redevelop valuable riverfront property at the LTV Hazelwood Works' former steel mill site near the Pittsburgh Technology Center. The plan calls for 1,150 housing units, 500,000 square feet to 1 million square feet of office and research space, 50,000 square feet of retail and a 125-room hotel. The plan forecasts that work could begin in the next 24 to 36 months.
In addition, conversion of older office space into residential condominiums, apartments and student housing in the CBD is an emerging trend with brisk demand. The residential conversions join an explosion of new units being developed in Pittsburgh's CBD and Greater CBD markets by groups such as the Ferchill Group, Lincoln Properties and others. The Union Bank Building, a 21-story, 120,000-square-foot office building in the heart of downtown, is slated to be converted by Columbus, Ohio-based EV Bishoff Company into a 60-unit condo-tower called the Carlyle.
Other CBD buildings slated to become condominiums include the 120,000-square-foot Commonwealth Building; the 37,800-square-foot Standard Life Building; the 24,000-square-foot Fidelity Building; the 60,000-square-foot Arrott Building; and the 30,000-square-foot Conestoga Building. The conversions of Class B and C properties removes approximately 572,000 square feet of competitive product from the 23 million-square-foot office inventory in the CBD. In addition, the conversions lower the vacancy rate in the Class B CBD sector to 12.5 percent; this market has struggled with soft demand and historically high vacancy rates. The CBD Class A sector currently has a 19.9 percent vacancy rate and would be unaffected by the conversions. Private sector residential development is likely to spark new retail developments to service the soon-to-be growing population of the CBD.
Office investment activity in the Pittsburgh market escalated recently as investors turned their attention away from saturated primary markets on the East and West Coasts. Phillip Morris Capital Corporation sold One Mellon Center to Metropolitan Life Insurance Company for $185 million. The recent 20-year master lease signed by Mellon Financial made the asset attractive to capital market investors despite soft office market conditions. In terms of value per square foot, One Mellon Center (1,452,504 square feet) fetched $127.36 per square foot. UBS Realty Advisors, based in Hartford, Connecticut, placed the 338,000-square-foot National City Center on the sale block in the CBD. The Class A office building is expected to fetch between $100 to $110 per square foot. In the west suburban market, nine office buildings in the Foster Plaza complex, totaling 900,000 square feet, sold for $69.1 million or $77 per square foot. Also in the west market, Park Ridge office buildings One and Two totaling 207,000 square feet are on the market with an asking price of $14.9 million or $78 per square foot. These sales and offerings come shortly after two of the largest Class A towers in Pittsburgh's CBD, US Steel Tower and Dominion Tower, sold earlier this year.
Over the short term, suburban absorption looks to be positive at year-end for the second consecutive year as centrifugal tenant migration trends continue away from the urban core. Moderate demand will keep new speculative construction at relatively low levels in the suburban markets. Despite modest demand, in both the suburban and urban markets, rents are likely to escalate to some degree because of the spike in energy costs. Interest in the CBD market will return gradually in 2006 as residential developments spark retail developments and renewed interest from office tenants.
— Mark Jablonski is a vice president and director of research and marketing communications, GVA Oxford.
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