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Higher building material costs could reduce vacancy rate

| Sunday, Oct. 22, 2006

Higher building materials prices may eventually have an impact -- in a positive way -- on the relatively high vacancy rate in the Pittsburgh office market, a report indicates.

According to Grubb & Ellis Co.'s 2006 Office Trends Pittsburgh report for the July-September quarter, the scenario goes this way:

  • Rising material costs and engineering/design requirements have increased the cost of new structures.

  • That means rental rates are approaching levels that will not justify new construction, which will result in a slowdown in new building activity.

  • That forces tenants to absorb existing space, which in turn helps decrease the vacancy rate in existing buildings, now at 19.5 percent for all classes of buildings in the area office market.

Although energy prices have dropped dramatically over the last several months, the impact of increased energy costs and material shortages have affected the costs of new construction, said Jason Stewart, a commercial real estate broker and Grubb & Ellis vice president.

Here's an example: A 48,000-square-foot building built for a Grubb & Ellis client in Cranberry cost about 20 percent more to build than a similar 48,000-square-foot building constructed there two years ago.

'It would be naive to say rising prices would not have an effect on rental rates for new construction," he said.

That means existing buildings with space to rent can be more attractive to tenants looking for space, he said.

Nonetheless, there also are reasons why new buildings will continue to be built; they offer tenants larger floors and modern mechanical and infrastructure systems.

Also, there's a certain "splash" a company gets by having its own signature building, Stewart said.

He cited local corporations -- among them Equitable Resources Inc. and Del Monte Foods Co. on the North Shore, American Eagle Outfitters Inc. at the SouthSide Works, and Consol Inc. at Southpointe II in Washington County -- that have either already moved to, or committed to locate in, new buildings.

"Additionally, rising construction costs impact tenant improvement dollars," the Grubb & Ellis report says.

"Landlords in softer submarkets may be more inclined to absorb these expenses while tenants in tighter submarkets may be required to (pay) out-of-pocket to offset these increases."

But while costs for construction materials may have been up in the range of 8 percent through the first half the year, they definitely "flattened out" in the last couple of months, giving back anywhere from 33 percent to 70 percent of those gains, said Jeff Burd, president of Tall Timber Marketing, a Ross-based construction market research and consulting firm.

That includes costs for such products as drywall and lumber, copper and other metals.

In the Pittsburgh region, overall commercial construction fueled by university, health care and power-plant construction projects actually has been soaring this year.

The company projects the region is on pace to surpass the $2.8 billion mark for new construction in 2006, up from about $2.35 billion in 2005.

Real estate notes:

  • West Elizabeth Lumber Co. in Elizabeth, Allegheny County, has been certified to supply lumber and plywood for green building projects in the Northeast. The firm received the Rainforest Alliance's SmartWood's Forest Stewardship Council certification.

  • TMI International Inc., which has had a location in the Pittsburgh market since the late 1990s, has purchased the manufacturing/office facility it has occupied at 5350 Campbells Run Road, Robinson, for $3.6 million. The company assembles energy controlled doors there. The seller was Joseph and Annie Kleynjans.

  • Newest restaurant additions at the Mall at Robinson is Longhorn Steakhouse, to be located in a one-story, 5,627-square-foot structure on Robinson Center Dr. Salsarita's Fresh Cantina, a 2,500-square-foot restaurant, is planned at Cranberry Commons. Also, Aspen Dental has opened its sixth area location in a 3,600-square-foot office at 5450 Campbell's Run Road, Robinson.

  • Recently elected to three-year terms on the Realtor Association of Metropolitan Pittsburgh board of directors were Suzanne Gruneberg, Dale C. Hinkle, Thomas J. McCaffrey, Phyllis L. Spiegel and Frederick D. Valicenti.

  • PJAX Inc. has purchased the former Kramer Brothers Freight Lines truck terminal on about 20 acres on Kramer Drive, Richland, for $3.15 million, from Northridge Enterprises LP, according to a deed filed with the Allegheny County Recorder of Deeds.

  • The Wexford Plaza complex at 10962 Perry Highway, Pine, has been sold for $3.7 million, according to a deed filed with the Allegheny County recorder of deeds. The seller was FRATO Inc., a business trust whose trustees include Frank Viola and Thomas J. Weir Jr. The buyer was MRW Realty LLC., which plans to rename the complex Best Tile Plaza.

  • Regatta Construction, a luxury builder/developer from Vero Beach, Fla., has opened an office in Center Township, Beaver County. Dennis Witherow, a Beaver County native, heads the company, and John DeChellis heads the local office.

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