This quarter, the news is all about companies downsizing, the resulting office vacancy and a bit of hope.
We’ve been saying for a year now that companies are in a state of uncertainty. Everyone knows that the Work from Home (WFH) movement has had an impact on business planning, but it seemed like companies were holding out hope that employees would return to the workplace full time without any external incentives.
It seems, however, that many employees will be spending at least part of each week working from home and companies are having to come up with a new game plan. Many firms are in full-on consolidation mode, downsizing their space to accommodate a new reality while others are taking advantage of the market and growing. It’s taken a while to settle into a clear pattern, because it is happening gradually as leases expire and companies are in a position to make changes.
As a result, office vacancy in Central Business Districts is high across the nation. We are seeing over 90% of all transactions being down in Class A buildings outside of the Central Business District. And even though that is also true for Pittsburgh, our vacancy rate is not nearly as high as it is nationally. Prior to 2020, Pittsburgh experienced limited vacancy and minimal deliveries, which combined have helped keep our vacancy rate lower than the national average.
However, the national trend towards smaller spaces is in full force but in Pittsburgh companies are ‘right sizing’. The average lease size on new projects is around 3,600 SF compared to 4,500 SF, down about 20%. The bad news is that, at least for the short term, many companies are taking less space, which will continue to have an impact on vacancy. The good news is that companies aren’t closing up shop and doing without office space altogether – and many industries are growing and returning to the office!
There is one upside to the downsizing trend. It seems that companies may still be hedging their bets and are looking for short-term lease options. This means that sublease availability seems to be stabilizing. Once again, Pittsburgh is behind the national curve – in a good way! Nationally, sublease availability to total availability is around 17%, but only 10% in Pittsburgh. Between fewer available subleases and fewer buildings being built, we are avoiding the sharp spike in vacancy that is affecting much of the rest of the nation.
That somewhat positive outlook continues when considering the industrial vacancy in Pittsburgh. There is still considerable demand for industrial space in our market and, when combined with few deliveries, this is setting us up for steady conditions and stable vacancy rates. We are excited about 2 new industrial/flex developments in central locations close to downtown Pittsburgh. These projects will help fill a void in as demand for this type of product continues to increase.
Rental rate growth in both the office and industrial sectors is being affected by these market conditions. Office rental rates are decreasing faster in Pittsburgh than those in similar cities and that will likely continue as the market continues to soften. However, even though industrial rate growth is decreasing more quickly than it is nationally, it’s not likely to be a long-term issue, as demand continues to increase, and construction remains stagnant.
Finally, I want to leave you with a positive thought. Yes, absolutely, we are struggling to make sense of the past few years. The pandemic and resulting impacts continue to affect the Pittsburgh market. However, there is still reason to hope. We have been here before – for different reasons and in different circumstances – and turned things around. We are known for being a hub for tech, med and ed and those fields are still here and still strong industries. It may take some time to adjust, but employees will return to the office and businesses will need to expand their footprint. And, until they do, we’ll be working with clients, large and small, to make sure they find the perfect space in the perfect place, we call that DreamSpace!