Downtown dynamics in flux: Office space falls, rents rise
By Sam Spatter
Published: Friday, September 2, 2011
The growth of law firms and financial and professional services companies has helped fill Downtown's office buildings to the extent that Class A buildings have their lowest vacancy rate in years.
Add the health care industry and universities as tenants, and the seven Trophy Class A buildings -- the most popular with these tenants -- have a vacancy rate of 7.8 percent, according to a report from Jones Lang LaSalle, a national commercial real estate company.
Financial firms headquartered outside the city have chosen Downtown to establish regional offices.
Huntington Bank, of Columbus, Ohio, concentrated its local administrative office in the Grant Building, and First Commonwealth Bank, of Indiana, Pa., is locating its regional office in the Frick Building. Hermitage-based FNB Corp.'s First National Bank of Pennsylvania located its regional headquarters just outside Downtown at One North Shore Center, North Shore.
"I haven't seen this situation in our office buildings since the early 1980s," said Rob Geiger, executive vice president of Grant Street Associates, another commercial real estate firm.
Tightness in occupancy then triggered construction of buildings such as One Oxford Centre, One Mellon Center and Liberty Center, he said.
But there's nothing in the pipeline except for PNC Financial Services Group's recently announced 800,000-square-foot headquarters, which won't open until 2015.
That means available space in most of the Class A buildings -- particularly those classified as Trophy -- will continue to decrease and give landlords the opportunity to raise rents.
Once PNC's new building opens, and it consolidates employees into its Downtown campus in 2015, significant space could be made available in buildings such as U.S. Steel Tower and Allegheny Center, said Dan Adamski, Jones Lang LaSalle managing director.
Law firms, such as Buchanan Ingersoll & Rooney, have established offices Downtown for years because they want to be close to their clients, many of them corporate giants such as U.S. Steel and PPG Industries.
"We have been in One Oxford Centre for years because Downtown is close to the courts, and our employees and clients have access to public transportation," said spokeswoman Tracie Gliozzi.
Trophy Class A buildings offer more than just an office for the tenants, said Jeremy Kronman, executive vice president with CB Richard Ellis, another commercial real estate firm.
"Beside having an open floor plan, they provide restaurants, fitness centers and parking spaces for their tenants, which most corporate officials want for their employees," he said.
Maryanne Dreas, 23, of Highland Park, a customer service trainee for Highmark Inc. with offices in Fifth Avenue Place, enjoys working Downtown.
When she worked in Chicago, she said, getting to work was an issue; and once there, it was a free-for-all of people trying to cram into elevators.
Since her move to Pittsburgh, she hasn't had that experience because there's only a 45-minute bus ride to Downtown. Her favorite reasons for working in Fifth Avenue Place are its architecture and the great food options surrounding the building.
One of them is Jimmy Johns Gourmet Sandwiches, across the street at Liberty Avenue and Delray Street.
"We get slammed every day around lunch time, said manager Jason Reichert. From 12 to 1:30 p.m., about 100 to 200 people walk into the store; and even when the weather is bad, he still gets between 30 and 60 calls for deliveries.
Besides the trophy buildings, other Class A buildings are showing low vacancy rates, while the vacancy rates at Class B buildings, although not showing such low vacancies, are improving.
In its report, "Perspective on a Changing Market, Pittsburgh Skyline Review," Jones Lang LaSalle noted the 7.8 percent vacancy rate as of the end of June marks a continual decline in vacancies since 2009.
"The Downtown market has experienced 11 consecutive quarters of decreasing Class A vacancy," Adamski said. "There are no near-term reasons to assume this trend will change significantly, or that any large blocks of (Class A) space will become available anytime soon."
"This is not a bubble," Kronman said.
As vacancies decline, landlords tend to raise rental rates, and they have increased over the past 12 months, the report said. Average rates for Class A office space Downtown range between $23 and $25 per square foot.
The report lists EQT Plaza, at 625 Liberty Ave., and One Oxford Centre as having the highest asking rental rates of $28 to $32 per square foot.
"Rental rates still do not approach the level required to justify speculative new construction Downtown, so expect to see a continued reduction in the vacancy rate and corresponding increases in rental rates," Adamski said.
Helping to reduce the vacancy rate of office space Downtown has been the conversion of older Class B and C building into residential units. These include, among others, the Century and Commonwealth buildings.
"The widely rumored conversion of Regional Enterprise Tower to residential use and the conversion of a portion of the Oliver Building and all of the former Reed Smith building to hotel use would eliminate a large block of Class B space in the market," Adamski said.
Kim Ford, managing principal with CresaPartners, said much of the increase in tenants in Class A buildings has been driven by the universities and health care companies. However, this expansion has lessened the space available in Class A buildings for new tenants and, in some cases, for expansion of existing tenants.
Because of the tightening of space, some landlords no longer are providing concessions to tenants, she said. Normally, these include offering free or reduced rent for a period, completing work on space to be occupied by the tenant and providing free parking.
"When UPMC decided to relocate its headquarters in the U.S. Steel Tower, that changed the dynamics of Downtown," she said.
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