Downtown office space filling up, rents rising
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When it comes to office space in Pittsburgh, there's little room to spare.
Aided by the Marcellus Shale boom and the growth of the local health care and banking industries, the Pittsburgh office market is tighter than ever, with near record low vacancy rates in some quarters pushing rental rates up.
In the Golden Triangle, demand has driven the vacancy rate for premier class A space down to 6 percent to 7 percent, one of its lowest points in decades.
Jeffrey Ackerman, executive vice president of the CB Richard Ellis investment properties group, said the vacancy rate hasn't been that low since the early 1980s, before construction of new skyscrapers like Oxford Centre, Fifth Avenue Place and BNY Mellon Center.
"I would say we're in record territory. There's never been such a dearth of space," added Dan Adamski, managing director of the Jones Lang LaSalle commercial real estate firm in Pittsburgh.
Mr. Adamski said it's becoming harder and harder to find class A space for clients, particularly larger ones, as the office market tightens.
"Anyone really needing two floors of space or more, you can count the options on one hand, where as recently as three years ago, you might have 15 options," he said.
As little as four years ago, the U.S. Steel Tower had half a million square feet of space available for lease and rental rates were less than $18 a square foot, Mr. Adamski said.
Now, the vacancy rate is less than 2 percent and what space is available costs at least $28 a square foot. "There's not even a full floor left," he said.
UPMC now occupies 13 floors of the U.S. Steel Tower and plans to add seven more by next summer. PNC is building a 40-story, $400 million skyscraper Downtown to consolidate employees.
Downtown isn't the only place feeling the squeeze. In Oakland, nearly all class A space has been taken, with a vacancy rate of less than 2 percent. Cranberry, Southpointe and the city's East End also are doing well.
"Over the last two years, we've been as strong as almost any market in the country," Mr. Ackerman said.
In fact, Downtown, at the end of last year, had a lower vacancy rate for class A space than most other big cities, including Philadelphia, Boston, Atlanta, Dallas, Houston, Chicago, Denver, San Francisco and Los Angeles, according to CB Richard Ellis. Only New York and Fort Worth, Texas, were lower.
Driving the demand for space are health care firms, banks, insurers and energy companies, particularly those involved in the production of the Marcellus Shale natural gas reserves. Another factor is the Pittsburgh unemployment rate, which is much lower than it is nationally.
Among the biggest consumers, particularly in the suburbs, are the Marcellus Shale companies.
Mr. Adamski said one Houston-based law firm opened an office in Southpointe about two years ago and already has expanded three times. It now is up to more than 15,000 square feet after starting with several thousand.
Also at Southpointe, a Tulsa company has grown from 7,000 square feet to 30,000. In the northern suburbs, Royal Dutch Shell started with 30,000 square feet of space and just added 77,000 more, Mr. Adamski said.
"It's hard to foresee any letup in demand," he added. "More than half of our oil and gas clients have taken more space and doubled in size in the last 12 months."
The overall vacancy rate for class A, B and C space in the Pittsburgh market currently is 10.9 percent with lease rates of $22.57 a square foot for class A space and $16.49 for class B, according to CB Richard Ellis.
Downtown, the overall vacancy rate for all space is 11.6 percent, also one of the lowest in recent times, Mr. Ackerman said, adding it was as high as 16 percent only a couple of years ago.
As office space has filled up, rental rates have climbed.
Downtown, class A rates have jumped 15 to 20 percent in the past two years, from an average $22 to $23 a square foot to $26 to $27 a square foot.
Viewed another way, since the last quarter of 2008, the combined vacancy rate for class A and class B space in the Pittsburgh market plunged from 13.25 percent to 10.7 percent while rental rates increased from $19.25 a square foot to $19.74, according to CB Richard Ellis.
The firm is predicting that the market's overall vacancy rate will fall to 8.7 percent by 2016 while rents will increase to $26.03 a square foot.
As conditions have tightened, landlords are holding more firmly to their asking prices, Mr. Adamski said.
"The pendulum has swung to the point that certainly if you're a landlord, you can offer fewer concessions than you have in years past," he said.
Experts believe the favorable trends are behind the recent surge in buildings being offered for sale Downtown. Among those on the market are PPG Place, the Macy's department store building, the Henry Oliver Building, the Manor Building and K&L Gates Center.
In April, U.S. Steel Tower was sold to a group led by New York real estate investor Mark Karasick for $250 million. In June, the former Westinghouse building, now known as 11 Stanwix Street, sold to Munich-based GLL Real Estate Partners for $66.6 million.
Jason Stewart, senior vice president of the Grubb and Ellis real estate firm, said the rash of for sale signs is a reflection of just how attractive Pittsburgh is to outside investors right now.
Building owners are hoping to take advantage of the strong market, just as stockholders sell high.
"There's a difference between a fire sale and a sale of opportunity. Most of the sales are sales of opportunity," Mr. Adamski said.
And despite a sour national economy and fears of another recession, experts see the local office market staying strong for some time, in part because of the dearth of new construction on the horizon.
"I think if you look at the maturity of the industries occupying space in Downtown Pittsburgh, it makes you feel that this is sustainable," Mr. Stewart said.
First Published August 5, 2011 12:00 am