The improving economy and demand related to Marcellus shale gas exploration have caused a shortage of industrial real estate space in the Pittsburgh region — a trend that’s encouraging but gives reason for concern, experts said.
The tight supply signals a healthy market but drives up prices and limits options for industrial companies looking to expand here.
“The Pittsburgh industrial market is at a tipping point,” said Lou Oliva, executive managing director at Newmark Grubb Knight Frank’s Pittsburgh office, an industrial real estate broker Downtown.
Vacancy rates for industrial space neared an all-time low of 7.4 percent at the end of last year, down from 9.2 percent in 2011, according to a report from Newmark Grubb Knight Frank. Another report from Grant Street Associates/Cushman & Wakefield put the vacancy rate at 8.5 percent.
The dwindling supply of sites for warehouses and industrial plants caused 67 companies to look elsewhere over the past five years, said Dewitt Peart, president of the Pittsburgh Regional Alliance.
“In the past few months, I have assisted two companies looking to lease … only to lose them to neighboring states because of our lack of inventory and higher than national rental rates,” said John M. Lisowski, vice president of Grant Street Associates.
When companies shy away from the market, the local economy loses job opportunities, said Don Smith, president of the Regional Industrial Development Corp. of Southwestern Pennsylvania.
“We could be losing about 1,000 new jobs a year with the failure to have sufficient space to accommodate new or expanding companies in the region,” Smith estimated.
The trend in Pittsburgh mirrors the national market. Demand locally is expected to remain healthy because of leases by shale gas drillers and related companies.
More than a third of respondents to a Grant Street Associates survey said they were working on business related to the natural gas industry — up 20 percent from 2010.
Though many manufacturers are not directly involved with the extraction process, they contribute to the supply chain for drillers, providing pipe or concrete.
Peart believes a need will arise for industrial buildings to house businesses related to the petrochemical industry if Royal Dutch Shell PLC builds a “cracker” plant in Beaver County as proposed. The plant would extract ethane and other compounds for use in making plastics and other materials.
“The market needs a catalyst for future growth, and the ethane cracker plant under consideration by Royal Dutch Shell could be the answer,” said Oliva.
One obstacle to growth in industrial space is the cost to prepare sites because of the difficult topography. One group is hoping to spur construction by offering low-interest loans to developers.
The Allegheny Conference on Community Development is trying to raise $50 million to $60 million for the loan program to offset risk developers face in preparing pad-ready sites for industrial development before they secure tenants, Peart said.
“The only viable solution for occupiers needing more than 200,000 square feet of quality space will be new construction, which should benefit existing landowners of pad-ready sites,” Oliva said.
Another challenge is developers’ apparent unwillingness to build industrial space larger than 200,000 square feet — the size of four football fields — without a signed tenant.
“Nationally, most new industrial construction in 2012 was composed of build-to-suit projects, so the Pittsburgh market was not alone in experiencing limited speculative development,” said Richard Gasperini, an industrial broker with CBRE Inc.
National developers of industrial real estate have invested in large East Coast and West Coast cities since the recession, and real estate experts do not expect that to change, Gasperini said.
The tight supply pushed up rents in Western Pennsylvania in 2012. The square-foot rate at year-end was $7.46, up from $7.43 in 2011, said the Grant Street Associates report. Newmark Grubb pegged asking rents at $5.15, up from $5.05.
Industrial facilities are under development:
• United Parcel Service will relocate from Butler to a building at Jackson Pointe Commerce Park in Jackson, Butler County, where a building for Highmark and a speculative building are planned.
• The Allegheny County Airport Authority is preparing sites in Findlay, including one at the end of McCaren Road and Route 30, and private developers are preparing properties near Pittsburgh International Airport, said Dennis Davin, director of the county Department of Economic Development.
Sam Spatter is a staff writer for Trib Total Media. He can be reached at 412-3207843 or [email protected].