By Mark Belko / Pittsburgh Post-Gazette
Office space in the Pittsburgh region is getting as scarce as rock salt — with no change in sight.
The office vacancy rate for the market as a whole fell to 8.1 percent in the fourth quarter of 2013, making it one of the lowest in the country, the Colliers International real estate firm reported Monday.
“I’ve been doing this since 1988 and I can say during that time, I’ve never seen it this tight,” said Paul Horan, founding principal at Colliers International in Pittsburgh.
The local rate was far better than that for the United States as a whole, which was just under 12 percent.
At 10.5 percent, the vacancy rate Downtown also outperformed the U.S. average. And it was even lower — 7.4 percent — for the coveted top-of-the-line Class A space.
“I definitely think the Downtown market is in excellent shape compared to the past. Specifically, the Class A market is the tightest it’s been in my career,” Mr. Horan said.
In fact, the Downtown market is so tight that tenants looking for more than 100,000 square feet of space to lease have only four options available, according to Colliers — U.S. Steel Tower; the half-empty Union Trust Building; a sublease in the Heinz 57 Center; or 441 Smithfield Street, if the owner, Oxford Development Co., decides to renovate instead of building new.
“For those looking for 25,000 square feet or greater, there are not a whole lot of options for them,” added Gerry McLaughlin, executive managing director of the Newmark Grubb Knight Frank real estate firm in Pittsburgh.
Space Downtown may become even more scarce if UPMC decides to move employees into the Heinz 57 Center, where up to six floors are available because of layoffs by Heinz last year.
Colliers stated that the Gardens at Market Square mixed-use development and the Oxford project could add as much as 300,000 square feet of office space over time to provide some relief, but it “still won’t be able to answer the long-term demands of the market.”
PNC’s new 33-story skyscraper under construction on Wood Street won’t provide much help when completed next year because the space will be used exclusively for employees of the bank.
The only way the Downtown market won’t continue to tighten, Mr. McLaughlin said, is if a firm leasing space in the Central Business District downsizes or decides to move elsewhere.
One key decision many are awaiting involves U.S. Steel, whose lease in U.S. Steel Tower expires in 2017. It has decided against anchoring Oxford’s proposed 33-story high-rise at 441 Smithfield and may end up staying where it is.
Downtown isn’t the only local market preparing no-vacancy signs.
In Cranberry, there’s nothing available exceeding 70,000 square feet and little above 20,000 square feet. The vacancy rate in always-tight Oakland is a mere 1.9 percent. The Parkway West market, which not long ago had plenty of space to offer, now has only two options exceeding 100,000 square feet and only six exceeding 50,000.
“A tenant within the market that needs options within the next 18 months will have to anticipate paying higher rates and more landlord-friendly lease terms,” the Colliers report stated.
Mr. McLaughlin said the tightening market is good news for landlords, who are able to charge higher rents for the space. But it also could be a curse, particularly if companies are looking to expand or move into the market.
“Tenants need to expand. … It makes them look at alternatives in the area or even outside the area,” he said.
At the same time, developers aren’t building more new space because banks are still being conservative in their lending, requiring developers to have an anchor tenant or as much as 50 percent of the structure leased to get a loan, Mr. McLaughlin said.
Newmark Grubb calculations show a higher vacancy rate for the region, 14.7 percent, and for Downtown, 13.4 percent, in the 2013 fourth quarter, than Colliers, whose numbers are based on the CoStar Pittsburgh Office Report and cover Allegheny, Armstrong, Beaver, Butler, Washington, and Westmoreland counties.
But the conclusion was much the same.
“I would say [the vacancy rate] ranks up there with some of the better markets in the country,” Mr. McLaughlin said.
While low vacancy rates can be a hindrance, particularly for companies looking to expand, there’s a good side to them as well, especially when they are lower than those in most other markets.
“What that means is that we have investors looking at Pittsburgh more now than we ever have. That’s extremely positive because they see the opportunity to create value here,” Mr. McLaughlin said.
Mark Belko: email@example.com or 412-263-1262.