OFFICE MARKET UPDATE
A s the region’s largest employers stagger back into the office at an unhurried pace, locally held companies outside of the Top-10 by employee count have picked up the gauntlet and started a recovery of the office market. Industry leaders like Dollar Bank, TriState Capital Bank, Civil & Environmental Consultants, GNC, Duolingo, and Management Science Associates are continuing to leverage the physical office to establish culture and encourage collaboration.
conceding to asks for term to secure tenant improvement allowances and rental abatement to offset occupancy costs. Property owners that have invested in amenities. Our region’s amenities arms race started in Trophy and Class A office properties, primarily in the CBD and Greater Downtown. During
acquisition activity as well as urbanization, the latter of which requires significant strategy execution at the CRE level. Pre- pandemic, some of our most celebrated deals were the result of urbanization, including Philips Respironics, Bombardier, Wabtec, Motional and Evoqua. The parallel between Covid and the halt in urbanization is glaring; companies are wrestling with return to office strategies for space already in their portfolios. Adding the complexity of return to office in a completely new submarket is even more challenging. Closing the loop on M&A activity, our market has celebrated the shiny new leases with names like Bosch, 3M, Smith & Nephew and Honeywell. These companies are here solely because of their acquiring Pittsburgh-born businesses. So, absent local Fortune 1000 demand, what’s the good news? In addition to the leasing, we’ve seen from well-known companies already mentioned,
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the pandemic, those strategies have spread to the suburbs, to
adaptive reuse developments and to repositioned Class B product. These suburban and repositioned assets have quietly stolen the show over the past 30 months. Where leasing has and has not occurred is a reflection – sometimes a sobering one – of who has and has not implemented return-to-office strategies. With a few exceptions, demand from Fortune 1000 and multi-market users of office space has yet to return to our region. We are also seeing an absence in mergers and
Who is benefitting?
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The tenants. Property owners have been more than willing to trade concessions that exceed pre-pandemic levels so long as their new customers return the favor with their creditworthiness and substantial length of lease term. Covid’s impact on leasing caused the average length of lease term to plummet in 2020. Now, tenants are increasingly
there’s been good-to-very good activity from younger companies that have had success recruiting locally. Names like Gecko Robotics, Castle Biosciences, Agility Robotics, Locomation and Fifth Season collectively absorbed a significant amount of space that we may not have predicted. What’s so encouraging about this leasing activity is that it was entirely home grown, indicating that our local engineering and tech ecosystem is faring well. Further, there is evidence that these sectors may have more runway. And, somewhat surprisingly, there’s been significant leasing in projects that were not very active pre-pandemic. On the Parkway West, the Soffer Organization has secured 120,000 square feet of new leasing during the pandemic
Pittsburgh Q2 Office Insight Graphs
Supply and demand (s.f.)
Fundamentals
Forecast
Net absorption Deliveries
YTDnet absorption Under construction
76,461 s.f. ▲ 558,000 s.f. ▼
0 1 2 3 4
Total vacancy
21.3% ▲
Sublease vacancy Direct asking rent Sublease asking rent
1,625,527 s.f. ▲ $26.61 p.s.f. ▲ $23.06 p.s.f. ▶
-2 -1
Concessions
Rising ▲
2018 2019 2020 2021 2022
Total vacancy (%)
Average asking rent ($ p.s.f.)
10% 12% 14% 16% 18% 20% 22% 24%
Direct
Sublease
$10 $15 $20 $25 $30
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