In The Lead: Low vacancy recorded in Downtown Pittsburgh

Market for office space is tight

These days, it's tougher to find an office in Downtown Pittsburgh than it is almost anywhere else.

Tougher than in New York or Chicago or San Francisco or Dallas. Tougher than in almost any other city in the country, so tight is the Downtown market when it comes to Class A office space.

In fact, according to the Jones Lang LaSalle real estate firm, Downtown Pittsburgh — at 5.2 percent — had the second lowest vacancy rate for Class A space among downtowns in the United States last year. The only one lower was Bellevue, Wash., at 3.9 percent.

"Downtown Pittsburgh is one of the tightest markets in the country," said Jason Stewart, Jones Lang LaSalle executive vice president.

Tighter than New York (12.8 percent vacancy rate), Boston (11.1 percent), Chicago (14.3 percent), Los Angeles (19.2 percent), San Francisco (9 percent), Seattle (12.9 percent), Austin (14.5 percent), Dallas (23.9 percent), Denver (12.7 percent), Charlotte (8 percent), Cincinnati (23.5 percent) and Columbus (16.1 percent).

It's not only Downtown that is doing well.

At 10 percent, the overall Pittsburgh metropolitan market had the third lowest vacancy rate in the U.S. last year, according to the CBRE real estate firm. The only metro areas lower were San Francisco at 8.6 percent and Manhattan at 8.5 percent.

The tightening market Downtown and elsewhere in the region has been a godsend for landlords, but not so much for companies looking for a deal on rents.

According to Jones Lang LaSalle, Downtown rents have jumped 11.5 percent over the last 24 months to $28.70 a square foot. Last year, only five other cities had larger increases in asking rents, the firm found.

The tight market "has resulted in a rising rental rate environment. It means that concessions like free rent will typically disappear," Mr. Stewart said.

Jeffrey Ackerman, managing director of CBRE's Pittsburgh office, said he sees the market getting even tighter this year with continuing growth in the energy and high technology sectors.

"It's great for landlords. And it's great for driving new development. It's also good for owners to be able to have capital to make improvements to buildings by putting in new elevators, new amenities, and I think you're starting to see that Downtown," Mr. Ackerman said.

If there's a downside, it's that companies looking to expand may not be able to or they may have to look outside of the Golden Triangle or even the region as a whole to find space.

With less inventory, tenants may have to plan their expansions more carefully, Mr. Stewart said.

"They should be able to satisfy their expansion requirements. They just have to go about it more diligently," he said.

Downtown will get some relief with the construction of the Gardens at Market Square, the $104 million mixed use development on Forbes Avenue scheduled to be completed in 2015.

With it will come 128,000 square feet of much-needed Class A office space along with a 198-room Hilton Garden Inn and a 330-car parking garage.

Mr. Stewart, who is in charge of leasing the space, said it represents the first new construction for third party tenants since EQT Plaza was built in 1987.

Turner Construction, the construction manager for the project, is taking one floor in the building. But developer Millcraft Investments lost its proposed anchor tenant when Fifth Third Bank pulled out last summer.

Nonetheless, Mr. Stewart said activity has been strong. "We have very good interest in the building" in advance of its 2015 opening.

At the same time, Oxford Development Co. is still trying to decide whether to renovate its seven-story 441 Smithfield St. property or tear it down and build new at the location. Either way, it could provide more top-shelf office space Downtown.

Burns & Scalo Real Estate Services is proposing to build a new office high-rise on Fort Pitt Boulevard near the Smithfield Street Bridge once it is able to land an anchor tenant.

One project that won't help the office crunch much is PNC Financial Services Group's new 33-story Tower at PNC Plaza being built on Wood Street between Forbes and Fifth Avenue. It will be used exclusively by employees of the bank.

Although it's not Downtown, a new three-story retail and office building is scheduled to be completed on the North Shore in October. The developer, Continental Real Estate Cos., launched the project without any office tenants in hand.

Barry Ford, Continental's president of development, said he is in discussions with a number of possible office tenants. "There's a lot of interest in the building," he said.

In Oakland, the Elmhurst Group broke ground in December on Schenley Place, a 105,000-square-foot, seven-story office building. In addition, a development team is considering an office complex at the site of the former Allegheny County Health Department building on Forbes Avenue.

Developer Walnut Capital is building a new six-story office building in the Bakery Square 2.0 development in the East End, with Google taking 66,000 square feet of space. At booming Southpointe, Burns & Scalo is constructing three new office buildings in the Zenith Ridge development. One building is being taken by software company Ansys but the other two are available for lease. Some speculative development also is occurring in the Parkway West corridor.

Mr. Ackerman said the demand for space is being driven by a number of industries, including energy, high technology, professional services, medical and educational.

"That's driving the demand for office space and lowering vacancy rates and driving rental rates up," he said.

The Marcellus Shale industry has played a big role in the tightening market, particularly in the suburbs, he said. As an example of the way such growth trickles down, he noted that CBRE hired three more people last year to work exclusively in the energy sector.

"If it weren't for the growth in the energy sector, I wouldn't have hired those three people because we already had people working in the energy field," he said.

Another factor in the tightening market, particularly Downtown, is that a lot of the Class B office space is being converted to housing, giving companies looking for space fewer options, Mr. Stewart said.

Mr. Ackerman sees the region's office market continuing to tighten this year but he also predicted there could be more speculative building, particularly in the suburbs, as developers try to respond to the demand.

— Mark Belko: or 412-263-1262.

First Published May 14, 2014 12:00 AM

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