Despite the Statistics, the Market is Confident
While the optics of the statistics may not bare it, there is plenty of reason to be optimistic about the second quarter. Increased tour activity coupled with more firms returning to the workplace are a welcomed change to the previous twelve months. Pandemic-related effects are expected to be bottoming and recovery is on the horizon. More leases are being executed, but the issue lies in the size of space and the length of term. Nonetheless, transactions are beginning to refuel a previously stagnant market.
Several long-time international companies headquartered within the city will be relocating. Del Monte Foods signed a lease for 15,722 SF at Three Penn Center West. This is a relocation from 375 North Shore Drive in the Greater Downtown, which once bared the name of the food giant. StarKist also announced it will be leaving not just the north shore, but the Pittsburgh region. The well-known tuna supplier is relocating its corporate headquarters to Reston, Virginia. The move is planned to occur in the Spring of 2022. Also, GNC revealed it will be relocating its corporate headquarter to 75 Hopper Place in the Strip District. The international vitamins and supplements retailer will be occupying approximately 76,000 SF. This is a decrease from their current footprint of 250,000 SF at 300 Sixth Avenue in the CBD. Their current headquarters will most likely be developed into apartments. Allegheny Technologies Inc. (ATI) is currently searching for space for their corporate headquarters and considering space outside the CBD. ATI presently occupies approximately 40,000 SF at Six PPG Place.
The CBD experienced a rise in vacancy, going from 14.9% to 15.4%. Pandemic-related rightsizing, accessibility and newer product are a few of the major factors for this decline. As a result of this trend of companies leaving the urban core for fringe neighborhoods or suburban buildings, rental rates in the CBD have declined to $26.45 per square foot. This is a $0.60 drop since the previous quarter. In addition to lower rental rates, many landlords are offering enhanced concessions, such as free rent and increased tenant improvement allowances.
Most of the activity within the CBD is internal, meaning not many firms are relocating from outlying submarkets. One example is the Allegheny County Department of Economic Development, which will be relocating from Chatham Center to the Koppers Building. The footprint of their new space totals approximately 23,000 SF. The Grable Foundation is also moving to the Koppers Building from Centre City Tower. The law firm, Goehring Rutter & Boehm (GRB), executed a lease for 17,160 SF at 525 William Penn Place. GRB is currently located in The Frick Building.
The suburbs saw a couple notable new leases. Renowned local radio station, WDVE, and its parent company, iHeartMedia, will be moving out of the prominent 200 Fleet Street building abutting the Parkway West. Their new home will be comprised of 9,400 SF at Beacon I in the South Pittsburgh submarket. Venture Engineering is relocating to approximately 25,000 SF at 200 Allegheny Drive and gaining equity in the building. They are staying in the North Pittsburgh submarket as their current offices are at 100 Global View Drive. Additionally, the technology firm, NetApp is doing its due diligence and scouring the market for a possible move. Currently, NetApp occupies approximately 70,000 SF in the Cranberry Woods Business Park in Butler County.
Deliveries were very minimal in Q2. However, that is expected to change as there is presently 1.5 million SF under construction. While that is not a particularly large figure, the next quarter should see the groundbreaking of FNB Tower in the CBD. The much-anticipated mixed-use building is expected to contain approximately 434,000 SF of office space, anchored by its namesake bank. Colliers, along with JLL represented FNB in this transaction. Oxford Development, the owner of 3 Crossings, now plans to expand the multi-use development by constructing an additional 450,000 SF of office space comprising four buildings in the Greater Downtown.
From a macro-economic standpoint, at the end of May, the national unemployment rate was 5.5%. This is a decline from 6.0% just two months prior. The sectors with the best employment rates are government (2.2%), financial activities (3.0%), and education and health services (3.4%), all of which are major regional employers. For the Pittsburgh region, unemployment was at 6.13% at the end of Q2. This is down considerably from April, 2020 when it topped off at 17.0%.
The third quarter is anticipated to see a drop in vacancy and an increase in positive absorption. Presently, two-thirds of all Americans 18 and older are fully vaccinated. As more pandemic-related restrictions are lifted, including mask mandates and occupancy limits, many employers are gaining comfort in re-populating their offices. Also, government-enacted policies such as the American Jobs Plan and changes to unemployment regulations should stimulate the workforce. Both locally and nationally, many firms announced plans to transition their workforce back to the office in Q3, whether that be a phased approach, hybrid model or full-time situation.