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Office Leasing Down in Pittsburgh, But Tech Sector is Growing

The Urban Land Institute (ULI) listed Pittsburgh among its top five markets to watch in the 2017 Emerging Trends in Real Estate report due to its low cost to do business; access to talent via four major universities; and its status as an emerging tech hub with the likes of Uber, Google, Facebook and most recently, Amazon, establishing regional research and development centers in the city.

Citizens Bank announced that it would remain a tenant in 525 William Penn Place, where it occupies approximately 150,000 square feet, reporting that its management views Pittsburgh as a growth driver for the company. Ford Motor Company inked a $1 billion deal with Argo AI, a Pittsburgh start-up that focuses on artificial intelligence and robotics, to expand its research and development of self-driving cars. Ford now is surveying the Greater Downtown submarket for space to construct a 100,000-square-foot facility to hold the 200 employees it expects to hire over the next 24 months.

Samuel McGill, Cushman & Wakefield | Grant Street Associates

Samuel McGill, Cushman & Wakefield | Grant Street Associates

Despite the region’s growing popularity as a tech hub, leasing activity in first quarter 2017 reported a 23.3 percent drop from the same period 2016, ending the quarter at just less than 600,000 square feet, while overall net absorption dropped an astonishing 171 percent to negative 143,008 square feet. Overall vacancy dropped 0.4 percentage points from first quarter 2016 to 9.6 percent. Class A space followed the lead of the overall market in first quarter 2017 with leasing activity down 9.5 percent to 343,260 square feet and absorption coming in at negative 251,758 square feet. Year-over-year overall vacancy was up 3.2 percentage points to 11.6 percent.

The argument could be made that the North Shore is the new Downtown as developers, investors and occupiers are growing increasingly more interested in the area just across the Allegheny River from the CBD. People’s Gas Company relocated and consolidated from suburban markets to approximately 153,000 square feet at the former Del Monte Center; and United Healthcare is moving from the Parkway East to just over 71,000 square feet at Nova Place on Pittsburgh’s North Side.

SAP announced plans to construct a 182,700-square-foot, seven-story office building on one of two remaining parcels on the North Shore. The company, which currently occupies more than 100,000 square feet in K&L Gates Center and 20,000 square feet in Pittsburgh’s Strip District, plans to consolidate operations in the new building and add 242 new positions over the next three years. The long-term lease for the new building to be constructed by Continental Real Estate Cos. is valued at over $70 million.

In contrast to the total market, leasing in the CBD was up 76.9 percent year-over-year in first quarter 2017 with a 6.1 percent increase in average asking rent posting at $28.77 per square foot. Continued institutional and out-of-town investment activity has perpetuated capital improvements in many of Pittsburgh’s trophy office projects, where rental rates range from just over $25 to just under $40 per square foot.

Among the most recent transactions is M&J Wilkow Ltd.’s $83.25 million purchase of 11 Stanwix Street, marking its sixth major purchase in the market in recent years. The 467,843-square-foot office tower is home to prominent tenants KeyBank and Skanska USA and had undergone significant renovations with previous ownership Rugby Realty Co. and GLL Real Estate Partners. CBRE Global Investors picked up the 27-story Liberty Center from Starwood Capital for approximately $97 million. The property remains one of Pittsburgh’s top Class A towers and is home to Federated Investors, which extended its lease term through 2030.

Stark Enterprises, a Cleveland-based group that maintains a diverse portfolio of mixed-use product throughout the U.S., reached an agreement with Oxford Development Company to purchase 441 Smithfield Street, a 200,000-square-foot office building across the street from the Macy’s redevelopment project, Kaufmann’s Grand on Fifth, for $18.75 million. Stark plans to renovate the existing building into fresh office space with street-level retail. Pittsburgh’s largest office tower and a pair of fully occupied North Shore properties are now on the market, setting the stage for record sales activity in 2017.

— By Samuel McGill, Vice President of Brokerage and Leasing, Cushman & Wakefield | Grant Street Associates. This article first appeared in the May 2017 issue of Northeast Real Estate Business magazine.

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