Buyer’s market
Downtown office vacancies hit a 10-year high
Six years ago, vacancy rates for some of Downtown’s premier office space hit lows not seen since the early 1980s. But now they are swinging in the opposite direction, leaving experts to ponder whether that amounts to a worrisome trend or an aberration.
At the end of 2019, the vacancy rate for top-level Class A office space in Downtown stood at 16.9%, according to the Newmark Knight Frank real estate firm. That marks the highest it has been since 2010, said Gerard McLaughlin, Newmark Knight executive managing director.
And it comes only a few years after the Jones Lang LaSalle real estate firm called Pittsburgh one of the tightest office markets in the country, with a Downtown vacancy rate of 4.9% in the first quarter of 2013, the lowest in three decades.
But despite the reversal in fortunes, Mr. McLaughlin does not see it as an ominous sign.
He attributed the rise in the rate in part to the BNY Mellon’s decision in 2015 to sell 525 William Penn Place, where it vacated twothirds of the building, and the move by the Buchanan Ingersoll & Rooney law firm to the Union Trust Building from One Oxford Centre last fall.
In making the move, the firm went with a smaller footprint — about 140,000 square feet compared to 200,000 in Oxford Centre. At the same time, the new owner of 525 William Penn Place has struggled to fill that building.
In addition, German software company SAP moved into its new headquarters on the North Shore last year, vacating a block of space it had occupied in the K&L Gates Center in Downtown.
So far, the rising vacancies apparently haven’t affected the lease rates landlords charge for the top space in Downtown. According to Newmark Knight Frank, asking rents for Class A space held firm at $30.01 a square foot, an 11-cent increase over year-end 2018 rates.
Rising vacancy rates can be worrisome, particularly for landlords. But in this case, Mr. McLaughlin saw it more as a matter of circumstances than a sign of a declining interest in Downtown.
He noted that First National Bank has signed a letter of intent to anchor a new 24-story office tower at the former Civic Arena site, with construction set to start in the third quarter of this year.
“I wouldn’t be too worried about the vacancy going up Downtown. It’s a normal ebb and flow of the market. Nothing goes up forever. Something comes down. You just rebuild it again,” he said.
But Dan Adamski, Jones Lang LaSalle senior managing director, sees another factor at work — the explosion of new office development in the Strip District, Oakland, and the East End.
New construction in those neighborhoods “is offering quality product for companies seeking close proximity to key talent,” he said. Firms coming into Pittsburgh or seeking to relocate are
gravitating to those places rather than Downtown.
The problem in those areas, Newmark Knight Frank stated in its 2019 year-end report, is not the lack of demand but a lack of space.
“A recent search for existing Class A space greater than 30,000 square feet only yielded a handful of options, with none in the Strip District and none in Oakland proper,” it stated.
That has prompted even more building, with Oxford Development Company beginning the second phase of its 3 Crossings project in the Strip, where several other developments also are in the works, including McCaffery Interests’ 1600 Smallman Street office project.
Among others, Walnut Capital is building a 268,000square-foot building, dubbed the Innovation Research Tower, on Fifth Avenue in Oakland and is completing Bakery Office Three at Bakery Square in the East End.
Still, Mr. Adamski saw FNB’s decision to build at the former Civic Arena site in the lower Hill District as a positive sign for Downtown.
“That development is going to expand the [Central Business District] by 28 acres and FNB will anchor a new trophy building on our skyline. While that lease may not do much for the overall vacancy rate because it will absorb space that wasn’t there before, it does serve as testament that demand still exists for the CBD,” he said
Some see the rising vacancy rate in Downtown not as a concern but as an opportunity.
One of them is Jonathan Bonime, senior vice president of Fischer and Co., a Downtown real estate firm that represents tenants.
“As a tenant rep, for us, having a client looking for space Downtown when the vacancy rate is going up has to bring the [rental] rate down,” he said.
Mr. McLaughlin agrees. “It’s an opportunity for tenants to find good space and make a deal,” he said.
One of the factors that has led to more space opening up in the Golden Triangle is that law firms, Mr. Bonime believes, are downsizing the square footage they need as the move to other locations or renew their leases.
Furthermore, companies are finding that they don’t need as much building square footage for employees as more and more have the option of working from home.
“Companies are starting to look at that and are saying if we can cut our square footage 20%, we can save a lot of money,” he said.
Where does all of this leave landlords? “Now it’s a matter of, ‘OK, we’ve got this space. Let’s go out and get tenants and make this work.’ The market ebbs and flows like this all the time. This happens in every market,” Mr. McLaughlin said.