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Views differ on the prospects for commercial real estate

Sunday, April 09, 2000

By Dan Fitzpatrick, Post-Gazette Staff Writer

It can't get much better for Pittsburgh's commercial real estate industry.

New construction, some of it publicly funded, is at a record high. Last year, more than $3.2 billion in new projects came out of the ground, including a new Pirates ballpark and a new Steelers stadium. Developers also put up 1 million square feet of new office space in 1999, building much of it without having tenants in hand. Another 900,000 square feet of new office space is scheduled for 2000.

Can Pittsburgh fill it all?

  Anita Dufalla - Post-Gazette

It is tough to answer that -- yet. Office vacancies across the region increased slightly last year from 11.9 percent to 13.1 percent. Downtown office vacancies also jumped, from 12.4 percent to 13.3 percent, according to a report from Grubb & Ellis Co. Pittsburgh-area companies absorbed less office space in 1999 than they did in 1998, according to Grubb & Ellis.

That is not a good sign. It could mean that the supply of new buildings is outpacing demand for the space.

"The party may be mostly over here," said Jeff Burd, president of Pittsburgh Construction News.

Others are noticing the same trend.

The Society of Industrial and Office Realtors has put Pittsburgh on its "watch list" of cities with high levels of vacancy and new construction, along with Atlanta, Dallas, San Antonio, Fort Worth, Texas and Tulsa, Okla. Along the Parkway West, several new, speculative office buildings are scheduled to open this year, creating more risk.

In the western suburbs, "there is a lot of product and not enough demand for it," said David Koch, vice president with commercial real estate brokerage Langholz/Wilson & Associates Inc.

Rising interest rates and a shortage of labor in the construction industry are sure to make things more difficult for landlords and developers in the coming years. The unknown variable is the local economy. If more high-technology firms start and expand locally, Pittsburgh will need new buildings to meet the demand.

That has happened before, in a big way, with Warrendale networking firm Fore Systems, now Marconi.

Started in a small office over an Oakland hair salon by four Carnegie Mellon University computer scientists, Fore quickly expanded to 2,000 employees in less than a decade. Its growth allowed the company to take more space and eventually build a $44 million campus in the North Hills that features a health club, a soda fountain and cubed architecture. One of Fore's original founders, Francois Bitz, also wants to help build a 227-acre office park on county-owned land near the Marconi campus, to attract and retain more technology companies.

That project, called Tech 21, is in the planning stages.

"My feeling is that we are on the verge of a great expansion in Pittsburgh with our high-tech companies," said Jeffrey Ackerman, an executive vice president at CB Richard Ellis/Pittsburgh, one of the largest commercial real estate brokerages in Pittsburgh.

Ackerman takes an optimistic view of Pittsburgh's commercial real estate future. Citing figures from CB Richard Ellis, he said Pittsburgh's developers are building the right amount of supply to meet demand. He also believes the market won't crest until 2005 and that the success of technology firms could push that date further into the future.

For proof, he points to FreeMarkets Inc., the Internet auctioneer that moved last March moved from the Cultural District to One Oliver Plaza, a 37-story office tower on Liberty Avenue.

At first, FreeMarkets took two floors. In December, the company went public, and its shares increased fivefold in the first day of trading. Last month, the company solidified its presence Downtown by signing a new lease for 109,000 square feet, giving it 10 floors and a total of 180,000 square feet at One Oliver.

FreeMarkets, as the building's dominant tenant, helped raise One Oliver's occupancy rate from 11 percent to 50 percent. In return, the building's landlord agreed to change the name of One Oliver to FreeMarkets Center and allow the company to install its red-and-white logo on four sides of the tower.

FreeMarkets is one of several technology firms planning to take more space in the years ahead.

California-based Seagate Technology, the world's largest maker of disk drives, plans to fill a $40 million, six-story building in the Strip District along the Allegheny River. It currently has temporary space on the South Side, where it employs 57 people. Its new research and development center should be ready in 18 months.

Another growing outfit is iGate Capital Corp., formerly Mastech, based in Oakdale. One of iGate's business units, Emplifi Consulting, is looking for 90,000 square feet of new office space, according to Oxford Realty Services' Bill Leone, who handles iGate's real estate needs.

"These companies exist in Pittsburgh," Leone said. "If we did not have the space available, they would go elsewhere."

That raises another point about the commercial real estate market. New blood is still rare. In 1999, many of the big leases were signed by companies relocating their operations from one part of the region to another.

NOVA Chemicals Corp., for example, decided to locate its new North American headquarters in Moon, consolidating employees from several different locations, including Monaca.

Engineering firm VoestAlpine Industries made the decision to consolidate its Robinson and Strip District employees at Southpointe, the Washington County business park. Federated Services Corp. also moved some local workers to the North Hills, taking 99,000 square feet at the Pittsburgh Office and Research Park.

The same trend is expected to continue in 2000.

All of the big companies currently looking for new space are either local or have local operations. One example is Smith-Kline Beecham Consumer Healthcare, which markets Aquafresh toothpaste from a campus in Kennedy. The company is considering a new North American headquarters of 170,000 square feet and is looking along the Parkway West. Another big example is American Eagle Outfitters, the casual clothier based in Warrendale. American Eagle is looking for 200,000 square feet of new office space.

Both SmithKline and American Eagle are expected to make decisions this year.

Another trend that took hold in the last year was the acquisition of big buildings by local investors.

That, too, is expected to continue in 2000.

The largest sale of 1999 was PPG Place, a 1.6-million-square-foot glass Gothic complex in Downtown Pittsburgh. The Hillman Co., an investment company that rarely talks about its deals, purchased PPG Place for $185 million last summer. It was the largest sale of a Downtown office building in 15 years.

Another big transaction was the old Gimbels Building, which sold for $15 million to two prominent Pittsburgh real estate families -- the Perlows and the Rudolphs. The Perlows are co-founders of Interstate Hotels, and the Rudolphs at one time owned 47 area Wendy's restaurants. Together, the two families are spending more than $25 million on renovations to Gimbels.

Only a few outside investors cracked the market in 1999.

A Massachusetts real estate investment trust paid $32.9 million for six buildings and 60 acres of vacant land at Cherrington Corporate Center, an office park in Moon. Still, that was the only large purchase by a real estate investment trust all year.

So-called REITs, which are publicly traded, are not doing well on Wall Street.

Created by Congress in 1966, REITs allow people of average incomes to invest in the expensive world of commercial real estate. Drawing from the example of mutual funds, REITs purchase properties, place them in a pool and sell shares of that pool as securities.

REITs own several office buildings, warehouses and shopping centers in the Pittsburgh area, including Ross Park Mall, South Hills Village, Washington Crown Center and the Century III Mall. Urban Retail Properties, the Chicago company promising a $480 million makeover of Downtown's retailing district, is part of a Chicago real estate investment trust called Urban Shopping Centers Inc.

In the last two years, investors have poured much of their money into technology stocks, ignoring companies that deal in bricks and mortar. As long as their stock prices stay low, REITs will have a difficult time growing.

Their ability to buy property is partly a function of their stock valuation.

But REITs' troubles have created opportunities for local companies such as Oxford Development Co. and Madison Realty Group Inc.

Last month, Oxford put the 32-story CNG Tower under contract, marking the company's return to its big real estate plays of the 1960s to the 1980s. Oxford, once the region's dominant development company, ran into problems in the early 1990s, when a soft real estate market made it difficult for Oxford to build new space or sign tenants. By cutting expenses and changing focus, Oxford was able to recover in the latter part of the decade.

A purchase of CNG would cap the recovery.

Madison Realty Group's big year was 1998, when it purchased the Frick and Westinghouse buildings Downtown and sat atop a $300 million collection of office buildings and shopping centers. Last year, though, founder Dan Summers left Madison and formed his own company, Hastings Realty. Since then, both groups have been quiet. Bernard Reilly, Madison's new president, could not be reached for comment.

Summers currently is negotiating the purchase of a shopping center in Florida.

"We are moving slowly, one project at a time," Summers said.

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