The skewed cap rate components are one more factor that could cool off financing over the next year or so. As good as Pittsburgh’s market conditions are, there remain a few headwinds to progress.
WHAT COULD STOP US? The most immediate concern about the regional real estate markets is the weakness of the global economy. One of the ingredients in the secret sauce of the Pittsburgh turnaround is the globalization of its businesses. While going global helped businesses expand their prospects and customers, it also opened them up to another level of the business cycle. The weakness in Europe and China has meant reduced sales for many companies with headquarters or large regional presence in Pittsburgh. That in turn, has reduced some of the demand for space. A deeper downturn overseas could hurt more. Another aspect of the current global weakness is that there are still problems with financial institutions. In Europe, the sovereign debt burdens have caused default already. The ongoing discussions are about how much of a haircut Eurozone creditors are willing to accept. Like with subprime mortgage defaults in 2008, the level of exposure of U.S. lenders is unknown at this point. Should it be high, banks will pull back on lending again. On the verge of jumping back into construction mode, Pittsburgh developers would be forced to slow down plans if credit were to be squeezed again. For developers who have demand, land and the wherewithal to finance new construction there is still the threat of rising costs. In the central business district, the shortage of land and supply has created a cost structure for new construction that makes new development difficult for multi-tenant projects. Rents in downtown have moved briskly higher over the past five years but still remain significantly below the $32 to $35 per square foot needed to justify new construction. Even in Oakland, where rents are in that ballpark, there are other development costs that make urban development difficult without subsidies to handle extraordinary site costs or parking. The
state has reorganized the Redevelopment Assistance Capital Program (RCAP), as well as some of the other programs under the Department of Community and Economic Development. Fewer funds will be available in 2012. “I’m a big proponent of RCAP. We have to have it if we’re going to do urban development,” says Jim Scalo. “There’s a round of RCAP grants out there right now but it’s only for projects that had prior authorization.” The fiscal handcuffs that are limiting government now represent a threat beyond the inability to fund P3 projects. One of the key roles that government plays is the upkeep of public infrastructure and at all levels of government that function is being deferred. Improved business conditions in the region will add revenues to the state and local coffers but crumbling infrastructure impedes growth as much as a shaky economy can. Investment in key infrastructure projects was an important ingredient in Pittsburgh’s recipe for success and reinvestment is needed to maintain the growth. In the suburbs, demand for land to develop real estate is up against demand to develop natural resources. In places where natural gas exploration isn’t happening, the word is out about the strength of the economy and land owners are feeling like this is their time to cash in. That’s good for landowners but rising land prices can ruin a development pro forma before a project can get off the ground. Highmark’s purchase price for 24 acres in Cranberry Woods was roughly double what Landmark Properties paid in 2011 for land on Dutilh Road, just across Route 228 from Cranberry Woods. The higher price would add at least $10 per square foot to the office buildings Landmark has proposed.
years went on the image of Pittsburgh became more elevated around the planet. Just as importantly, the image became more elevated here in our backyard. Commercial real estate is on some levels a confidence game. Without faith in the future prospects there is little motivation for anyone to build or expand. What the regional economic development leaders have learned is that a strategy that builds incrementally upon past successes creates sustainable progress. Much like word of mouth for a small business, the reputation of Pittsburgh has begun to be a principle market driver. Perhaps the best indicator of the validity of that approach is the imitation of other cities. Former Allegheny Conference CEO Mike Langley was hired last year by the Minneapolis-St. Paul Regional Economic Development Partnership with the hope that he could create in the Twin Cities a unified economic development approach similar to the one that the Allegheny Conference had during his tenure. And in January of this year, York County, PA merged its County Chamber of Commerce and the York County Economic Development Corporation to become a one-stop organization for business. The county studied a number of EDC business models from around the country and chose to follow that of the Allegheny Conference. As much as anything else, the story of Pittsburgh’s resurgence is the story of a resurgent attitude. Confidence in the region has been a powerful weapon in the arsenal of the counties in southwestern PA as they work to make sites ready for new business. The strategy of hitting singles and doubles has led to some home runs during the past five years. Even after 250 years, the story of Pittsburgh’s evolving economy is still in the early innings. DP
RESURGENT ATTITUDES What has truly been transformed over the past five years has been the attitude of those who are in the commercial real estate business. The recession created hardships for Pittsburgh businesses but as those www.developingpittsburgh.com
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