2020 Q3 Office Report

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Vacancy for Class A and B properties in the entire Pittsburgh market is currently 11.7%. This is up from 10.9% last quarter. At the start of the year, vacancy was 10.2%. The Central Business District’s (CBD) vacancy is 14.3%, but the total availability is 16.9%. Last quarter, the CBD vacancy rate was 14.0%, however, the availability rate was at 17.5%; this was the highest it has been since our records began in 2000. The submarket with the most vacancy is West Pittsburgh, with a vacancy rate of 14.5%. Fayette County has the lowest vacancy rate at 4.5%, however, it also has the least amount of Class A or B space. Oakland has the second lowest vacancy rate at 5.2%.

Currently, there are nearly 1.7 million square feet (SF) of sublease space available. This is up from 781,900 SF at the beginning of the year. A large portion of this space is in the CBD, where 524,754 SF is available for sublease in Class A and B buildings. This also accounts for approximately 2% of all the Class A and B space downtown. Despite rising vacancy rates and negative absorption, Class A and B rental rates continue to climb, currently topping off at an average of $25.47. In the CBD, Class A and B rates average $27.32. This is up $0.05 over last quarter and the highest it has ever been. Rates are expected to have peaked and should begin declining to adjust for the increasing vacancy.

Total net absorption for the quarter was negative 679,172 SF and year-to-date it is negative 1,030,034 SF. In Q3, the CBD had the greatest negative absorption rate of 332,487 SF.

Presently, there are 21 buildings under construction for a total of approximately 2.2 million SF. A large portion of these properties are in the Greater Downtown or Parkway East submarkets. The three largest properties under construction are Bakery Square Three, Liberty East and Innovation Research Tower.

The tech and robotics industries are ones which have shown signs of thriving, particularly in the Greater Downtown submarket. Aurora Innovation will relocate from approximately 39,000 SF at Tech Forge in Lawrenceville to more than 100,00 SF at 1600 Smallman Street in the Strip District. RE2 Robotics expanded from 20,000 SF to 30,000
SF. The former Sears outlet building in Lawrenceville is also being converted into a mix of office and industrial space. Many of these properties are being termed “tech-flex,” meaning while a large portion of the space is designated for office use, there is a flex or light industrial component designed for R&D and light manufacturing geared towards the technology and artificial intelligence fields. At the Three Crossings development in the Strip District, there is a 53,000 SF building being transitioned into tech-flex and will be known as Factory 26.

Dollar Bank’s announcement of their relocation from Three Gateway Center was one of the most highly anticipated transactions of the quarter. The tenant, who called Gateway Center home for more than 30 years, has chosen to remain in the CBD and move into 20 Stanwix Street. The bank will occupy 76,000 SF on the top four floors of the building, as well as a branch on the first floor. Dollar Bank will also expand their presence in the Strip District (Greater Downtown Submarket) by an additional 35,000 SF.

The architecture firm, Perkins Eastman, is relocating from The Pennsylvanian to 525 William Penn Place. This is a prime example of a firm requiring more space to accommodate proper distancing due to COVID-19. While their former space contained many smaller cubicles and bench seating, their new space will be more spacious with larger workstations and private offices. This is a trend we expect to see more firms enact. So, while firms might be reducing the number of employees they have in the office, it will be important to maintain a large footprint to accommodate healthy social distancing.

Other notable Class A transactions in the CBD include Lockton Companies’ lease of 8,000 SF in One Oxford Center and Wealth Enhancement Group occupying 7,000 SF at 11 Stanwix Street. DFL Legal, represented by Colliers, renewed for 14,000 SF at 20 Stanwix Street.

While deal activity was slowed, a couple of notable suburban transactions closed in Q3. In Washington County, Inovalon signed a lease for approximately 40,000 SF at 275 Technology Drive and Scio Health Analytics will be occupying nearly 11,000 SF at 111 Ryan Court in the Parkway West.

As we move forward in the time of a pandemic, rental rates are expected to decline as vacancy rates rise. Absorption is not expected to reach positive levels in the near future, particularly in the CBD. The suburban submarkets should fare better, as there is newer product, more space for social distancing, and less of a need for public transportation.

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2020 Q3 Office Report

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