This quarter, Pittsburgh appears to be ahead of the national curve – especially where commercial real estate is concerned.
Normally, Pittsburgh has the dubious reputation for being 10 years behind the times. Skinny jeans are on the way out, but everyone in Pittsburgh is wearing them! Big hair has been out for decades, but you’d never know it when you walk the city streets. AI is making waves, but most Yinzers haven’t a clue what it’s all about.
This quarter, though, Pittsburgh appears to be ahead of the national curve especially where commercial real estate is concerned. Office rental rates are decreasing more quickly here than in the rest of the US. The same goes for average rental rate increases in the industrial sector. Fewer new builds are helping to keep industrial vacancy reasonably well controlled. However, the same can’t necessarily be said for office vacancy. Here are a few takeaways from this quarter:
- Tenants are shifting their footprints which continues to have significant implications for Landlords and the overall market dynamic.
- Fluctuating construction costs continue to make budgeting for tenant improvements more difficult. Landlords end up trying to push any overages onto the Tenant.
- Cranberry Township, Oakland, and East End (thanks to Duolingo’s continued growth in Pittsburgh) saw positive net absorption. Net absorption measures the change in occupied space over a specific period, meaning more space was leased than was released to the market.
- Stakeholders in the Pittsburgh industrial real estate market may need to adjust their strategies in response to slowing rent growth.
Generally speaking, what’s happening in the office market in Pittsburgh is similar to what’s happening across the country. We’re finding that businesses are still consolidating and decreasing their space footprints. Companies are back in the market and looking for space, just much less space than in previous years. Almost 1 million square feet has been put back on the Pittsburgh market. And offices aren’t being built because no one knows if office demand will increase, or when interest rates, labor costs and material expenses will decrease.
All this makes it look like this is a tenant’s market and great deals should be abundant. However, in our day-to-day negotiations on behalf of our clients, we’re not seeing sharp declines in asking rates. First, our clients are truly looking to upgrade to high-end space, while right-sizing for their new normal. Most trophy buildings are still leasing quickly, with tenants taking less space but wanting the best space they can get. Because demand is high, Class A buildings are not really offering bargains rates.
Second, and maybe even more importantly, the cost of construction for tenant improvements is increasingly uncertain. This instability seems to be surprising both tenants and landlords. For most of my career, we’ve been able to get turnkey improvements for our tenants. That has not been the case recently. We’re more likely to receive a tenant improvement allowance that covers only part of the proposed or agreed upon improvements. And almost 100% of the time, the overages are being absorbed by the tenant, rather than the landlord. So, even if an exceptionally low rate can be negotiated for a tenant, they end up having to pay for a significant portion of the cost to improve their space – often upfront, cash out of pocket.
As we learn more and gain experience in this ambiguous market, our job still is to make sure our clients get the best deal possible for a space that meets their needs now and going forward. Truly, it’s not an easy market and we don’t want you facing it alone!
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