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Real Estate: Commercial realty market slows
Sunday, March 25, 2001 By Dan Fitzpatrick, Post-Gazette Staff Writer
But that trend doesn't trouble Cleveland developer John Ferchill, who is planning three office buildings at the Pittsburgh Technology Center, a business park in Hazelwood. He knows the market is past its late 1990s boom, but said, "We are not really shook up or terribly worried about it."
Pittsburgh, he added, "is no different than anyplace else."
Some statistics, though, tell a different story.
Even as two new stadiums come out of the ground on the North Side and an expanded convention center takes shape Downtown, there are signs that commercial real estate is cooling faster here than it is in other parts of the country. Pittsburgh now has the highest vacancies of any large office market in North America, according to Oncor International, with 19.4 percent of its available space sitting empty. Based on that type of information, New York real estate consultant Integra Realty Resources recently named Pittsburgh the second-worst place to invest in office buildings among U.S. cities surveyed.
The pace, conceded CB Richard Ellis executive Jeffrey Ackerman, "is slowing a little bit."Weighing down the market is the glut of new buildings along the Parkway West, once considered the region's hottest area for new buildings and growing companies. In the last several years, developers have flooded the western suburbs with new construction. Seven new buildings went up last year alone, according to Pittsburgh Construction News' Jeff Burd. But now there are signs that developers may have built too much, too fast. Parkway West vacancies topped 20 percent last year, according to Grubb & Ellis Co. That pushed vacancies for all of Pittsburgh's suburban buildings over 16 percent.
The suburbs have not had that much empty office space in 10 years.
"I think it is a concern, sure," said David Koch, an executive with Langholz/Wilson & Associates Inc. who represents companies in their searches for new spaces. "I don't know how it couldn't be." But, the higher vacancy rates are "certainly advantageous for doing what we do."
Pittsburgh, he said, is now "a tenants' market."
Tenants should have even more leverage in 2001, with suburban vacancy rates expected to go higher and several large blocks of space becoming available Downtown. "There are plenty of people looking at lots of choices," said Grant Street Associates' Rob Geiger, who is trying to lease 250,000 square feet of empty space at Three Mellon Bank Center. Several big companies, such as American Eagle Outfitters and Dick's Sporting Goods, are hunting for new headquarters space. So far, though, most landlords have resisted large rent discounts.
"No one has been forced into a fire sale yet," said Mark Stabile, a real estate attorney for Cohen & Grigsby. But, "I think the next six months will be telling."
The next six months will be telling in a number of ways.
Will developers keep building? What happens if the economy continues to slump? Is this a repeat of the late 1980s, when too much supply sunk the commercial real estate market? Nationally, the outlook is "marginal at best," according to Oncor International, which warned in a recent report that "economic turbulence of any kind must be regarded edgily by an industry not renowned for its soft landings."
Oncor is predicting a hard slowdown in the third or fourth quarter of 2001.
In Pittsburgh, most real estate observers expect developers to delay new construction without having tenants in hand. They also expect companies to slowly absorb the empty space, allowing the market to rebound within a year or so. "I don't believe the landing will be extremely hard," said Allan Wampler, a Downtown real estate consultant who owns Synergy Real Estate Corp. "My hunch is that this is a short-lived bubble. A year from now, we will all say, 'Isn't it wonderful we had vacant space that we can be competitive on and help bring companies into the region?'"
Developers are having an easier time filling new and old buildings near the Golden Triangle.
Downtown vacancies are at their lowest point of the last decade, having dropped to 12.3 percent in 2000, according to CB Richard Ellis. For top buildings in the Golden Triangle, landlords are asking as much as $24.34 per square foot in rents. That is up more than $1 from a year ago, according to Grubb & Ellis.
Most of the region's large real estate deals are happening Downtown, too. Mellon and PNC both opened large Downtown operations centers last year, filling more than 1 million square feet. H.J. Heinz Co. signed a lease for 276,000 square feet in the old Gimbels department store, where it plans to locate its North American headquarters. FreeMarkets Inc., the online auctioneer, expanded by more than 110,000 square feet in the old One Oliver Plaza, which is now known as FreeMarkets Center. Seagate, a California disk drive maker, is building a research and technology center nearby in the Strip District. Across the river, developers are scrambling to build offices and retail space near the new baseball and football stadiums.
"I am not seeing any evidence that the real estate market is slowing down in Pittsburgh," said Mulugetta Birru, director of the Urban Redevelopment Authority, which owns land throughout the city. "It is totally the reverse. I am seeing increasing interest for sites. I literally don't have any sites left."
Ferchill, the Cleveland developer, was confident enough about the city to start construction last year on a 153,000-square-foot office building in Hazelwood, without any tenants. His risk paid off. Earlier this month, Harmar biotechnology firm Cellomics Inc. agreed to fill the building. On the heels of that deal, Ferchill announced plans for two more buildings at the same office park
Again, he wants to build them without having tenants in hand.
"Ferchill wouldn't put them up if there wasn't demand," said Jermemy Kronman of Oxford Realty Services.
Compare Ferchill's situation to that of Trammell Crow Co., a Dallas developer that has struggled to lease a 192,000-square-foot office building that overlooks the Parkway West, in Moon. Trammell Crow started work on the suburban building in June 1999.
Almost two years later, the building is still empty.
"I think you always worry until you get the building full," said Rick Strom, the Trammell Crow executive who is trying to lease the building.
But Strom believes the Parkway West's recent slump "has hit bottom," and he expects leasing to pick up in the next year.
Several other developers expressed the same opinion.
"I am not worried about it at all," said Sam DiCicco, who is putting up a 105,000-square-foot building at RIDC Park West, in Findlay. DiCicco's building, which should be done this summer, adds more space to an already saturated market.
But, "I am not too concerned that it is not going to rent," DiCicco said.
"We are certainly optimistic."
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