Pent-up demand spurs growth in Pittsburgh's industrial sector
The Pittsburgh industrial market has historically been a relatively small property sector due to several limiting factors, including difficult topography, infrastructure constraints and Pittsburgh’s location between two major industrial markets: Columbus, which is a three-hour drive to the west of Pittsburgh, and Pennsylvania’s Central Valley, which is a three-hour drive to the East of Pittsburgh.
However, with the emergence of e-commerce fulfillment centers, the growth of the Pittsburgh economy and major infrastructure improvements, we are starting to see strong demand for well-located industrial properties in the region.
The size of the Industrial market for the greater Pittsburgh MSA is 185 million square feet, of which, 23.6 million square feet is Flex and 161.1 million square feet is warehouse. Flex vacancy rate is currently 9.4 percent with 98,000 square feet under construction, and warehouse vacancy is 5.8 percent with 263,000 square feet under construction.
Spec Development Abounds
Based upon the tight vacancy and limited new construction in the warehouse space, there is believed to be significant pent-up demand, particularly for Class A users requiring 250,000 to 500,000 square feet. Accordingly, there are a handful of planned speculative projects in this size range in the Airport, Butler County and Beaver County submarkets breaking ground in 2018. Lenders in the region are also bullish on the strength of the Pittsburgh industrial sector and will lend on speculative well-located projects with strong and experienced sponsorship.
Many of the speculative projects are being developed in the Parkway West/Airport submarket due to the availability of land, proximity to highways, the Pittsburgh International Airport and Shell Ethane Cracker plant.
Another driver of this growth is the construction of the second leg of the Southern Beltway (Route 576) from Route 22 to I-79, which is scheduled for completion in 2020. This project is the spine of the 40-mile Energy Corridor starting at I-79/Southpointe and continuing to the Royal Dutch Shell petrochemical plant at Route 18/I-376 in Beaver County. The expectation is that completion of this highway will spur significant future industrial development.
Challenges for Developers
On the investment side, according to Real Capital Analytics (RCA), the average cap rate for the Pittsburgh Industrial market in 2017 was 6.8 percent. Consequently, we are generally seeing developers building to an approximately eight percent cap for speculative projects and with average rents for newer Class A warehouse product generally ranging between $6.00 to $6.75 per square foot, the maximum supportable project cost (leaving room for developer profit) is roughly $70 to $75 per square foot. This cost number can be a challenge due to the difficult topography and related sitework costs. Raw land prices can range between $40,000 to $100,000 per acre, but in certain situations, site improvement costs could be two to three times the raw land cost making the feasibility of the development questionable.
As previously mentioned, industrial brokers in the region are confident that there is significant pent-up demand for larger (300,000 to 500,000-square-foot) new, state-of-the art industrial facilities to satisfy the needs of certain users who have identified a strategic need to be in Pittsburgh. Again, the primary limiting factor for delivery of a large industrial building is the scarcity of sites due to the topographical and infrastructure challenges\costs associated with creating a site that can accommodate a single building with a large footprint.
Due to the relatively small size of the Pittsburgh industrial market, national development companies and REITs are virtually non-existent in the Pittsburgh market. Instead, new development is dominated by local and regional companies, including Chapman Properties, Neyer, The Buncher Company, Chaska Property Advisors and CJ Betters.
Overall, we expect to see continued industrial development as rents and demand rise due to Pittsburgh’s continued growth and investment in tech companies, along with e-commerce and infrastructure improvements, which will drive demand for space in the long term. Furthermore, the passage of the recent tax reform could spur additional capital investment in new or expanded industrial facilities. Much like other property sectors in Pittsburgh region, the industrial market is anticipated to show moderate stability and growth as demand continues to increase while supply growth is kept in check due to the challenges outlined above.
