The Pittsburgh office market continued its steady growth during the third quarter with increased absorption and an unchanged vacancy rate of 8.4%. The average asking lease rate was up over last quarter to $19.97 per square foot, an increase of 0.7%. Class “A” space continues to be in strong demand, especially in the CBD where the vacancy rate is 6.84% and large blocks of space are scarce. Suburban class “A” space has a higher vacancy rate of 9.1%, with large vacancies in the Cranberry, Monroeville and Parkway West submarkets.
Lease rates have general held steady or increased over the quarter. Overall, asking lease rates for the CBD are $21.84 with suburban asking lease rates coming in at $19.20. The average lease rate for the entire market is $19.97, which represents a healthy increase over the average rate of $18.79 quoted at this time last year.
Absorption for the quarter was 404,283 square feet, the largest amount since fourth quarter 2012. The largest transactions during the quarter were Express Scripts’ lease for 70,000 square feet and EQT’s lease of 30,000 square feet at Zenith Ridge Two. It is anticipated that absorption should continue to be positive for the near term although new deliveries may hold the occupancy rate in check. A number of new projects are on the drawing board, but not many will be built on a speculative basis, and those that are built speculatively will be relatively small. With the exception of the Gardens at Market Square (159,000 SF), the most speculative construction is under 100,000 square feet.
Activity in the office leasing market in Pittsburgh leveled off in the first quarter of 2014, but overall the market performance continues to exceed typical expectations for the region. The overall office vacancy rate in the region is up slightly to 8.3 percent from 8.1 percent at the end of 2013, while Class A office space in the CBD market has one of the lowest vacancy rates in the country at just 8.1 percent. The fundamentals reflect a tight office market and are testament to why Pittsburgh continues to attract serious outside consideration from institutional investors. A prime illustration is the recent acquisition of the venerable Union Trust Building by Boston based, The Davis Companies. The company’s immediate plans are to maintain the 517,000 square-foot building for office use, pending additional research into the market.
As Pittsburgh emerges from one of the coldest winters in recent memory, a number of positive economic news items have been published, which reflect continued momentum for the region and potential reasons why interest from the outside investment community will continue. For instance, the Pittsburgh Regional Alliance (“PRA”) recently announced that economic development deals increased by 12 percent during 2013 to a total of 302 throughout the 10-county region. In its March press release, the PRA stated that the deals or “wins” were related to “new facilities, expansions of existing companies, attraction/retention of companies and startups around Southwestern Pennsylvania.” The announcement by the PRA provides further evidence to Pittsburgh’s growing economy and substantiates interest from outside real estate investors.
With the rest of the country’s real estate portfolio just beginning to recover, the Pittsburgh office market has seen unprecedented success in terms of its vacancy rate. The overall vacancy rate for the market, at 8.1 percent, is one of the lowest in the country, but only begins to tell the story of how vibrant the market truly is. At no point in time during the last thirty years has our market been as healthy as it is today, with the potential for vacancy rates to dip even lower.
The number of large blocks (greater than 50,000 square feet) of class “A” space in downtown Pittsburgh can be counted on one hand, with only a limited number of new options appearing on the market. A tenant in the downtown market looking for more than 100,000 square feet has as few as four options, with one being a prominent sublease and another going to sheriff’s sale in the near future. Two projects, The Gardens and 350 Fifth Avenue, may add 300,000 square feet to the mix, but still won’t be able to answer the long term demands of the market.