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CONTENTS
| Fall 2022
05
President’s Message
07
Executive Director’s Message
21
Development Profile Smithfield Custom Condominiums Developing Trend Adaptive Re-use: Office to Residential
25
29
Eye on the Economy
35
Office Market Update JLL
08 Repositioning Downtown (This Isn’t About the Office of the Future)
39
Industrial Market Update Newmark
45
Capital Market Update
51
Legal/Legislative Three Ways to Streamline Entitlements
53 55
Voices
News from the Counties
65
71 NAIOP Pittsburgh Buyer’s Guide
People / Events
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At First Commonwealth Bank, ® we understand that helping today’s developers stay focused on their goals for the future means providing the insight, support and resources they need to seize opportunities that fit their plans for growth. It means making a commitment to their business, being a good partner who listens, and building relationships for the long term. If you’re ready to talk with the team that has the experience and resources to help your project move from vision to completion, call Dave Reed or visit fcbanking.com/business to learn more. Relentlessly working to be the best bank for your big plans.
Dave Reed PA State President 724.463.5741
Member FDIC
President’s Message
PUBLISHER Tall Timber Group www.talltimbergroup.com EDITOR Jeff Burd 412-366-1857 jburd@talltimbergroup.com PRODUCTION Carson Publishing, Inc. Kevin J. Gordon kgordon@carsonpublishing.com
D EI (Diversity, Equity, and Inclusion) means something different to each of us, depending on our background and experiences. NAIOP Corporate and NAIOP Pittsburgh have taken a very straight forward measuring stick when examining DEI at both our local and national organization… “Are minorities and woman both working within Commercial Real Estate (CRE) and joining NAIOP in proportion to demographics?” Approximately 12 years ago, during NAIOP Pittsburgh strategic planning, this issue came up for discussion. We first focused on exclusion. What did we need to stop doing so that we are not excluding groups of people from our industry and organization? While this may have been an important first step, it did not yield results. In more recent years, we have been focusing on inclusion. How do we encourage minorities and women to work within CRE and those already established within CRE to become active NAIOP members? NAIOP has been making measurable progress engaging minority and women CRE professionals as a result. However, regarding our total CRE workforce demographics, we are lagging other professional service industries such as law, medicine, and education, especially with regard to minority participation. For the past three years we have been actively working with Robert Morris University to create a summer program for high performing minority high school students to expose them to the many career opportunities withing CRE. To date, NAIOP Pittsburgh members have invested over $80,000 and well over 1,500 volunteer hours bringing this program to life. In the past two years approximately 43 high school students and 10 mentor college students have completed the program. Planning has already started for the 2023 CRE Immersion Program. As these students transition to college and work, we will see if this investment yields the anticipated return on investment. And NAIOP Pittsburgh is looking at expanding the investment to include mentoring of the program alumni through college. An additional benefit to the program is that RMU has developed some of the program classes into college business classes which will better prepare their graduates for opportunities within CRE.
CRE is a significant portion of the economy. Shortages of design professionals, contractors, skilled craftsman, property managers, analysts, brokers, and other jobs can be eased simply by including a more diverse work force. More important, expanding minority investment into real estate of all types increases the net worth of communities and improves the economic growth and stability of our nation. This allows additional CRE development that improves the quality of life within a community. So yes, there is possible future financial benefit to NAIOP members. Those involved in redevelopment also benefit by having team members who better relate and communicate to minority communities affected by redevelopment, and can communicate the needs and expectations of those communities to those of us who have not lived there. Most important, there is a moral obligation for those of us who have benefited from years of working within CRE to actively include those groups who have not been so blessed. Richard Rothstein’s 2017 book “The Color of Law” takes a disturbing look at the discrimination that black Americans faced in the residential real estate market (and CRE) from before the Civil War to as recent as the 1970s and beyond. It wasn’t until the 1970s, that women could obtain a real estate loan without a man co-signing. Just about all of us started work after discrimination was legally abolished (almost). So while we may have been good at not excluding, it is now our obligation to actively include. This is my last “President’s Message”. For the five of you who read it to the end, thank you. Serving NAIOP Pittsburgh has been an honor. As president elect, Brandon Snyder is well prepared to take
GRAPHIC DESIGN Blink
CONTRIBUTING PHOTOGRAPHY NAIOP Pittsburgh
Massery Photography Buccini Pollin Group Gensler
Strada Architecture PWWG Architects GBBN Mike Lee Craig Thompson Photography Tall Timber Group
CONTRIBUTING EDITORS Karen Kukish
ADVERTISING SALES Karen Kukish 412-837-6971 kkukish@talltimbergroup.com
MORE INFORMATION: DevelopingPittsburgh TM is published by Tall Timber Group for NAIOP Pittsburgh 412-928-8303 www.naioppittsburgh.com No part of this magazine may be reproduced without written permission by the Publisher. All rights reserved. This information is carefully gathered and compiled in such a manner as to ensure maximum accuracy. We cannot, and do not, guarantee either the cor - rectness of all information furnished nor the complete absence of errors
the chapter to new heights. I am genuinely excited for the future of NAIOP Pittsburgh.
and omissions. Hence, respon- sibility for same neither can be, nor is, assumed. Keep up with regional con- struction and real estate events at: www.building- pittsburgh.com
Jamie White NAIOP Pittsburgh President
Why does this investment matter?
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THE CONVERGENCE OF TECHNOLOGY & MANUFACTURING
ELMHURST INNOVATION CENTER
NOW LEASING PHASE 1: 80,000 S.F. AVAILABLE
In the heart of the Pittsburgh Technology Center, Elmhurst Group is developing a new two-building 160,000 square foot R&D campus. Combining modern high-bay suites with dynamic office and open flex space, this Spec-to-Suit project is unmatched in design, function, and location. Fully customizable build-out and amenities packages are available as well as drive-in loading doors and 20’9” - 28’6” clear heights designed for tech, R&D, and life science-focused tenants. Located in South Oakland, Elmhurst Innovation Center offers unparalleled access to the Universities-Medical Hub in Oakland, Downtown Pittsburgh, and the SouthSide Works riverfront amenities. Prime visibility from I-376, signage opportunities, and on-site parking put this site in a league of its own.
www.elmhurstinnovation.com
EXECUTIVE DIRECTOR’S MESSAGE
A s we enter fall of 2022, it is apparent that our city has emerged from the pandemic and investment and economic activity has normalized. However, this return to growth has not been equal throughout our city and region. Particularly, downtown continues to lag in this economic rebound. To start 2022, Class A and Class B office vacancy rate was near 21 percent and that has impact throughout the entire Central Business District (CBD). Retailers, restaurants, our Cultural District, and most importantly our fellow Pittsburghers, need a thriving downtown. We in the commercial real estate (CRE) community have an opportunity to help propel our downtown’s resurgence. Following the lead of the Pittsburgh Downtown Partnership (PDP), our state, county, and city are preparing plans to invest $9 million in converting historic office buildings to multifamily residential.
While this investment is only a pilot program, it is an important first step in our city’s plans to revitalize our downtown. The CRE community must partner to help produce ROI and public value to justify further investment in these conversions. With a new Governor in 2023, we need to ensure that the next administration understands the importance of investing in our CBDs. Our legislative leaders also need to hear from the CRE community about the benefits of these investments. Additionally, Target’s move into downtown presents our city with an opportunity to prove that sizable retailers can thrive in the CBD. If Target succeeds, other top retailers will follow. We should support Target and encourage our networks to support them as well. Our downtown businesses showed resiliency through 2020 and 2021. Now we need to support these businesses with our spending. A vibrant downtown helps the
entire economy, including the CRE sector.
If our city and region are going to fully bounce back from the pandemic, we can’t leave downtown behind. Thankfully, the PDP is working hard to ensure there is a vision and strategy to rebound. We in the CRE community must continue to partner to help accelerate this rebound.
Brandon J. Mendoza Executive Director NAIOP Pittsburgh
PNC REAL ESTATE | As a successful commercial real estate owner, developer or investor, you have a clear vision for today and for the future. Named a #6 originator among banks 1 and largest syndicator of affordable rental housing in the country, 2 PNC Real Estate offers expertise in construction, bridge and permanent financing; agency and tax credit equity financing; public equity and debt solutions; treasury management; risk mitigation; and loan syndications delivered through an integrated model. With PNC Real Estate’s innovative solutions, you’re ready for today. To learn more, visit pnc.com/realestate . WHEN VISION MEETS SOLUTIONS, YOU’RE READY FOR TODAY.
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◊ 1 MBA Commercial/Multifamily Annual Origination Rankings, 2019, www.mba.org 2 National Multifamily Housing Council, 2020, Top 10 Syndicators for Affordable Housing PNC, PNC Bank and Midland Loan Services are registered marks of The PNC Financial Services Group, Inc. (“PNC”).
Treasury management, lending products and services, and derivative products (including commodity derivatives), are provided by PNC Bank, National Association (“PNC Bank”), a wholly-owned subsidiary of PNC and Member FDIC . Services such as public finance investment banking services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC. PNC Bank and certain of its affiliates, including PNC TC, LLC, an SEC-registered investment adviser wholly-owned by PNC Bank, do business as PNC Real Estate. PNC Real Estate provides commercial real estate financing and related services. Through its Tax Credit Solutions segment, PNC Real Estate provides lending services, equity investments and equity investment services relating to Low Income Housing Tax Credit (“LIHTC”), affordable housing preservation, New Markets Tax Credit (“NMTC”), and Historic Tax Credit (“HTC”) investments. PNC TC, LLC provides investment advisory services to funds sponsored by PNC Real Estate for LIHTC, HTC and affordable housing preservation investments. Registration with the SEC does not imply a certain level of skill or training. This material does not constitute an offer to sell or a solicitation of an offer to buy any investment product. Risks of each fund, as well as information regarding the investments, risks, and expenses of each fund, are described in the funds’ private placement memorandum (“PPM”) or other offering
documents. Please read the PPM and offering documents carefully before investing with PNC Bank. Important Investor Information: Securities, insurance, foreign exchange, and derivative products are:
Not FDIC Insured • Not Bank Guaranteed • Not a Deposit Not Insured By Any Government Agency • May Lose Value Lending, leasing and equity products and services, as well as certain other banking products and services, require credit approval. PNC does not provide legal, tax or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. ©2022 The PNC Financial Services Group, Inc. All rights reserved.
CIB RE PDF 0422-060-2032704
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(THIS ISN’T ABOUT THE
OFFICE OF THE FUTURE)
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DEVELOPING PITTSBURGH | Fall 2022
For many aspects of American life, the pandemic that began in March 2020 was an accelerator of trends that were already under- way. For Downtown Pittsburgh, the initial measures to mitigate the spread of COVID-19 – sheltering in place and working from home – masked an underlying trend that had been accelerating since 2017.
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F E A T U R E
D owntown Pittsburgh was 2010s, but the “work” part of that equation had begun eroding in the middle of the decade. Once the third largest home to Fortune 500 companies, Downtown becoming a more vibrant live/ work/play center throughout the Pittsburgh lost tens of thousands of daytime workers when industrial giants moved out in the 1980s, even as five new buildings were built. After stabilizing and rebounding in the 1990s, office occupancy rates soared in the mid-2010s. Those single-digit vacancy rates belied the coming trend of subleases and structural downsizing that was to come later in the decade. The pandemic was the last straw. In the fall of 2022, the effects of the pandemic are still palpable from 9:00-to- 5:00; however, the vibrance of nights in
revitalized retail driving new residential development 20 years ago. When the city got out of the way and let developers set the vision, residential flourished and lifestyle amenities followed. But the health of the office market downtown was masked by several factors that were unrelated to the factor that drives office occupancy: job growth. The job growth that is anticipated in Pittsburgh in the coming decade is unlikely to be in sectors that will gravitate to downtown. It will be tough to move the needle on the office occupancy levels downtown, even if everyone returned to the office by Thanksgiving. That does not mean that downtown faces a bleak future. What the market has already begun to demand – more residential downtown – is being met by converting
downtown has returned. Restaurants and bars are full. The Cultural District is selling out again. Streets are full of residents walking dogs and suburbanites taking a night on the town. If you had asked a civic leader for a vision of a vibrant downtown 20 years ago, chances are they would have described a scene like you can find on any given evening. Even the most optimistic promoter of downtown might not have expected the number of apartments and condos being occupied. It is safe to say that no one would have predicted that 80 percent of the daytime workforce would be absent. Leaders now must set a new course for Downtown Pittsburgh. With any luck, the market will follow. That does not always happen. Tom Murphy had a vision of
The addition of permanent outdoor seating throughout the CBD helped restaurants survive the pandemic and is one reason why dining is stronger in 2022 than in 2019. Image courtesy of the Pittsburgh Downtown Partnership.
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more of the office buildings to apartments and condominiums. Public- and private- sector leaders seem to have recognized this. Policies and incentives are beginning to follow. It is clear that the future of Downtown Pittsburgh will be more residential, more 24/7. That will not be a bad thing, just a different thing.
Beginning with Citizens Bank’s 2015 announcement of its intentions to vacate its space at 525 William Penn Place, multiple corporations relocated from downtown or downsized dramatically. Few, if any, of these changes were the result of a negative Pittsburgh experience, but the market nonetheless saw almost two million square feet of space available for sublease. The impact of this was muted because of three positive market influences a decade earlier. UPMC added more than a million square feet of absorption to downtown when it moved its headquarters from Oakland to 600 Grant Street. Point Park University acquired and repurposed a handful of obsolete office buildings between Fourth Avenue and the Boulevard of Allies. And a dozen office buildings were converted to hotel or residential use. The vacancy rate plunged in Pittsburgh more because the denominator shrank. The numerator – the number of people occupying offices – remained almost the same. Pittsburgh remains a home to a large number of law firms, accountants, and financial service providers. That is a remnant of the demand created by the industrial corporations that called Pittsburgh home. Indeed, many of the firms located in Pittsburgh today still serve those industrial giants all over the world, even though the clients have not been in Pittsburgh for decades. Improvements in technology reduced the number of administrative staff needed. Changes in culture and design shrank private offices and eliminated walls. The net result has been a reduction in demand for space, even as the firms in downtown have expanded. These trends in office space were becoming impactful before the pandemic. Downtown’s most recent big lease news is a perfect example. Dickie McCamey & Chilcote announced the signing of an 80,000 square foot lease in Gateway Center, a reduction of 20 percent from its existing space at the same time the firm reached the 200-attorney level for the first time. Since March 2020, companies providing professional services, such as attorneys, accountants, and bankers, learned how to be effective for their clients while working outside the office.
Another factor making downtown occupancy more difficult is the increased competition from the areas just beyond the central business district (CBD), especially the Strip District. Developments like 3 Crossings, District 15, and Vision on 15th, have grabbed tenants that might otherwise have opted for the Golden Triangle, including a couple firms that were located there. While this trend effectively expands the perception of what is “Downtown Pittsburgh,” it draws tenants away from the traditional downtown offices. “When you see three million square feet being built on the periphery, where are those tenants coming from?” asks Jeremy Waldrup, president and CEO of Pittsburgh Downtown Partnership (PDP). “They will pull from the Golden Triangle and the 25 million square feet of office here.” Those are several strong headwinds working against occupancy levels in the CBD. None compare, however, to the disruption to office life that came from the pandemic. For all the regional market issues that might be making the downtown office market more difficult to lease more fully, the biggest problem has a simple solution: people need to return to the office. It is a simple solution that has thus far eluded the market. The impact of work from home, either as a full time or hybrid policy, is dramatic. Daytime visitation to downtown is about 77,000 people now, compared to 137,000 a day before the pandemic. For a submarket in which 77 percent of building stock is office, one of the highest shares of office space among major metropolitan cities in the U.S., that is a dramatic change. Waldrup notes that the return to office has crept up slightly in recent months but has essentially been range-bound around 20 percent since the late summer of 2021. The share of employees who have returned to work downtown is more than double that number, reaching 44 percent in June. The disparity between those numbers underlines the headache for downtown landlords and tenants. While nearly half the employees have come back to the office, only one in five occupies on any given day.
The Office Problem(s)
The principal problem facing the Downtown Pittsburgh office market is the same problem facing office markets everywhere: fewer people want to go to the office to work. That change in attitude, brought on by the necessity of working from home during the pandemic, may be temporary in nature; however, there are other forces acting as headwinds to office occupancy downtown.
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F E A T U R E
In contrast, the level of leisure and travel activity in downtown have returned almost entirely. Tourism recovered to between 80 and 90 percent during the 2021 football and holiday season, dropping off to the 70 percent range in recent months. The number of daily visitors to downtown has mostly recovered to pre-pandemic levels, however, suggesting that people from around the region are returning to enjoy the lifestyle amenities in downtown. One metric, the number of restaurant seats occupied, sits at 115 percent of the 2019 level. If you have visited downtown in the evening or on a weekend, the vibrance that was palpable in 2019 is there. During the day, however, the CBD does not have the hustle and bustle of three years ago. That has changed how landlords are operating. “Things are going to start changing and have changed already. The issue right now is that we don’t know what things are going to change to. There has to be a strong office market in Downtown Pittsburgh, and I think there will be. It will take some time to adjust,” says Gerard McLaughlin, executive managing director at Newmark. “If you own a building that is 80 percent occupied you should do everything in your power to attract tenants to your building. That means modernizing the building, adding amenities, and working with your leasing team to make the building as attractive as it can be.” McLaughlin notes that the shift to work from home swung the market in favor of the tenants, particularly the employees of tenants. The need to upgrade and “amenitize” buildings is a response to the challenge of retaining workers and attracting them to return to the office, even if on a hybrid basis. Tim Goetz sees corporate occupiers responding to the shift. “We are seeing longer term leases again. In return, tenants are looking for amenities for their employees. The process has been more democratic. They are asking their employees what they want to see after working from home for two years,” explains Goetz, who is managing director for Cushman Pittsburgh. “The landlords are committing to collaboration spaces, fitness centers, storage space, conference
rooms, and other amenities to attract credit worthy, quality tenants. Landlords are going to need to do that if they want to compete. If tenants are trying to retain and recruit, they will need workspaces that are attractive to workers.” The new balance of market power means that the decade-long upward trend in CBD rents is likely to end. Office rents in downtown were the highest in the region, but Class A buildings in Oakland and the Strip have commanded higher rents than those in the CBD for several years. Competition from those submarkets will continue and the focus on employee wants also has employers evaluating their space needs differently. “We don’t have a lot of new companies coming into downtown. When leases come up for renewal, companies are looking at how they are using their space and often now are looking at using less space,” notes McLaughlin. “We are seeing landlords provide contraction rights, so tenants have flexibility if they make a longer-term competitive commitment. We are seeing landlords be more aggressive to retain tenants. That will bring rates down a bit,” agrees Goetz. “On the other side of the coin, tenants that are moving and willing to make a long-term commitment understand that landlords are making a long-term investment and need market rates for that space.” Goetz emphasized that the market was still feeling its way through unknown territory and that tenants were still searching for what their needs will be as leases turn over. The way forward is unlikely to be known until that search ends. In the meantime, the conditions will challenge landlords to retain tenants and reward investors.
leads to higher unemployment, might make workers less comfortable about their absence from the office, while others believe that a reversal of the trend will come if working from home begins to feel like missing out – maybe literally when it comes to raises and promotions. It may also be that employees will not feel obliged to change unless they are compelled to by employers. “A return to the office will have to be driven by the big employers,” says Jim Scalo, CEO of Burns Scalo Real Estate. One trend that will not be driving occupancy downtown is new development. While there are speculative offices in development and under construction in Oakland and the Strip District, there are no plans for new
The Downtown Office Solution(s)
Few observers of the office market or Downtown Pittsburgh expect a solution to the underlying problem to emerge. While a miraculous return to office occupancy would be welcome, landlords in downtown would still be challenged with the long-term structural trends. It is difficult to suggest what might trigger a return to normal office occupancy again. Some suggest that a recession, which
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The Market Square BRT station at Fifth Avenue and Liberty Avenue will be across from the Fairmont. Rendering courtesy Pittsburgh Regional Transit.
construction downtown. The flight to quality is simply outweighed by the difficulty and cost of construction in the CBD. “There are issues working downtown that you don’t have in the suburbs. There’s a lack of lay down issue area. There are more labor issues. And then there’s the time involved,” says Scalo. “The biggest issue in town today is still permitting. We can do three projects in the suburbs in the time that we can do one in the city.” “When you’re building in downtown it’s that much more difficult, especially if you’re trying to be sustainable. There is little room for laydown and staging so you need to make more trips to bring material in. There is little room for cranes. The duration of the project is longer in
the CBD because of how you stage, how you deliver, and the number of hours you can work,” explains Steve Guy, president and CEO of Oxford Development Co. “In downtown you also have to go more vertical, and the more vertical you go the cost per square foot increases and the efficiency decreases. The cost per usable square foot is going to go up in a CBD or urban core environment. In the urban fringe there is a natural benefit of at least three percent, probably five to eight percent, over what you can build in an urban core.” Guy argues that the math does not work for investors in the current market conditions. “We all compete for the same rental dollars. We don’t get better financing or
cap rate in the CBD. When you’re looking at the same rent dollar that extra $20 or $40 or $50 per square foot is a real differentiator in the yield,” says Guy. “If you have to charge the same rent, your investors have to be willing to accept perhaps 150 basis points lower yield. Even if I believe the demand side opportunity is equal, why would I invest where I would get 150 basis points lower yield?” Steve Guy’s rhetorical question assumes that demand for office space downtown is equal to other parts of the region, an assumption that is difficult to accept. None of the growth sectors of Pittsburgh’s economy – healthcare, robotics, artificial intelligence, or life sciences – are natural fits for high-rise office settings. (In fact, it’s easier to argue the opposite.) In general, office demand is weaker now regardless
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DOWNTOWN PITTSBURGH Ready to welcome you!
WORK, LIVE, LEARN AND GROW, RIGHT IN THE HEART OF OUR REGION.
With exceptional commercial office spaces to fit every need, expansive residential and retail opportunities, and boundless forms of entertainment, imagining and achieving is all within reach in Downtown Pittsburgh. This vibrant city is evolving. Join the evolution.
DOWNTOWNPITTSBURGH.COM
F E A T U R E
since the pandemic.
Jeremy Waldrup sees the conversion as a needed boost for the residential component of downtown, as well as for the troubled office market trying to rebound from the pandemic. “Taking 500,000 square feet of commercial office off the real estate rolls will help the market. It will push current tenants in those spaces into other buildings. We are seeing the flight to quality play out in the leases that expired in the last two years, not just in Pittsburgh but everywhere,” he says. Waldrup thinks the relatively low number of downtown residents has impacted the return-to-work metrics in Pittsburgh, at least when compared to other cities with more residential downtown areas. “Look at the residential makeup of Philadelphia. It has quadrupled over the last 20 years. Philadelphia is at 90-plus percent return to work, not because they have more people in the office, but because they did not lose people who worked and lived downtown.” Leonard Klehr, principal at Lubert Adler, is based in Philadelphia and saw that disparity as an opportunity when his firm looked at taking control of the redevelopment of the former Kaufmann’s into apartments. “Pittsburgh is not a foreign market to us. We know about it and think about it. The Kauffman’s development was in a distressed situation. The developer found his way to us, and it was the kind of transaction that Lubert Adler specializes in,” Klehr recalls. “We certainly had our questions about demand, especially given that the transaction took place during the pandemic. Traditional urban residential is dependent upon job growth and there wasn’t any at that point. Lubert Adler has a history of adaptive reuse in a number of cities, and we wanted to take a shot at Pittsburgh. It was behind its sister city, Philadelphia, in developing residential units downtown.” The Kaufmann’s Grand project and the conversion of the Commonwealth Building occurred during the lull in residential development in the early 2020s. Those properties now have waiting lists of prospective renters.
PMC has started work converting the former Allegheny Building on Fourth Avenue into 177 apartments. Roughly 700 units in three major projects on the verge of construction in the Golden Triangle. The Former GNC headquarters building at 300 Sixth Avenue is being converted into 254 apartments by Victrix LLC. Douglas Development has proposed 142 units in the former Easter Seals Building at 642 Fort Duquesne Boulevard. City Club Apartments are 300 units of new construction being developed
Employee data represent estimates taken Monday - Friday and exclude major U.S. holidays. Employees working in-person less than 4-days per week are counted as visitors. Source: Pittsburgh Downtown Partnership, Placer.ai.
by Jonathan Holzman at 305 Wood
Street. Another 125 units or so
Source: Pittsburgh Downtown Partnership
are proposed in numerous smaller buildings. That is the first wave of new residential. Recently, Hertz Investment Group floated the idea of converting 3 Gateway Center to 300 residential units and Rugby Realty announced it was looking for a development partner to convert the 44-story Gulf Tower into a mix of luxury hotel and roughly 200 residential units on the upper 25 floors. In announcing Rugby’s plan, Aaron Stauber referred to research that suggested that demand existed for 5,000 or more additional residential units in the Golden Triangle.
of the location. But demand for residential space continues to grow and that may provide the solution to the downtown office problem. There are 7,000 residents living in downtown in 4,100 dwelling units, most of which are rentals. That is roughly twice the number of people who lived downtown in 2000. The vacancy rate in downtown apartments is six percent. After a decade of adapting old offices and building new units – led by PMC Property Group from Philadelphia and the Piatt Organization (then Millcraft) – developers cooled on the CBD. That has changed
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CELEBRATING
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DEVELOPING PITTSBURGH | Fall 2022
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for Pittsburgh Regional Transit (PRT), notes that all turns made in downtown will be right turns, eliminating the traffic problems that result from buses turning left. The pattern should reduce congestion from bus traffic
As Downtown Pittsburgh sees more residential development, the developers will run into conflict with the desire of civic leadership to bring more affordable housing into the city. As Klehr noted, adaptive re-use of obsolete office buildings is usually complicated and complicated costs more money. Mayor Gainey launched the Downtown Conversion Pilot Program on July 1 to create opportunities for workforce housing by offering incentives to developers for up to 10 percent of the units and committed $2.1 million in American Rescue Plan (ARPA) funds to aid in financing. Though well intentioned, the program will need to bridge a larger gap in financing than the current funding level. “This conversation about commercial conversion to residential will continue to be a priority for us. We have been lobbying the city, county, and state to provide additional funds for this. Right now, we have a $9 million commitment and we’re looking to grow that to $50 million,” says Waldrup. “We’re interested in creating workforce housing, not just luxury units but opportunities for our service workers, healthcare workers, and restaurant workers to have access to downtown housing. That would be an amazing opportunity to provide but something that downtown landlords haven’t figured out yet. We see it as a boon to recruiting healthcare workers or other service providers to our region. Imagine the opportunity to offer a 20-something person just graduating from college to work and live downtown instead of being forced into a suburban setting.” Another regional improvement that could facilitate the development of more housing, particularly workforce housing, is the bus rapid transit system (BRT) that will connect downtown to Oakland and other eastern Pittsburgh locations that are employment centers. The downtown phases of the $291 million project are scheduled to go out for bid in late 2022, with construction starting in spring of 2023. The new system will be operational before the end of 2024. The BRT route will bring the buses west on Fifth Avenue into downtown and east on Sixth Avenue to the Steel Plaza Station, after which buses head east to Oakland and beyond on Forbes Avenue. Adam Brandolph, public relations manager
and speed up the trips from downtown stations to eastern Pittsburgh destinations.
Source: Pittsburgh Downtown Partnership
Stations will be built along Fifth Avenue at Ross Street, William Penn Place, and at Liberty Avenue, opposite Market Street. Along Sixth Avenue, the stations will be located at Wood Street and Steel Plaza on Grant Street. The latter two stations will be integral to connecting the BRT to the PRT’s light rail system.
Source: Pittsburgh Downtown Partnership
“The BRT will connect with the light rail system at the Wood Street and Steel Plaza stations,” says Brandolph. “From there riders can travel seamlessly to the North Shore or the destinations in the South Hills.” If these efforts to develop and attract more residents and visitors to downtown are successful, PDP recognizes that there will be increased focus on public safety and infrastructure in the CBD. After a decade of advocacy, funding has been freed to complete the redesign of Smithfield Street, which will improve pedestrian safety and traffic flow. Waldrup jokes that Downtown Pittsburgh needs another handful of similar projects and expects the public infrastructure upgrade to increase private
investment. He also expects improvements in human services downtown. “We’re focusing on downtown being a welcoming. We will continue to focus on clean and safe. We’re working with police department and homeless outreach providers to provide services. Things have changed. We have more people sleeping on our streets than we have in recent memory,” Waldrup acknowledges. “There are a lot of organizations interested in supporting those individuals. The Second Avenue Commons shelter facility will open in mid-September. That should be transformative to providing services for folks in a low barrier setting. We don’t have that now.”
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F E A T U R E
Clean and safe are important ingredients for attracting retailers, another important component of developing an 18-hour downtown. Retail (including restaurants) was decimated by the COVID-19 mitigation measures in spring 2020 and the climate for shopping and dining did not improve much until after vaccines were widely distributed. Waldrup reports that 30 percent of the ground floor tenants went out of business downtown in 2020. New businesses have been backfilling those spaces and the survivors of the pandemic have seen demand recover. “It’s an interesting time for retail and restaurants. Coming out of the pandemic, there weren’t enough people downtown to support these businesses. Now, these businesses are seeing more customers, but downtown workers don’t make up most of that customer base like they did in the past,” says Jason Cannon, first vice president at CBRE. Adele Morelli, owner of Boutique La Passerelle, echoes Cannon’s observations. Morelli says she took advantage of any available grants and incentive programs to survive 2020 and built a new website that gave her customers a way to buy without visiting the store. When foot traffic returned in 2021, she had a record year with a different clientele. “2021 was a building back type of environment. PDP continued to have events and Visit Pittsburgh drew people into the city; so, while we lost our main client base of women working downtown, we gained clients from people who were visiting Pittsburgh,” Morelli says. That’s my biggest new client base. Every day someone comes in who is visiting Pittsburgh because people are doing more regional travel by car.”
The City Club Apartments will be the first residential new construction in downtown since the Lumiere Condominiums were developed by the Piatt Organization in 2017. Rendering by Indovina Associates Architects.
The synergy between residential development and retail is as real in
Downtown Pittsburgh as it is in Cranberry Township. The reality that retailers need lots of rooftops – or at least lots of apartment doors – was misread by Mayor Murphy 25 years ago. Downtown office workers can support retail and restaurant businesses, but the daytime workforce in Pittsburgh was no longer large enough by the mid- 1990s. Today, those businesses are thriving with a fraction of the daytime workforce as potential customers. The current environment proved attractive enough for Target, which is devoting half its floor space to groceries and staples.
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F E A T U R E
“I think Target moving in gave people a sense of comfort that even in uncertain times, one of America’s favorite retailers was willing to commit to downtown Pittsburgh,” says Cannon. Downtown has changed more in the past two years than in two decades. As a 24/7 neighborhood, the changes have been incremental, almost unnoticeable to the untrained eye, except between 8:00 AM and 5:00 PM. But those changes have been dramatic. Office buildings are mostly empty most days of the week. Fewer restaurants are open at lunch. You can get a parking place any time of the day. Rush hour is not that rushed. It is possible, maybe likely, that Downtown Pittsburgh in 2030 will look like 2019 looked during the workday. It seems foolish to predict when or how people will return to working in the office again. Until the new normal of office occupancy emerges, landlords and office tenants will be challenged to match space and needs. That will be true anywhere. If, in Pittsburgh, another dozen or so office buildings get a new life as an apartment or condominium, the commercial real estate market will benefit. It is worth remembering that Downtown Pittsburgh is home to 20 million square feet of office space. There is room for changes to occur. Jerry McLaughlin believes that the basic value of the office – to offer a place where workers can collaborate to solve customer’s problems to a profitable end – is unchanged. He reminds us that the Downtown Pittsburgh office market has seen troubled days before. “Pittsburgh is very adaptable. We went from 1980 having all the Fortune 500 companies to very few by 1995,” he says. “We’ll adapt to whatever the future brings.” “We will get back to where the economy was pre-pandemic. Will offices look the same? Probably not. Once we all got a taste of working from home that became a game changer. Landlords will figure it out as well,” agrees Goetz. “How much residential can we have in the CBD? It would be great to increase that core of residents. It is a cycle, but we are resilient in Pittsburgh.” DP
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Development Profile
Smithfield Condominiums
B ost Development is most of the way through the entitlement and design of the conversion of the properties that span 635-641 Smithfield Street from an historic office use to an unusual residential use. Thomas Bost is planning to start work late this year on a condominium that draws its inspiration as much from suburban neighborhoods as the downtown architecture. “This is a boutique development and we’re looking for anywhere from three units to 12. We are offering customizable condos. What that means is that not only are you able to select your floor plan and layout, but you will be able to do full customization as if this were a single-family home,” Bost says. “Instead of providing lots; we’re providing square footage.” Bost was interested in developing residential downtown because of what he perceived as a shortage of inventory relative to other cities. As he examined the downtown market, he saw an opportunity at the upper end of the price range, where there is a limited supply of units available for ownership, and an even more limited supply of luxury product. He looked at how the residential units at 3 PNC Plaza were sold as an indication of what kinds of buyers might look for condos downtown, and how those buyers would want to behave. “When the PNC condos were completed, they started out selling them fully finished and received a lot of pushback from buyers who were spending millions of dollars and wanted to customize them. The last units they allowed full customization, and they were able to sell them,” he says. “The more people spend on a home property, the higher the expectation level. There’s less willingness to sacrifice what they want. We’re trying to make this as flexible as possible. That eliminates excuses that people might have who want to live downtown for the experience but can’t find something similar to what they have in the suburbs.”
Rendering by Wildman Chalmers Design LLC.
Of course, the Smithfield Condominiums is not a green field suburban development. The project will transform a Frederic Osterling-designed office building built just before the turn of the 20th century and build a new single-story retail building adjacent to it. The latter part of the scope of the project also involves demolishing the iconic Smithfield Café, which closed in
2012. The condos will be in an eight-story office building that has been vacant since Pittsburgh Technical Institute last occupied it in 2000. Sitting vacant has not resulted in condition problems. “It’s a well-designed building with a lot of character. Luckily, it is steel, concrete, and masonry so it was still in very good
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the other direction. We maximized the number of windows in the bedrooms and living space by putting more windows on the north side of the building,” Chalmers says. “We had to consolidate two pieces of property and build one building to achieve it.” Choosing to develop condominiums instead of apartments created another challenge for the developer: providing parking. “If we couldn’t get parking for the residents, it would not work as a condo. Even though there is plenty of accessibility with public transportation, Pittsburghers like to have their vehicles,” Bost says. “Even if they’re walking everywhere, they want to have the car for the weekend. We’re working with the parking authority to have direct access to the building from the adjacent garage. You can get away with not having parking to a degree for apartments, although your rents will suffer, but for condos parking is a must.” The buyer Bost is pursuing will certainly be a discriminating buyer. Each floor is roughly 4,600 square feet, with a 560 square foot outdoor terrace that is private for that unit. The smallest unit is a 1,775 square foot half floor. Buyers will have the opportunity to take a whole floor or a floor and a half, which will be larger than 6,000 square feet. Bost also expects to offer two full floors, which will be more than 10,000 square feet, on the upper two stories. An additional outdoor entertainment space and swimming pool are planned for the penthouse. For the right mix of buyers, the Smithfield Condominiums could be home to as few as six residents. Bost is betting that there are sufficient buyers for this unusual concept to work. “The size of the units sounds a little crazy, but we know there are a lot of people coming in from huge homes in the suburbs to the Cultural District who would prefer not to get in their car and drive back home. Those kinds of people have said it would be great to have the ability to walk to a restaurant, go to these events, and come back home,” Bost says. “Here is that opportunity. I know that’s not everyone’s problem, but we see a need for it. That kind of buyer wants to own instead of renting. We think that the amount of square footage and the customization will be appealing.”
reuse for a building that was not designed to be residential in the first place” Chalmers explains. “Typically, we look for 25-foot bays for residential construction because that allows for 12.5 feet per room, which is a good size. In office construction you typically want 30-foot bays because it gives you three offices of 10 feet each. We’re dealing with a structural
component that is slightly different.”
“Another challenge is that when you are changing use, you have to revert back to the full construction code compliance. There is no grandfathering. There is no ‘that will work for now.’ You have to be in full compliance,” Chalmers continues. “For example, we are required to have a fire command center on the first floor that takes up 150 square feet of prime retail space. That was a change in the building codes that was driven by 9/11. Right away you’re eating into the retail space. We also had to add stairs and elevators.” The floor plates typical of a 1900 Downtown Pittsburgh office building were two or
Units on the north side of the building will have large balconies which overlook the new construction below. 3D image by Wildman Chalmers Design LLC.
condition. We have the opportunity to bring it back,” Bost reports.
three times as deep as they were wide. That is a configuration that does not lend itself easily to residential conversion, since the apartment or condo would have windows only in the front of each unit. Here, the large unit size proposed by Bost Development worked to the architect’s advantage. “We turned the building sideways. Normally the bedroom windows would face the front on Smithfield but because it’s 120 feet deep, we faced them in
The fortuitous condition does not mean there are not challenges in restoring the building and bringing into it 21st century usage. Architect Chad Chalmers, partner at Wildman Chalmers Design LLC, spells out the issues faced in bringing 635 Smithfield Street back to life. “First of all, it’s an existing building in the city of Pittsburgh and existing buildings are always a challenge. It’s an adaptive
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