In Pittsburgh’s industrial market, the fourth quarter of 2013 finished in much the same way it began and maintained throughout the year; solid if unspectacular growth. The vacancy rate fell from 7.9 percent in the third quarter to 7.7 percent in the fourth quarter and dropped three basis points in total over the course of the year. The lack of quality Class A warehouse space continues to be a factor with vacancy levels dropping to an astounding 2.97 percent.
The greater Pittsburgh’s industrial market is approximately 172 million square feet spread out over the six-county region that includes Allegheny, Butler, Beaver, Westmoreland, Washington, and Armstrong counties. The Class A portion is approximately 17.5 million square feet. With a vacancy rate of 2.97 percent, we only have a total availability across our total market of 519,750 square feet of Class A product. This is below equilibrium for a healthy market. Furthermore, the definition of Class A product in the Pittsburgh region would not necessarily hold up in markets with more speculative developments such as Columbus or Lehigh Valley.
Although Pittsburgh has hit the radar of the national real estate community for the opportunity on the investment side, we are still very much a secondary market.
Positive Story Lines
“Optimism” is the word for 2014. Pittsburgh should be especially bullish given the multitude of story lines that should positively impact the industrial market. These include CSX’s announcement that they will construct a $50 million multi-modal facility in McKees Rocks, the continued expansion of the Southwest Pennsylvania energy sector and the much-needed passage of the State Transportation Bill. Any of these alone are significant but, taken in total and combined with the positive national dynamics, these factors ensure that the region will continue to advance forward.
The investment being made by CSX is evidence that they consider Pittsburgh to be a player in the inland intermodal supply chain. The McKees Rocks project will entail the renovation of the former Pittsburgh and Lake Erie Railroad site which operated for more than 100 years. This project is part of CSX’s National Gateway project. The Gateway project is an $850 million public-private partnership to create a highly efficient and environmentally friendly double-stacked clear rail corridor on the CSX network between the Mid-Atlantic and the Midwest. According to Michael J. Ward, chairman, president and chief executive officer of CSX, “The facility will create more economic opportunity for residents and significantly enhance distribution opportunities for businesses.”
The other critical component of the intermodal trifecta is highway infrastructure. While Western Pennsylvania still has our windmills to tilt with respect to our highway system, we took a huge step in the right direction with the passage of House Bill 1060 in November 2013. The State Transportation Bill will infuse $2.3 billion to $2.4 billion of sorely needed funds into road and bridge projects across the state of Pennsylvania. This will lead to the repair of aging infrastructure and the avoidance of road closures and weight reductions on bridges, as well as the start of new projects.
The most high-profile of these is Phase II of the Mon-Fayette Express Way/Southern Beltway. This 13.3-mile stretch of highway will connect Phase I, which travels from the Pittsburgh International Airport to Imperial (Route 22) and then runs South into Washington County, ultimately connecting to I-79. For a region without a conventional beltway (and no, red, yellow, blue, and green do not count), this is a much-awaited announcement.
Unfortunately, the news is not all positive with the third key element required for intermodal transportation. Our nation’s system of locks and dams is collectively in very poor condition given that 52 percent have eclipsed their designated life expectancy of 50 years. Nearly 45,000 loaded barges carrying more than 66 million tons of material, valued at $5.6 billion passed through district locks in fiscal year 2012. The funding for replacement and rehabilitation is piecemeal and results in continued construction delays and cost overruns. The expansion of the Panama Canal portends great opportunity to inland ports in the Tri-State region, provided the material can navigate the lock systems.
Recent Transactions
Deals of significance in the fourth quarter include Trufood’s (formerly Tsudis Chocolate) lease of 155,000 square feet at 106 Gamma Drive in RIDC O’Hara, the sale at 3000 Grand Avenue (60,000 square feet) on Neville Island; and the sale at 19 35th Street (40,000 square feet) in the Strip District.
On the land side, Paragon USA purchased 13 acres on 62nd Street from the URA with plans to build a new food distribution warehouse. The first quarter of 2014 has already brought the announcement that the Pittsburgh Post Gazette will move its printing operation out to the 240,000-square-foot former Flabeg Solar building at the Clinton Commerce Park. Flabeg exited the building only three years after taking occupancy and hiring 300 employees. This is good news for the region, but offers further evidence that supply is tight when a building is scooped up prior to formally going to market.
Looking Forward
As we move through 2014, the overall industrial market future looks bright. Disruptions are inevitable, but companies will continue to look to Western Pennsylvania as an area of growth. The shale boom has created a cottage industry for not only the drillers and gas suppliers, but also for companies that benefit from participating within the mid- and downstream markets. Demand for good warehouse/distribution space will continue to outstrip supply and hopefully lead to additional speculative development. By not offering the market-quality options in which incoming companies can set up shop or for existing businesses to expand, the region risks opportunity loss to our neighboring industrial regions that offer better options.
— By Colliers International’s Pittsburgh industrial team, including John Bilyak, Principal; Anthony Pantoni, Vice President | Industrial Brokerage; Patrick Tracy, Vice President | Industrial Brokerage; Raymond Orowetz, Vice President | Industrial Brokerage. This article first appeared in the May 2014 issue of Northeast Real Estate Business magazine.