Category: Real estate news

Pittsburgh Planning Should Approve This Project

On September 15, the Pittsburgh Planning Commission will again hear from JMC Holdings about its plans for a $200 million mid-rise office building proposed for the for Wholey refrigerated warehouse site. The project , 1501 Penn Avenue, is a 525,000 square foot office building, with 12 floors of offices atop a podium that includes parking and retail. JMC has worked with Turner Construction on preconstruction, although the project is expected to eventually bid to Turner, Mascaro, Rycon, and a PJ Dick/Dick Building Co. joint venture.

Rendering by Brandon Haw Architecture

When the geometric 21-story structure was first revealed to the public earlier this year, Mayor Peduto panned the design and the Planning Commission was lukewarm about the project. One of the principal concerns is the building’s height, which will be roughly twice that of the next tallest building, the Penn-Rose Building one block east. The 1501 Penn project presents the city with the perfect opportunity to transition what is Pittsburgh’s second-hottest office market (and the one with actual land on which to build) towards Downtown. Real estate professionals have considered the Strip District to be the fringe of the Central Business District for a while now. The Pittsburgh Downtown Partnership includes it in its description of the Greater Downtown. If the vision of developers matches the demand from Pittsburgh’s emerging technologies, the Strip could ultimately look like what Fifth and Forbes are becoming in Oakland – blocks of 10-15 story tech “towers” that put thousands of well-paid people in proximity to the city’s center. The image above shows the glass tower rendered in the context of the 1500 block of Penn Avenue, with Downtown beyond. Its location does not threaten the character of the Strip’s iconic retail blocks to the east and provides a reasonable first step towards denser, taller construction between the 16th Street and Downtown.

Wholey’s warehouse

For those concerned about the cold, symmetrical architecture, let’s remember what building will be replaced by 1501 Penn (see above).

If your argument is that the project is overly ambitious for the times or the market, I understand. That’s the call the developers and their investors get to make, however. The same argument was reasonably made about Bakery Square in 2009. That turned out rather well. Like 1501 Penn Avenue, Bakery Square was the latest in a series of attempts to redevelop a legacy building that was unworkable in the 21st century. Bakery Square was also started during the depths of the Great Recession. The Wholey’s warehouse has been proposed as a telecomm center, apartments, condos, and offices over at least two decades. The structure is poured concrete. The concrete is meant to act as one of the insulating materials so the walls are extremely thick. It simply won’t be re-purposed within the bounds of economic sense. If JMC and its investors see a diamond in the rough, I hope the City of Pittsburgh allows them to polish it. The city may no longer need to offer enticements to attract developers like JMC Holdings from New York, but Pittsburgh isn’t Seattle. Planning Commission would do well to remember that we’re still the pursuer, not the pursued. JMC isn’t proposing a chemical plant, just a place where 1,500 or so people will work. After the obstacles that were put in front of McCaffery Interests for five years to make development of 1600 Smallman and the Terminal Building possible, it might be a good idea to put 1,500 customers one block away. How do you think McCaffery feels about the vision rendered below? Seems like the occupants of 1501 Penn Avenue might like having those lovely lifestyle amenities close by.

Rendering by Studio 97.

1501 Penn Avenue can be another linkage between Downtown and the burgeoning Strip District. The Downtown market has gotten softer in recent years. Allowing the Strip Dictrict to become more like Downtown will make for better connections and better rationale for renting Downtown. Planning Commission should let the rising tide continue.

Another interesting project on the agenda for September 15 is the Uptown Tech Flex development proposed by Westrise. The former commercial laundry on Jumonville Street will be converted by Omega Building Co. into a 63,000 square foot office/lab/shop for emerging tech companies. The property type is suddenly a hot item and the Uptown Tech Flex project is located about midway between Oakland and Downtown, just a block from the route of the Bus Rapid Transit (BRT). You can view Desmone Architects’ design at the Planning Commission’s website. The Westrise development is one more private investment that is slowly bringing Oakland and Downtown together, with Uptown and the Hill District standing to benefit. You can only imagine what might occur in this neighborhood if the BRT was running.

Healthcare Construction Update

One of the reasons the Pittsburgh construction market looks weaker for the next 12-18 months is the uncertainty in the healthcare market. Just two years ago, the major programs at UPMC and AHN were going to bring billions of dollars in construction projects to the region from 2019-2022. Some of those projects were being pushed back already (UPMC Heart & Transplant, UPMC Shadyside/Hillman were probably 2021-2022 starts at best), but the financial stress caused by the COVID-19 pandemic. If you want an in-depth look at what’s going on in the healthcare market in Pittsburgh (and beyond), the July/August BreakingGround dropped this week. Check out the feature.Earlier this week, AHN presented the updated institutional master plan for West Penn Hospital to Pittsburgh Planning Commission. Among the major highlights of the ten-year plan were a $100 million outpatient/medical office, a replacement for the Mellon Pavilion, and a 450,000 square foot inpatient tower. Along with the inpatient tower, a 100,000 square foot inpatient infill project will be built, an investment of $300-400 million for new or expanded inpatient facilities. AHN’s other major project on the boards is the $300 million cardiovascular tower planned as a vertical addition above the new cancer center (see cover above) at Allegheny General Hospital. No schedule has been set for construction but CM proposals are expected to be sought this summer.

Following up two projects that had been bid earlier in the spring, PJ Dick is doing preconstruction services for The Watson Institute’s $9 million expansion in Sewickley and Evans General Contracting is building the 250,000 square foot global distribution center for Komatsu. That’s being developed by SunCap Property Group at the Alta Vista Business Park in Fallowfield Township, Washington County. That’s a big win for Mon Valley Alliance and Washington County.

A Tale of Two Overlooked Trends

With two full months of pandemic mitigation under our belts, we are finally beginning to understand the secondary effects of the health crisis. Here are a couple of derivative financial impacts to consider. Unlike previous recessions, the peculiarities and uncertainty of the COVID-19 pandemic are creating unusual stresses on primary care medicine and bankruptcy. As the divergence grows between the health of the stock market and the health of the underlying economy, the shutdown is impacting each of these in an exceptional way.

The fact that there are likely to be a dramatic increase in bankruptcy filings is not unusual for the coronavirus-induced recession. Recessions create different winners and losers. Sometimes it’s just bad luck or timing for a firm that was doing well prior to a downturn. Regardless of the reasons, the steep reduction in business and disruption of credit that accompany recessions results in businesses having to declare bankruptcy. For many of those firms, the bankruptcy allows for reorganization and forbearance that leads to recovery, and ultimately to creditors being repaid. In many cases, the act of filing bankruptcy motivates creditors to reassess their positions and the bankruptcy is avoided altogether. Of course, a significant share of the bankruptcies filed during a recession is Chapter 7 filings, which result in liquidation.

This recession is causing a shakeup in the bankruptcy landscape and the pattern of financial distress is different from any post-World War II recession. One factor that leads to bankruptcy is corporate debt that can’t be paid. Coming into 2020, the levels of corporate debt held in speculative BBB or junk bonds were high, and the stress since then has elevated worries of default. As defaults increase, bonds will be further downgraded, meaning it will be harder for U.S. corporations to raise debt and more costly when they do.

One measure of this problem is the rise in distressed credits, or junk bonds with spreads that are ten points higher than the corresponding U.S. Treasury bonds. In other words, a distressed two-year corporate bond would yield 10.13% on May 20. Standard & Poors estimates that distressed credits as a share of junk bonds rose from 25% to 30% from March 16 to April 10. During that same period the default rate for junk bonds rose in the U.S. from 3.5% to 3.9%. Two-thirds of global defaults in April were by U.S. corporations. This is strong indicator of coming bankruptcies. Moody’s predicts that the global default rate for junk bonds will be twice the 10% rate that marked the financial crisis.

Should this trend play out to bring a steep rise in bankruptcy filings, another issue looms: inadequate bankruptcy court capacity. Courts are already stretched thin and the looming wave of bankruptcies threatens to overwhelm them. That would leave corporations and creditors floundering without resolution while the courts try to catch up.

These dynamics suggest that there will be an increase in pre-packaged bankruptcy agreements and other alternatives to dissolution. Unlike in 2009, liquidity is not a problem in capital markets. There has been dramatic growth in private equity rescue funds. Viable companies should be able to access credit to survive the business disruption or to negotiate satisfactory payments and refinance debt with creditors. But the peculiar nature of this recession makes it almost impossible to determine corporate value. That makes it tough to assign share prices for investors in exchange for equity, or to determine credit worthiness when there are limited revenues, cash flow and view to the future of the market.

Solutions to these challenges for bankruptcy and debt refinancing could keep businesses from closing their doors in the coming months.

The plight of hospitals during the pandemic has been well-documented. What has received less attention is the financial stress of the healthcare system’s foundational element, the personal care physician (PCP).

Mitigation measures in all states included avoidance of doctors’ offices for anything other than emergency or necessary visits. That has resulted in a massive loss in revenues for PCP practices across the U.S. Physicians switched gears fairly adroitly as the virus spread, moving quickly to telemedicine as a way to treat many patients; however, fees for telemedicine appointments are lower, as are reimbursements. Compounding the revenue problem are the delays in getting reimbursements from insurers during the shutdown and the delays in billing from the more limited staffing in PCP offices.

Losing PCP practices, either to closing doors or mergers with large practices, will be bad for healthcare consumers. If there are fewer PCPs competition is reduced, raising prices. In areas that are already underserved by PCPs, consolidation will just broaden these healthcare deserts. Losing more density of healthcare providers will reduce the number of referrals to specialists. More people will put off treating nagging ailments and chronic conditions if the PCP office is inconvenient. That will result in higher hospital admissions and escalating costs of treatment for serious conditions that could have been treated cheaper at an earlier stage.

The problems facing primary care and bankruptcy are downstream from the obvious healthcare and economic crisis. But they represent systemic weaknesses that will present challenges that are mostly unforeseen now.

Innovation Research Tower at Fifth & Halket. Image courtesy Walnut Capital.

Some construction news: PBX is reporting that the $55 million Evans City Elementary School is out to bid due June 19. Continental Building Co. is taking bids for the $12 million North Shore Lot 10 445-car parking garage on May 27. Rycon Construction was selected as CM for the $25 million redevelopment of the former Sears Outlet on 51st Street. Construction will resume on the $80 million, 280,000 square foot Innovation Research Center in Oakland being developed by Walnut Capital and built by PJ Dick Inc.

The Confusing Future of Office Space

Imagine you’re the owner or developer of office buildings. For the past two months most, if not all, of your properties have been nearly empty. A pandemic has forced the adoption of new work habits for tens of millions of people, now working from home and thinking differently about what their workplace should be. Some tenants may not survive the disruption. Those that do are going to have new needs. Think of the questions running through your mind as the landlord:

• When will my tenants come back to the building?
• What do they want from me that is different from what they wanted in January?
• How many of them will work from home now?
• Will they expect me to clean more often? How often?
• What do I do with that million-dollar amenity space I just renovated in the lobby?
• Will they need less space?
• Will they need more space?

This is hardly a parlor game for landlords. As two weeks of social distancing has turned into two months (or more) of shelter-at-home, experts have begun regularly speculating about what the post-pandemic office will look like. Since I’m on record opposing any kind of post-crisis predictions made while the crisis is ongoing, I’ll refrain from commenting upon the many predictions being offered, except to say that I agree the workplace will be different. Bear in mind, however, that there is rarely a time when it is untrue that the workplace of the future will be different. There were already a number of workplace-altering trends in place in 2020. The pandemic has accelerated, eliminated or exaggerated most of them.

First among the trends being accelerated is the move away from the open office plan. Hundreds of articles had been published about the fatigue that was setting in about open office plans. Whatever benefits came from that office design trend are currently being weighed against the fear of easier infection transmission. Likewise, the need to maintain a safe distance from co-workers is inspiring fresh looks at collaboration spaces and shared amenities, which were among the “must haves” for occupiers looking to use their real estate to attract talent.

Developer Jim Scalo is among those looking to understand what changes will be required of the post-COVID-19 workplace. He’s an advocate for the idea of attracting talent through better real estate. He also believes that on balance the pandemic will create demand for more space and he’s not alone. Former Google CEO Eric Schmidt recently made the same prediction on Meet the Press.

The rationale behind this theory is the need to make space less densely populated in order to reduce the risk of infection. Fewer people per square foot mean more space. This flies in the face of one of the primary motives driving the more dense open office plan: lower rent. Open plans may have been trendy for any number of reasons, but the most compelling (and mostly unspoken) was the decrease in space needed. CFOs became very trendy people once they realized the bottom line benefit of density was a smaller rent payment.

Countering the argument for more space is the change in perception about work from home (WFH). Forced to work from home for two months, the American office worker has adjusted very well. The same is true for employers. Most of them look at their next lease renewal with the new perspective on WFH and see the potential for a smaller office footprint. One big North Shore tenant was looking forward to expanding space to keep up with a growing workforce. A month into shelter-at-home, he wondered if he could get smaller space for the same number of people.

You can start to understand why office building owners and occupants are searching for answers. There isn’t much data on the subject and what exists adds to the dilemma. Continental Office did a survey of 424 people, ranging from admins to CEOs, during April and published the results today. Here are some highlights:

• 95% expect the office to be disinfected before returning to work and 96% expect the office to be cleaned and disinfected more often.

• 76% of people think shared seating should be eliminated. 71% think adding partitions to workstations is important.

• 58% of CEOs say they are re-thinking the amount of space they use.

• 74% of people aged 25-34 say they want a WFH option. 72% of all people said they were as productive or more productive working from home as from the office.

• 94% still want to have a physical workspace, regardless of how often they work from home.

• 72% said they missed the social interaction of an office.

Now try reconciling the last two bullet points with the three above them. Work from home can reduce the physical footprint of a business, but not if the company still needs to maintain a workplace for 94% of the workers! That’s probably the reason that Perkin Eastman’s Jeff Young guesses that some form of shared address seating will be part of the future office plan.

Young was one of just a few architects who said that clients had requested that they look at actual space requirements as a result of the pandemic. For their part, architects are being proactive and have generated some interesting guidelines for post-COVID offices, like The Post Quarentine Workplace from Dan Delisio at NEXT Architecture, or We are Here to Help from Perkins Eastman, or WELL Building Cleaning Protocol from Chip Desmone.

At the end of the day, it will be the occupants of the offices that drive whatever the office of the future looks like. Thus far, occupants are just as confused. Two veteran tenant reps, Kim Ford from COEO and Dan Adamski from JLL, were clear that it was too early to draw any conclusions. In fact, they both indicated a lack of specific requirements from tenants. Searches for space are on hold, except for those who absolutely must move.

It’s tough to count your blessings in the midst of a pandemic and business shutdown. You can, at least, thank your lucky stars that you don’t own an office building right now.

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech might not be a deeply ingrained industry standard, but every indication is that it is here to stay. Short for property technology, PropTech is essential for commercial real estate professionals and average people alike. The name PropTech suggests some sort of trendy new thing, but it represents more of a shift in real estate thinking than any one technological advancement. PropTech allows the real estate industry to act intelligently, anticipate future trends, and even improve customer experience

With all of this in mind, today we will aim to define PropTech, identify how PropTech is being used today, and how PropTech has and will continue to impact the commercial real estate landscape.

What is PropTech

What is PropTech? (Property Technology)

According to techtarget.com: “PropTech (property technology) is the use of information technology (IT) to help individuals and companies research, buy, sell and manage real estate…PropTech uses digital innovation to address the needs of the property industry.” In other words, PropTech can be thought of as any software or data analysis application that can be utilized within the real estate sector. 

It can be tempting to assume that PropTech must utilize some cutting edge technology like advanced algorithms, artificial intelligence, or advanced cloud computing. Those technologies certainly can be used, but the everyday realities of PropTech are more about the utilization of any technology for real estate purposes than the nature of the underlying technology itself. 

Going back to the introduction, commercial real estate is an industry that relies on industry wisdom like the one percent rule, the 50 percent rules, vacancy rates, cash flow rules, and much more. This creates a situation where real estate firms and professionals willing to embrace PropTech have a unique leg up on the competition. 

How PropTech is Used for Real Estate Today

How PropTech is Used for Real Estate Today

How can PropTech be used in the real world? Here are some ways in which PropTech is already being used for commercial, residential, and industrial real estate today.

  • Handling big data in the real estate sector: before diving into specifics, one of the main benefits of integrating PropTech into real estate is the need for real estate investors and other industry professionals to leverage the big data available today. When information is cheap, utilizing this information in a profitable manner is essential.

  • Real estate rental and/or buying sites: there are dozens of legitimate real estate search sites out there where users can rent or buy properties. Most people think of these as being for individuals searching for residential real estate, but plenty of PropTech apps/sites exist for commercial real estate including Digsy and LoopNet.

  • Virtual tour applications: for premium real estate listings, virtual tours have become the expectation. Full 360-degree tours available in VR and through standard screens are certainly examples of PropTech. This application has become extremely valuable as social distancing and more severe isolation measures taken to mitigate the COVID-19 pandemic limit physical property tours.

  • Real estate investment technology: for the investor, there are plenty of CRE investment apps from which to choose. These apps might run the numbers on property valuations, give comparables, set realistic rent goals, and much more.

  • Blockchain technology: the technology which allows many cryptocurrencies to operate without government backing is also getting a stronger foothold into the world of real estate every day. For more on blockchain technology and commercial real estate, read on here.

  • Consumer technology that connects them to the world of real estate: just about anything can be PropTech if it is used for the purposes of real estate. This could include your smart device, a digital assistant, a web browser and more. 

Commercial Real Estate PropTech Today and Tomorrow

Commercial Real Estate PropTech Today and Tomorrow

Many of the aforementioned applications of PropTech tie in closely with commercial real estate. The integration between technology and commercial real estate investment and construction gets deeper by the day. One aspect that we have not yet mentioned is how the commercial real estate industry is investing in PropTech itself. In 2016, over $2.5 billion was invested in real estate tech organizations. 

It is next to impossible to predict the future of technology. What is more reliably true is that PropTech will continue to influence commercial real estate construction and investment. A notable downstream impact of PropTech that we did not yet mention is how technology tends to equalize the “have’s” and the “have not’s” in deeply seeded industries. Where commercial real estate information used to be very difficult to find and analyze, many PropTech solutions offer anybody with an internet connection a fairly comprehensive look at industry information. This might also encourage more commercial real estate investment through REITs, crowdfunding, and other modern options. 

Going Forward

Major commercial real estate firms are not only trying to develop their own PropTech, but they are also trying to locate and utilize the best PropTech solutions from startups and third-party companies. The world of commercial real estate is always looking out for the next big industry disruptors such as finding new talent, changing consumer behaviors, and the future of the economy. The emergence and evolution of PropTech is right there with the most significant disruptors to the future landscape of CRE.

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

The stagnation or flat out devaluation of retail real estate values has been well documented in recent years. Dead malls and empty storefronts aren’t just headlines in the news, they are apparent for most of us in our daily lives. Yet it isn’t all doom and gloom. Brick & mortar retail is bouncing back in many regions and within many business sectors. Perhaps more importantly, commercial real estate owners are finding new and different methods to make retail spaces profitable again. In the case of Bed Bath & Beyond, their recent sale and leaseback arrangement could set a precedent for other struggling retailers to get an influx of liquid cash while also planning for the future. 

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Bed Bath & Beyond sold a large portion of its owned commercial real estate in January for a grand total of $250 million. The sale included a wide range of properties including multiple retails stores, office space, and a distribution center, totaling 2.1 million square feet. The commercial real estate portfolio was purchased by Oak Street Real Estate Capital, a privately owned real estate firm operating out of Chicago. It is estimated that the 2.1 million square foot sale accounts for approximately 50% of the real estate owned by Bed Bath & Beyond.

As part of the sales agreement, Bed Bath & Beyond has agreed to lease these properties back from Oak Street Real Estate Capital for an undisclosed period of time. According to Bed Bath & Beyond CEO Mark Tritton: “This marks the first step toward unlocking valuable capital in our business that can be put to work to amplify our plans to build a stronger, more efficient foundation to support revenue growth, financial stability and enhance shareholder value.”

Why This Move is Being Viewed as a Positive for Shareholders

Why This Move is Being Viewed as a Positive for Shareholders

Bed Bath & Beyond, like many struggling retailers, has a debt problem. According to their own public financial reports, the retail giant had accumulated approximately $1.5 billion in total debts as of early 2019. This had investors concerned in previous years. The decision to dump about half of its real estate interests was viewed as a smart move by many in the investment industry based on the fact that Bed Bath & Beyond desperately needed liquid capital to reinvest in their business.

New CEO Mark Tritton prioritized the sale of this property to free up the value of the company’s portfolio. Of course, renting vs. owning creates its own set of headaches. Now Bed Bath & Beyond is on the hook to wisely use this influx of cash to turn a profit or risk wasting their previously owned real estate assets. 

Some Pros and Cons of “Sale-Leaseback” Deals

Some Pros and Cons of “Sale-Leaseback” Deals

Sale-leaseback agreements are relatively uncommon, but they can certainly be mutually beneficial under the right circumstances. With deals like the one struck between Bed Bath & Beyond and Oak Street Real Estate Capital, there are some key benefits and risks that come with the territory, including:

  • Pro: the new lessee frees up capital. As we have already reviewed, perhaps the most obvious and important benefit from the perspective of the seller is the injection of cash they receive from the sale of their real estate. This one in the hand is worth two in the bush only works if organizations reinvest their cash wisely.
  • Pro: sale-leaseback agreements are alternatives to loans. When companies need cash fast, they generally seek loans or equity financing. Sale-leaseback deals allow companies to raise their own capital using owned assets and save money in the long run.
  • Con: tax implications. $250 million in cash sounds like a great deal, but Bed Bath & Beyond may be responsible for paying property sales tax on their new cash injection. There are deductions and reinvestment options to save on taxes, but taxes will be part of the picture regardless.
  • Con: lost long term value. Owning property might not be as sexy as making a huge sale, but the value of real estate cannot be overstated in the long haul. Selling massive real estate interests can be detrimental overall.

Impact of the Deal on Commercial Real Estate Going Forward

Sale-leaseback deals are nothing new. The impact of Bed Bath & Beyond’s recent real estate dump might come down to how the move impacts the company’s financial standing in the next few years. Complicating matters further, the recent Coronavirus fueled bear market has muddied the public’s ability to track Bed Bath & Beyond’s financial health in March and beyond. Projections still suggest that the move will benefit Bed Bath & Beyond in the long term. This may prompt other cash strapped retailers to make similar decisions with their commercial real estate portfolios. 

It will also be telling to see whether the company continues to sell its remaining CRE assets. Other major retailers like Macy’s and Sears have also employed this in the past with mixed results. Whether the latest major sale-leaseback is a revitalization or a last gasp, it will likely inform the future decisions of other companies in similar situations moving forward.

Pittsburgh’s Tech Boom is Driving the Local Real Estate Market

Pittsburgh’s real estate landscape has changed significantly since the slowdown of the manufacturing and steel industry decades ago. The influx of technology giants such as Uber and Google has brought a rise in the demand for both commercial and residential real estate. The low cost of property relative to cities like New York and San Francisco has been attracting companies such as Duolingo, a language learning app that moved its headquarters to Pittsburgh and subsequently put up billboards in San Francisco in 2018 advertising, “Own a Home. Work in Tech. Move to Pittsburgh.” Although plenty of attention has been paid to the effects of the tech industry on residential real estate, not as much as has been placed on commercial real estate.

Today, we will try to connect the dots between the influx of high profile tech companies, trends in local employee behaviors, and how this new Pittsburgh business atmosphere is having a major impact on the local commercial real estate market.

The Current State of Pittsburgh’s Tech Boom

Most of us in Western PA have noticed the recent boost in high tech presence in our local regions. Splitting from our historical business ventures like steel and coal, Pittsburgh is becoming an affordable alternative for tech companies who are no longer willing or able to pay for spaces in Silicon Valley, San Francisco, and other bloated commercial real estate markets.

Much of this tech boom is reliant on the rich talent pool being churned out by local universities. In particular, computer science, robotics, and other high tech programs at Carnegie Mellon University are routinely ranked amongst the best in the world. In recent years, companies like Google and Uber have been working hard to keep these young tech professionals in the local Pittsburgh area after graduation. Those efforts are starting to pay dividends.

Today, there are significantly more jobs (approximately 41%) in research and development than there are in iron and steel mills. Pittsburgh is also experiencing attention from investors. “SoftBank Group Corp (9984.T) last year led a $93 million investment in Pittsburgh-based AI company Petuum. Innovation Works recently hosted 30 Chinese investors interested in robotics and health care start-ups.”

Office Spaces for Google, Uber, Duolingo, and More

While there are many players in the technological revitalization of Pittsburgh, there are a few key players who are leading the way.

Google has long made massive investments in Pittsburgh, particularly with their Bakery Square office spaces. The refurbished Nabisco factory is a fitting transition from the old to the new. Much like Duolingo, Google has actively pursued bringing tech talent to the Pittsburgh area to live and work in the East End.

Uber employs thousands of workers in the Pittsburgh area, which of course does not include the drivers themselves. Perhaps more importantly, Uber has selected Pittsburgh as a research center for self-driving cars. This move ties the ridesharing tech giant to our region for years to come.

Duolingo was founded and is currently headquartered in Pittsburgh. In December, Duolingo became Pittsburgh’s first tech “unicorn” when a fundraising round pushed the company’s value above $1 billion. Rather than going the route of other tech giants and selecting our region as an affordable alternative, Duolingo has always been committed to revitalizing the Pittsburgh area. Duolingo employs 200 workers in local offices.

The Impact of Tech Companies on Commercial Real Estate in Pittsburgh

Beyond the obvious connection of tech companies’ presence being an injection to the local economy, here are some concrete ways in which tech companies have impacted the local commercial real estate industry:

  • Office jobs are on the rise: commercial real estate value for office spaces have been increasing as tech companies continue to occupy more and more space. Thousands of jobs were added in the summer of 2019 as a continuing trend of higher occupancy rates for local office space.
  • Tech companies are investing in properties: not all CRE impacts are directly related to office spaces. For example, Uber recently purchased 600 acres of commercial real estate in Findlay County, PA. This space is going to be used for a self-driving test track for their latest vehicles.
  • Tech workers are driving occupancy in apartment complexes: large multi-family CRE complexes have been going up around the Pittsburgh area, particularly in areas like East Liberty, Lawrenceville, and South of downtown. These complexes are being built in part to accommodate a rising number of tech employees in our area.
  • More tech investment = more local wealth: last but not least, it is undeniable that tech dollars drive local economies. A strong local economy often means a strong commercial real estate market.

Going Forward

There are no signs that the trend of high tech companies choosing Pittsburgh will slow any time soon. An industry-wide trend of shifting away from California and other west coast markets towards traditionally affordable markets is driving the tech industry overall. Other cities experiencing similar growth include Nashville, TN and Austin, TX. The Pittsburgh commercial real estate market has responded in turn, focusing more on offering high scale amenities at premium prices.

What remains to be seen is whether any other large companies like Amazon will set up additional headquarters in our area. Regardless, the effort to keep local talent and recruit local talent to our area will certainly continue to have a major impact on our economy and real estate markets.

Understanding Triple Net Lease (NNN) Agreements

Understanding the intricacies of different commercial real estate lease agreements allows investors, property managers, and lessees to come to an arrangement that is mutually beneficial. One common “special” type of lease arrangement for commercial real estate is known as a triple net lease or a NNN lease. These types of lease arrangements are typically utilized in situations where a single tenant rents out an entire space. While NNN leases are almost always for commercial real estate agreements, they apply to other real estate ventures as well.

With all of this in mind, today we will define triple net leases in detail, explain how they differ from standard leases, single net leases, and double net leases, and finally discuss why NNN leases can benefit both investors and tenants for medium to long term commercial real estate agreements.

What is a Triple Net Lease (NNN) Agreement?

As mentioned in the introduction, a triple net lease may also be called a NNN lease or a net-net-net lease. In a triple net lease agreement, “tenant(s) agree to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.” In other words, the landowner will not be responsible for many, if any, maintenance expenses on the property during the term of the lease.

For a multitude of reasons, NNN leases are less common for short term leases. It is more common for triple net leases to range from 10 to 15 years with stipulations for rate increases over the term of the loan as appropriate. As we will discuss in greater detail below, the primary benefits of NNN leases are lower risk for investors/property owners and lower rates for lessees.

Single vs. Double vs. Triple Net Lease Agreements

Net leases are not necessarily an all or nothing proposition. Instead, there are also single and double net leases that are sometimes used to balance risk vs. cash flow. Here are the similarities and differences between single net leases, double net leases, and triple net leases:

Single net leases are less common than triple net leases, particularly for commercial real estate. According to investopedia.com, single net leases are when: “the landlord transfers a minimal amount of risk to the tenant, who pays the property taxes. This means any other expense—such as insurance, maintenance and repairs, and utilities—are the landlord’s responsibility. The landlord is also responsible for any maintenance and/or repairs that must be done during the course of the lease within the property.”

Double net leases are much more common for commercial real estate agreements. In double net leases, tenants are responsible for insurance premiums and property tax on top of their rent owed. Maintenance costs remain with the landowner.

Triple net leases put the biggest responsibility on the tenants, essentially making the tenants responsible for any ongoing fees and costs related to the property. These include all three of the costs discussed above: insurance premiums, property tax, and maintenance costs.

Gross vs. Net Leases for Commercial Real Estate

Of course, not all commercial real estate agreements are considered “net”. There are also gross leases in CRE in which the property owner maintains fully financial liability for the property during the course of the lease. All commercial real estate leases are considered either gross or net, with single, double, and triple net lease agreements being the differentiator for the degree of responsibility that will reside with the tenant(s).

Benefits of NNN Agreements for Commercial Real Estate Properties

This leads us to our last question: why are NNN leases preferable to other commercial real estate leases? The answer is that they aren’t preferable in all situations. All types of leases from gross to triple net lease arrangements have their share of benefits and risks. Here is a high-level checklist of the benefits of triple net leases:

  • NNN leases carry the lowest risk for investors. The primary benefit of a triple net lease from the perspective of the investor/property owner is the low risk. If insurance premiums go up or if a major repair is required, with a NNN lease, that onus falls on the tenant.
  • Triple net leases are more affordable for tenants. On the flip side, the selling point for NNN leases to tenants is their affordability. Lessened risk for the commercial real estate investor also means lower rental rates.
  • Triple net cap rates are easier to calculate. While this is all relative, calculating NNN cap rates is more reliable than calculating gross cap rates. This is tied into the concept of risk and a more reliable return on investment.

In Summary

Double and triple net leases are likely to remain an appealing option for commercial real estate investors and tenants for many years to come. In the right circumstances, NNN leases are mutually beneficial with their ability to reduce risk for investors and reduce total costs for tenants. Yet they are not appropriate for all CRE lease agreements. As with many decision-making processes, understanding all options available before entering into a commercial real estate lease agreement is a great way to make the best possible choice.

Construction Underway at Beaver Valley Mall

Recently, we discussed what commercial real estate investors were doing to solve the problem of America’s dead malls. As part of that article, one of the solutions which have effectively brought life back to struggling retail real estate is to invest in renovations or other related construction projects. The Beaver Valley Mall in Beaver County, PA has recently broken ground on a new construction effort. If successful, this revitalization could be a blueprint for other dying malls in the Western PA region.

Today, we will review some highlights of the Beaver Valley Mall, discuss the details of the newest construction project, and how this project might impact the local commercial real estate landscape.

CBRE Heads New Strip Mall Construction at the Beaver Valley Mall

Funded by commercial real estate giant CBRE, plans to redevelop a now-defunct Macy’s location are underway at the Beaver Valley Mall. The former site of a Macy’s megastore will be turned into a mini strip mall. This is part of a plan to redevelop large retail locations that were struggling in the region. This new mini strip mall is to be named The Shops at Beaver Valley Mall. JJO Construction started work on the first building in the fall of 2019.

As reported by timesonline.com: “The Shops at Beaver Valley Mall, which will include about 50,000 square feet of retail, office and service space with mall access available in various sizes. According to a CBRE press release, there will be nearly 27,000 square feet of retail space facing Brodhead Road. The Shops at Beaver Valley Mall will join other anchor tenants, such as JCPenney, Dick’s Sporting Goods, U-Haul, Rural King, Planet Fitness and Boscov’s.”

This is not the first renovation and/or construction effort that has recently taken place at the Beaver Valley Mall. Recent construction updates for restaurants and entertainment venues including escape rooms have been part of the shift away from large retail locations and towards smaller, more profitable business partners.

Beaver Valley Mall History and Current Climate

Beaver Valley Mall is located less than an hour north of downtown Pittsburgh. The location first opened in 1970 and boasts over 100 individual stores, a gym, restaurants, and is getting more involved in the entertainment space. Beaver Valley Mall is also dedicated to offering free programs and events for local community members and their families.

As with many American malls, Beaver Valley Mall enjoyed financial success through partnership with anchor tenants including JCPenney, Gimbels, The Joseph Horne Company, and Sears. The location of this latest construction, a now-empty Macy’s, is just one example of these retail giants struggling in the 21st century. Sears and Macy’s locations closed in 2016 and 2017 respectively.

Despite all of the hyperbole surrounding the detail of traditional retail, many malls remain successful. Recent history has shown that successful malls have been willing to make updates to both their facilities and their business model. With the recent backing of CBRE, Beaver Valley Mall is looking towards the future.

Following the Beaver Valley Mall Template

As a continuation of this point, Beaver Valley Mall is by no means in a unique situation. Other large, local malls such as Ross Park Mall, Monroeville Mall, and The Pittsburgh Mills, are all in relatively similar situations. In particular, the Galleria at the Pittsburgh Mills has an uncertain future. Despite promises by Mason Asset Management that renovations were high on the priority list, no action has yet been taken.

The four most recent tenants of the Pittsburgh Mills: Allegheny Health Network Citizens’ School of Nursing, Focus on the Arts, Chicken Connection, and Himalayan Salts Co, tell the story of a shift away from large retailers and towards alternative mall tenants. Many Western PA malls are considering what these new tenants might require from an infrastructure perspective.

Beaver Valley Mall is amongst the local commercial real estate leaders investing significant capital into their retail facilities. With backing from a well-financed organization such as CBRE and a commitment to investing in the space, local commercial real estate professionals and residents will be watching how this new construction effort pays dividends.

Going Forward

As all commercial real estate professionals know, there is not much room for waiting in this industry. As the retail space continues to evolve, so too will commercial real estate investors’ mindsets about malls and other large spaces. The process of revitalizing America’s dead malls is already well underway. In the local Western PA area, it remains to be seen which malls will be able to successfully adapt to a changing retail reality. The truth likely lies somewhere in between exaggerated reports of the demise of traditional retail and the rosy reports of modern retail evolutions.

The mall industry will need to adapt to changing consumer behaviors. Beaver Valley Mall is using a now-defunct mega-retail location as an opportunity to develop a location for multiple, smaller, more profitable tenants. Whether this investment will pay dividends remains to be seen. In either case, the success or failure of mall renovation projects will inform future decisions in our area.

Renovations have Brought the US Steel Tower Back to Prominence in Pittsburgh

The US Steel Tower, also referred to as the Steel Building and the USX Tower, has been a trademark of the Pittsburgh skyline since its construction was completed in 1970. The building is now also known as the UPMC building, and has a long history of importance to the Pittsburgh people, identity, and economy. Recent renovations have breathed new life into the now 50-year-old building. Office spaces in Pittsburgh have become more decentralized in recent years with tech companies like Google and Uber electing to headquarter outside downtown offices.

With all of this in mind, today we will review the recent work being done on the US Steel building and what impact this might have on the building itself and downtown as a whole.

Details of Steel Tower Renovations

Although there is no onset of renovations, the US Steel Tower has undergone some major facelifts in the past months and years which will be noticeable to regulars in the area. Here are some of the highlights:

The US Steel Tower is now the second-largest LEED Silver Certified office building in the world

LEED stands for Leadership in Energy and Environmental Design. While the US Steel Building may be thought of as a 50-year-old dinosaur, it is likely the most economically and technologically advanced building in downtown Pittsburgh. This is thanks to recent renovations aimed at efficiency and eco-friendliness.

The US Steel Tower renovations modernized the infrastructure

As a continuation of the above, the US Steel Tower has implemented a number of modern changes that improve cost and environmental inefficiencies. Modern renovations/improvements include retrofitting water supplies, sustainable energy practices, offering alternative transportation services, installing eco-friendly LED lights, installing eco-friendly HVAC products, and much more.

US Steel Building has renovated office spaces

As part of UPMC moving in, several large renovations took place to the office amenities of the US Steel Building. These renovations included:

  • Renovation of seven (7) full floors of office space to be used for UPMC headquarters
  • Changing cubicle like layouts to more modern designs including high-end, high-tech offices and support areas
  • Updates to the 60th floor “Center for Connected Medicine (CCM)”
  • Overall renovations to existing workspaces and offices

These renovations covered a total of 185,000 square feet over 11 months and were all part of the LEED silver certification process.

Pittsburgh Steel Building Facts

To understand why renovations of the US Steel Building are so significant to the local Pittsburgh economy and atmosphere, let’s look at some quick facts on the building itself.

  • The US Steel Building stands at approximately 841 feet tall, making it the 66th tallest building in the United States.
  • Those 841 feet are spread across 64 floors, which are mostly comprised of office space.
  • The single floor area equals 41,163 square feet, which is only ~2,000 square feet shy of a full acre.
  • The facilities include a 2,900,000 square foot grass area which is used as a local park for the public.
  • The US Steel Tower underbelly holds a three-level parking garage which can accommodate 700 cars.
  • The building holds 11,000 windows, 54 elevators, and boasts a massive lobby area with full amenities

List of Recent US Steel Tower Updates

In a five year period, over $60 million was invested into the US Steel Building in total renovations with no end date in sight. These changes include:

  • Lobby updates including renovations to many interior businesses
  • The addition of two (2) garage elevators
  • Newly installed brick and granite in the plaza area
  • A new fire alarm and security system
  • A new tenant and building sprinkler system
  • Renovated restroom facilities
  • Energy-efficient upgrades (as mentioned above) including closed water loops, HVAC upgrades, energy-efficient light installations, and more
  • Improved facilities to comply and exceed the American with Disabilities Act (ADA) requirements
  • New infrastructure including improved electric distribution panels and “base building mechanical improvements”

Going Forward

For those of us native to Pittsburgh, the US Steel Tower is probably the building we think of when we think of the downtown area. While the name and ownership may have changed hands, the importance of this structure remains. Recent renovations have improved both the work lives of the office tenants within and the amenities for the public passing through the building for a bite to eat or just to take in the sights. With major backers including CBRE and Jamestown L.P., it is likely that we will continue to see investments being made into the tallest and most historic Pittsburgh skyscraper.