Northeast Real Estate Business

MAY 2018

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

Issue link: https://northeastrealestatebusiness.epubxp.com/i/978140

Contents of this Issue

Navigation

Page 28 of 44

24 • May 2018 • Northeast Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: P I T T S B U R G H The Pittsburgh industrial market has historically been a relatively small property sector due to several limit- ing factors, including difficult topog- raphy, infrastructure constraints and Pittsburgh's location between two major industrial markets (Columbus to the west and Pennsylvania's Cen- tral Valley to the east). However, with the emergence of e-commerce fulfillment centers, the growth of the Pittsburgh economy and major infrastructure improvements, we are starting to see strong demand for well-located industrial properties in the region. The size of the industrial market for the greater Pittsburgh area is 185 mil- lion square feet, of which 23.6 million square feet is flex space and 161.1 mil- lion square feet is warehouse space. The vacancy rate for flex space is cur- rently 9.4 percent with 98,000 square feet under construction. Meanwhile, the vacancy rate for warehouse space is 5.8 percent with 263,000 square feet under construction. Spec Development Abounds Based on the relatively low vacancy rate and limited new construction in the warehouse segment, the consen- sus among industry experts is that there is significant pent-up tenant de- mand, particularly among Class A us- ers requiring 250,000 to 500,000 square feet. Accordingly, developers have sever- al planned speculative projects of that size in the Airport, Butler County and Beaver County submarkets that they expect to break ground on this year. Lenders in the region are also bull- ish on the strength of the Pittsburgh industrial sector and will lend on speculative, well-located projects un- dertaken by strong and experienced sponsorship. Many of the speculative projects are being developed in the Parkway West/Airport submarket due to the availability of land, proximity to high- ways and the Pittsburgh International Airport. Another driver of this growth is the construction of the second leg of the southern beltway (Pennsylvania Route 576) from U.S. Route 22 to Interstate 79, which is scheduled for completion in 2020. This project is the spine of the 40-mile Energy Corridor starting at I-79/Southpointe and continuing to the Royal Dutch Shell petrochemical plant at route Pennsylvania Route 18/ Interstate 376 in Beaver County. The expectation is that completion of this highway will spur significant future industrial development. Challenges for Developers On the investment side, the average cap rate for the Pittsburgh industrial market in 2017 was 6.8 percent, ac- cording to according to Real Capital Analytics. Consequently, we are gen- erally seeing developers building to an approximately 8 percent cap for speculative projects. With average rents for newer Class A warehouse product generally rang- ing from $6 to $6.75 per square foot, the maximum supportable project cost (leaving room for developer profit) is roughly $70 to $75 per square foot. Staying within that overall project cost can be a challenge due to the dif- ficult topography and the related site work costs. Raw land prices can range between $40,000 and $100,000 per acre, but in certain situations site improve- ment costs could be two to three times the raw land cost, making feasibility of the development questionable. Industrial brokers in the region are confident there is significant pent-up demand for new, 300,000- to 500,000-square-foot, state-of-the art industrial facilities to satisfy the needs of certain users who have identified a strategic need to be in Pittsburgh. The primary limiting factor for delivery of a large industrial building is the scar- city of sites due to the topographical and infrastructure challenges associ- ated with creating a site that can ac- commodate a single building with a large footprint. Due to the relatively small size of the Pittsburgh industrial market, national development companies and REITs are virtually non-existent. Instead, lo- cal and regional companies such as Chapman Properties, Al. Neyer, The Buncher Company, Chaska Property Advisors and C.J. Betters Enterprises dominate the local development activ- ity. Overall, we expect to see continued industrial development as rents and demand rise due to Pittsburgh's con- tinued growth and investment in tech companies, along with e-commerce and infrastructure improvements. That in turn, will drive demand for space in the long term. The passage of the Tax Cuts and Jobs Act could also spur additional capital investment in new or expanded industrial facilities. Much like other property sectors in Pittsburgh region, the industrial mar- ket is likely to show moderate stabil- ity and growth as demand continues to increase and supply growth is kept in check. Mark Popovich Senior Managing Director, HFF PENT-UP DEMAND SPURS GROWTH IN PITTSBURGH'S INDUSTRIAL SECTOR Pittsburgh was recently ranked among the "Top 100 Best Places to Live in 2018" by Livability.com, citing the region's strong university pres- ence, burgeoning craft beer industry and successful professional sports franchises as important factors. Home to more than 15 breweries and a vari- ety of new restaurants garnering na- tional critical acclaim, Pittsburgh has also added foodie town to its list of accolades. A mix of local ownership groups and national franchisees has been ac- tively pursuing expansion opportuni- ties and new concepts in the region. Among the most active are AMPD Group, a partnership that includes Local Bar + Kitchen, Steel Cactus and Social House 7, which has six new res- taurants in the works in the coming months both in Pittsburgh and out- side the region in Myrtle Beach, South Carolina. The owners behind a local gastro- pub, The Yard, are introducing a new concept call Stout Pub & Kitchen in the Airport Corridor submarket. This new concept will focus on a variety of cured and smoked meats coupled with local beers and spirits. The fifth location of The Yard, which special- izes in craft beers and gourmet grilled cheese sandwiches, is under construc- tion in the adjacent space. Full Menu of Food Options While full-service dining continues to flourish in Pittsburgh's suburban markets, fast-casual concepts are pick- ing up speed within the central busi- ness district. Landlords are opting to ditch long-established chains in favor of new concepts and food halls that enhance the overall amenity package for prospective tenants. Shorenstein Properties, which add- ed One Oxford Centre to its portfolio in 2016, opened The Oxford Market and Bar in the former food court area in early 2018. The market features ro- tating food themes, a full salad bar and snack items obtained via kiosks where interactive menus guide visi- tors through the process of placing and paying for orders. Pittsburgh's total retail market has seen little fluctuation over the past several quarters, posting vacancy rates ranging between 2 and 3 percent over the past two years. Economic development groups, in collaboration with landlords and lo- cal government officials, are pushing to bring a diverse selection of new re- tail and entertainment venues to the greater downtown area, including a movie theater, arcade and bowling al- ley. Meanwhile, owners and investors in the suburbs are seeking new us- ers for mature big box stores vacated during the onslaught of bankruptcies and inventory reductions in recent months. In Beaver County, the Beaver Valley Mall has backfilled former Macy's and Sears stores with a U-Haul showroom and self-storage facility. To the east of Pittsburgh, Les and Jonah Sandler are bringing their Scene75 concept to an old Kmart. Upon completion, the 90,000-square-foot facility will house an arcade, bar and other activities de- signed for family entertainment. The first location of its kind in Pennsylva- nia, Scene75 is expected to bring 150 jobs and a $10 million investment to the market. Mixed-Use Is Hot Development and new construction in the region have largely focused on mixed-use projects anchored by big box or major grocery stores. In the South Pittsburgh market, Sienna @ Saint Clair opened in late 2017 and is anchored by a Whole Foods Market. The complex offers a variety of restau- rants, shops, salons and professional service offices situated adjacent to new multifamily units. North of Pittsburgh, the rede- velopment and rebranding of the 500,000-square-foot Northway Mall has welcomed the area's first Nord- strom Rack and Container Store, as well as Saks Off 5th, Bassett and J. Crew Mercantile. The project, called The Block at Northway, is nestled among several multifamily complexes along Mc - Knight Road, one of Pittsburgh's most highly traveled roadways. All in all, Pittsburgh's retail market is reinventing itself in a number of creative ways. It's both an innovative and exciting time to be working in this commercial real estate space. John Jackson Vice President, Cushman & Wakefield | Grant Street Associates NEW RESTAURANTS, BREWERIES MAKE PITTSBURGH CULINARY DESTINATION

Articles in this issue

Links on this page

Archives of this issue

view archives of Northeast Real Estate Business - MAY 2018