'Hotbed of activity' in Downtown real estate
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If you're searching for a bright spot in a gloomy economy, look no further than Downtown's gleaming skyscrapers.
Despite a deepening recession nationwide, the Downtown office market hasn't been stronger in years, led by several high-profile corporate moves to the central business district.
The performance has led one real estate company, Grubb & Ellis, to describe Pittsburgh's central business district as a "hotbed of activity." It placed the Downtown office vacancy rate at 17.5 percent, one of its lowest rates in some time.
"As we sit right now, the Downtown office market is probably as strong as it's been in years, if perhaps not decades," said Jason Stewart, vice president at Grubb & Ellis.
By the end of the third quarter, occupancy rates for premium class A office space, such as One Oxford Centre and PPG Place, hovered above 90 percent, the highest level since perhaps the early 1980s, added Jeffrey Ackerman, executive vice president of the CB Richard Ellis Inc. real estate firm.
The surge has been fueled by corporate relocations as well as the expansion by existing firms. Among the key changes:
• UPMC this year moved its corporate headquarters from Oakland to the U.S. Steel Tower on Grant Street, almost overnight boosting the fortunes of the central business district. The relocation involved 1,200 workers. The health-care giant occupies seven floors and 265,000 square feet of the 64-story skyscraper, with more to come.
• Siemens Power Generation Inc. has taken over four floors of the venerable Union Trust Building, a move involving more than 500 workers. It will occupy about 185,000 square feet of the building, which was purchased by Mika Realty Group of Los Angeles early this year.
• Equitable Resources this fall reached a deal to move its corporate offices and two business units to the 625 Liberty Avenue building, formerly known as Dominion Tower, starting in the spring. Equitable will occupy 12 floors in the building. About 500 employees will make the move, and there's enough space to add 235 more in the future.
"We've got some significant room to grow at 625 Liberty, which is part of the reason for the move," spokesman Wayne Desbrow said.
Expansions have provided a spark as well:
• Bank of New York Mellon has added 845 people since January 2007. That has helped to fill space in BNY Mellon Center, formerly One Mellon Center, 525 William Penn Place, and the BNY Mellon Client Service Center.
Before the merger of Bank of New York and Mellon, as much as 400,000 square feet of space was available in those three buildings. The new hirings are in keeping with BNY Mellon's commitment to add 1,000 to 2,000 people in Pittsburgh after the merger, spokesman Ron Gruendl said.
• Law firm K & L Gates LLP has signed a long-term lease to occupy 251,000 square feet, or 14 floors, in the 37-story One Oliver Plaza. The move from the Oliver Building in 2010 also will involve renaming the building the K & L Gates Center.
With the higher occupancy Downtown, rental rates for class A space have increased from $21.50 to $23 a square foot the last two years, their highest point since the late 1990s, Mr. Ackerman said.
Despite the faltering economy, local commercial real estate experts believe the Downtown office market will remain relatively stable into 2009 and even beyond. One reason is that the types of firms most heavily invested in the core -- health care concerns, utilities, financial services, and law -- seem to be well-positioned to weather the storm.
"Right now, knock on wood, I think Pittsburgh is bucking the trend. Its corporate leaders and its industries seem to be faring well in what's been a very difficult year otherwise. The banks are in good shape. Highmark is still employing lots of people. UPMC speaks for itself. And you've got the utilities," Mr. Stewart said.
While Mr. Ackerman sees the demand for smaller and older office space Downtown softening next year, he believes the premium space will remain stable, with more expansion by BNY Mellon and Equitable's transition. UPMC also plans to add another 150 employees and 40,000 square feet in September at U.S. Steel Tower. In late 2010, it expects to add another 80,000 square feet and 300 workers.
"We still see some positive growth next year for office workers," Mr. Ackerman said.
Downtown remains attractive to companies, much more so than some other cities, he and other experts said.
"I think that Downtown Pittsburgh serves our region very well. Topography defines our region and all the highways lead to Downtown and our mass transit system serves Downtown very well," Mr. Ackerman said.
One uncertainty heading into 2009 involves PNC Financial Services Group's takeover of National City Corp. The acquisition not only will lead to the sale of some National City branches Downtown but it also could affect the 20-story National City Center on Stanwix Street. National City occupies five stories in the building.
Mr. Ackerman said it was hard to predict what could end up happening with the riverfront property as a result of the merger. However, Peter Sukernek, the vice president and general manager of Howard Hanna Commercial, said it could be a positive for the city. He believes PNC may move people from National City locations in Ohio into Pittsburgh as part of the acquisition.
"If anything, PNC would want to have the top people in Pittsburgh," he said.
Another uncertainty involves the State Office Building, which is up for sale. The 16-story, 273,000-square-foot structure currently houses more than 800 employees. Once a deal is reached with a buyer, the state plans to move those employees to other locations in the city, with one prime candidate being Piatt Place, the former Lazarus-Macy's store, where three floors of vacant office space are available.
Next year, the Reed Smith LP law firm will be moving from the James H. Reed Building on Sixth Avenue to Three PNC Plaza, now under construction on Fifth Avenue, along with about 325 employees.
That will leave a hole at the Reed building, which was purchased by Mika Realty for $6.5 million in October.
Rick Barreca, Mika chief executive officer, said the firm would like to use the building for commercial office space but also is exploring the idea of converting it into some type of hospitality use, perhaps a hotel.
"The building is well laid out for that type of use and, if done correctly, there would be a lot of amenities. The location is very strong," he said.
While the increased occupancy might seem to be a boon for retail activity, real estate experts are divided on that count.
Mr. Stewart believes students and Downtown residents will have more of an impact than office workers. "[Retail] needs people here seven days a week as opposed to 40 hours a week," he said.
However, Mr. Sukernek sees potential positives spinning off from the office growth. "I think it makes the Downtown area stronger. It creates more opportunities for retail in the Downtown area," he said.
While it's tough to predict what will happen given the global economic woes, he added, "what I see Downtown is certainly a steady increase in people working Downtown, people living Downtown, and the retail that follows that kind of increase in potential customers."
First Published December 28, 2008 12:00 am