Over the last few years, tight conditions in Pittsburgh’s multifamily market have allowed operators to aggressively push rents among all class levels. This year, a surge in multifamily completions will put elevated pressure on vacancies, but more jobs and new households will keep across the board operations in positive motion, supporting another year of rent growth. Developers are expected to build more than 1,600 multifamily units in 2014, the largest expansion of supply in over ten years.
Most new multifamily projects in Pittsburgh are located north and south of the central business district where construction costs are lower. For example, in Cranberry Township in the north many units are strategically situated around the newly announced $72 million UPMC Lemieux Sports Complex. In southern Pittsburgh, added drilling activity in the Marcellus Shale and energy-related company expansions encouraged demand for rentals, spurring construction of several multifamily and residential communities. A minor overstock of brand-new rentals and single-family homes will move vacancy up somewhat in select submarkets, slowing down the previous year’s persevering rent growth.
An improving economy in Pittsburgh and further rent gains will sustain strong buyer demand throughout 2014. Employers will add 24,600 jobs in 2014 to expand employment in Pittsburgh 2.1 percent. This is an increase from the addition of 17,300 jobs in 2013. Meanwhile, transaction velocity is moving slowly due to a limited supply of for-sale properties on the market. Owners who have retained properties for generations continue to be disinclined to sell when the market is strong. In an effort to acquire properties, investors expand their acquisition criteria, targeting Class B and C assets under $10 million. Properties listed in Oakland and Shady Side near the University of Pittsburgh, are in demand. As the year moves forward, buyer competition and the risk of rising interest rates will motivate owners to sell.
New inventory will raise vacancy 40 basis points to 3.8 percent by year end. In 2013, vacancy rose 30 basis points. Effective rents will advance 2.1 percent to $1,041 per month in 2014, following a 2.6 percent increase last year. Many investors who purchased bargains during the downturn will bring these assets to the market while buyer competition keeps cap rates compressed. Investors are looking for properties with potential for steady rental growth over extended holding periods.
— Joshua Raggi, Associate in the Pittsburgh office of Marcus & Millichap. This article originally appeared in the May 2014 issue of Northeast Real Estate Business magazine.
