NORTHEAST SNAPSHOT, SEPTEMBER 2008

Pittsburgh Office Market

Following a recent trend in many mid-sized American cities, Pittsburgh is experiencing a return to city-based residential redevelopment, in which Class C office buildings and warehouses are being converted into new housing stock for both the for-sale and rental sectors. While the Class C office stock has been reduced through this type of redevelopment, the office market has remained stable, even as growth among small and mid-sized businesses has stalled.

In addition to the housing thrust, several of the suburban office markets are experiencing a surge in new commercial development. Paramount among these is the Cranberry Woods project located in Butler County to the north of Pittsburgh. This is where Westinghouse is building its foundation in the burgeoning nuclear fuel industry with a campus that will ultimately total 1 million rentable square feet. Westinghouse will likely take this opportunity to consolidate its offices from the eastern Pittsburgh submarket of Monroeville. As the nuclear energy industry evolves in Pittsburgh, it should spawn further development around the Westinghouse project.

Pittsburgh’s first new high-rise in years, the 23-story Three PNC Plaza, is presently under construction. In addition to accommodating the expansion of PNC Bank, the project will be co-anchored by Reed Smith, which is relocating from uptown. A Fairmont Hotel and associated retail will round out the project.   

The North, West and South submarkets are all experiencing new momentum. Southpointe, a 2.5 million-square-foot office, flex and residential development in the Washington County submarket, has broken ground on Phase II. Horizon Properties is nearing completion of a 330,000-square-foot headquarters for Consol Energy at the site, along with other speculative office and retail components.  

Some of the city’s major tenants have been making big moves lately. The University of Pittsburgh Medical Corporation (UPMC), one of the area’s largest employers, recently leased 500,000 square feet of high-rise office space at the U.S. Steel Tower in the city’s central business district (CBD). This is in addition to the dominant presence UPMC enjoys in the Oakland market just east of downtown. Dick’s Sporting Goods also continues to expand its headquarters in Pittsburgh, as evidenced by its recent leasing of 670,000 square feet in the Parkway West corridor near Pittsburgh International Airport.

Like most cities, the largest submarket in Pittsburgh is the CBD, where the vacancy rate hovers around 11 percent. In the suburbs, where speculative office development is still underway, the vacancy rate is pretty stable at 15 percent. One of Pittsburgh’s leading commercial brokers, Greg Schuster, reports that the new Interstate 79 / Interstate 376 interchange is going to have a dramatic positive impact on the western submarkets, especially around the airport where land remains abundant.  I anticipate new speculative office and related developments near the airport and in nearby submarkets to the north. 

For companies seeking Class A office space around Pittsburgh, there are a lot of quality options. Developments such as Foster Plaza in Green Tree Borough, located just west of downtown, have rents starting in the low $20s per square foot (full service). There is also newer, high-rise office product downtown such as Dominion Tower, One Mellon Bank Center and PPG Place. Rents here are approaching $30 per square foot.

But as is the case in most commercial real estate markets across the country right now, leasing activity in Pittsburgh is flat. The good news is that the downward pressure on rates is not as severe here as it is in newer office markets such as Phoenix.  Pragmatism among local developers has resulted in a relatively limited supply that has created a safety net for landlords and will keep the struggling economy from dragging commercial real estate investments down while the housing market fallout continues.

— Matt Harvey is a vice president / asset manager for Sterling American Property, Inc.

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