Industrial properties have experienced unprecedented growth in demand over the past several years as both new and old companies seek to find space. This shift has benefited industrial assets in many metros across the country, although investors may unintentionally limit their focus to the markets with the most outsized gains. Smaller cities can provide equally compelling investment opportunities due to some unique advantages. Multiple factors combine to create such a scenario in Pittsburgh.
The city is home to several prominent educational institutions, healthcare providers and technology companies that are fueling job growth, thus dropping the unemployment rate to its lowest in two decades. Opportunities in these high-wage industries are bolstering the metro’s median household income and improving retail sales.
Consumer spending is projected to jump 4.4 percent in 2019, about 100 basis points more than last year. As shopping activity expands, the need for distribution centers is becoming more acute. Together with an established manufacturing sector, both sources of demand are supporting the absorption of industrial space.
More tenants moving in are enabling properties to perform at a greater level. The metro’s vacancy rate has declined 400 basis points since 2009 and is now under 6 percent.
Availability is lowest in North Pittsburgh, where supply growth has been muted, but vacancy is also dropping in the submarkets with the most development. That includes the Parkway West Corridor, where inventory expanded 21 percent in nine years, well above the market rate of 4 percent. In turn, the availability of fewer empty facilities to lease supports higher rents. The average asking rate surged by almost 10 percent last year and is expected to appreciate by more than 5 percent in 2019.
Beyond improvements to vacancies and rents, Pittsburgh industrial properties also feature nationally competitive yields and entry costs. The average cap rate here lies in the high-7 to low-8 percent range, exceeding some other major metros. At the same time, entry costs are sometimes half as much. Both factors are driving buyer interest, especially across the southwestern portion of the market, where a greater share of the inventory was built after 1990.
Institutions that require larger floor plates are also looking in the Parkway West Corridor, partly because the recent construction in the area provides more options for acquiring a modern facility. Some of these parties may be looking to hold investments for the longer term, as the market will welcome new industrial investment in the coming years.
Royal Dutch Shell is building a new petrochemical complex in Beaver County, which should draw new businesses to Pittsburgh. The 500,000-square-foot, $6 billion facility will open in 2021 or 2022 and manufacture various types of plastics using local oil and gas reserves, providing a service that was previously outsourced.
Now an entire division of the oil and gas industry will be available locally, which bodes well for industrial investors in general. The operation will almost assuredly need a variety of support services nearby, raising demand for industrial space. Overall, investors looking to position themselves for the next several years may find opportunities to do so in Pittsburgh.
— By Sean Beuche, regional manager, Marcus & Millichap. This article first appeared in the May 2019 issue of Northeast Real Estate Business magazine.