Almost overnight, it seems, developers are stepping forward with bold proposals for big, new office projects in or near Downtown.
Alco Parking President Merrill Stabile announced a plan Oct. 8 to build two 11-story office towers and a 1,227-space parking garage in a lot he owns behind PNC Park.
The next day, Raleigh, N.C.-based Highwoods Properties unveiled a proposal to erect a six-story glass office building on the Monongahela riverfront at SouthSide Works as part of a four-building deal with the Soffer Organization.
And in August, Oxford Development Co. pitched a plan for its Smithfield Street property — a 20-story office high-rise that it’s billing as the most efficient in the city.
Why the flurry of proposals?
It’s all about the office market in and near Downtown, local real estate experts say. It’s very tight, with top-of-the-line Class A office space tough to find. Developers are hoping to capitalize on the shortage.
“Probably what’s driving it is the strength of the market. I would think developers would want to take advantage of that if they’re in control of viable sites,” said Jon Harrigan, CEO of Pennsylvania Commercial Real Estate Inc., Downtown.
It doesn’t hurt to test the waters, he added.
“If I were in their situation, I would be doing the same thing. You want to make sure your oar is in the water in case there’s an anchor tenant searching for a new home,” he said.
Richard Beynon, president of the Beynon & Co. real estate firm, said it’s not unusual to see such proposals when the office market is tight. Historically, when Class A occupancy rates hit the mid-90s Downtown, new development takes place.
That last happened in the mid-1980s, resulting in the construction of Liberty Center, Fifth Avenue Place and EQT Plaza, he said.
According to the Newark Grubb Knight Frank real estate firm, the Class A vacancy rate is 7 percent Downtown and 9.6 percent on the fringe — the North Side, South Side and Strip District.
For tenants looking for 25,000 square feet of office space or more, there are “few options either Downtown or on the fringe,” said Gerard M. McLaughlin, Newmark Grubb executive managing director.
“The bottom line is that there’s not a lot of good Class A space available,” he said.
The shortage of space does not necessarily translate into tenants. Oxford, for example, has been trying for two years to secure an anchor tenant for its new office tower, one that started out at 33 stories and has since been reduced to 20.
Like Oxford, Mr. Stabile and Highwoods are waiting to secure a tenant before they start construction. Those projects differ from the new PNC office tower, which is being built by the bank for the bank.
Jonathan D. Bonime, vice president of Fischer & Co., a firm that represents tenants, said there’s a good reason companies don’t jump at the chance to be the first tenants in a new office building in or near Downtown: price.
Building Downtown is expensive and asking rents for new space typically top $30 a square foot, he said. For many of the tenants that he represents, the rate “makes them blink, that’s for sure.” Some won’t consider it. Rates for new space on the North Shore or SouthSide Works probably would be less, but not substantially so, Mr. Beynon said.
Although Class A space is tight, deals can be found in “good” Class B buildings such as the Frick, Union Trust, Koppers and Gulf, where rents generally run in the lower $20 range per square foot, Mr. Bonime said.
For tenants seeking 20,000 square feet of space, leasing a new office building at $30 a square foot compared with existing space at $22 will cost an extra $160,000 a year, or $1.6 million over a 10-year lease, he noted. “That’s a big number,” he said.
He predicted a race among developers such as Mr. Stabile, Highwoods and Oxford to be the first to land a tenant for their projects.
“I think there are people out there willing to pay the price. I don’t think there’s enough out there willing to pay the price to fill out these projects,” he said. “I just don’t see the demand unless there are people coming in from out of town that I don’t know about. I don’t see the internal Pittsburgh demand for that many projects at one time.”
The developers themselves are more confident.
Andy Wisniewski, Highwoods vice president in Pittsburgh, said the Raleigh real estate trust has been bullish on the city since it bought PPG Place Downtown three years ago.
“We think the quality of the building, the amenities of the building, are factors that are going to differentiate one site over another. We believe the plan we put together offers the right mix of amenities and building features to attract the next large user,” he said.
Mr. Stabile said CBRE, the broker for his proposed office towers, already has received calls from people interested in the project. He said he decided to pitch the development now because of market conditions.
“When you look around, you see most of the buildings full. That wasn’t the case two years ago. Now there’s a very healthy absorption of office space that has occurred,” he said. “We just felt the time was right.”