Is the CBD Becoming a Tenant’s Market?

Is the CBD becoming a tenant’s market?

A 'tenant's market" is a term used to describe a real estate market in which tenants hold the upper hand over landlords during negotiation. This can occur when vacancy rates rise in a certain area and landlords must provide their current and future tenants with incentives that they wouldn't normally provide, in order to retain and attract tenants for their buildings. Incentives can include (but aren't limited to) rent-free periods, reduced rental rates, increased flexibility, and landlord contributions to build/fit out construction.

So, with the vacancy rate sitting at the highest it's been since 2012, is it fair to ask if Pittsburgh’s Central Business District (CBD) is on the verge of becoming a Tenant’s market? There are a host of factors that play into a question like this: the desire of technology companies to be near the universities and in the trendier fringe markets, companies (law firms specifically) downsizing their space, and increased asking prices – which are projected to continue to rise.

The East End is home to companies like Google, Facebook, and Duolingo. With their proximity to CMU and the University of Pittsburgh, it's a popular spot for companies to set up shop for recruiting purposes and take advantage of the live-work-play environment the surrounding neighborhoods offer. With Oakland having a vacancy rate south of 2%, companies are exploring options in the Strip District and Lawrenceville. Technology companies are increasing their presence in these areas with desirable rental rates in flex buildings that are not available in Oakland or the East End.

Companies looking to save money are evaluating their leases and real estate portfolios, then downsizing when possible. Open floor plans, shared spaces, and the ability to work remotely have allowed companies to drastically reduce the size of space they need. Found Advisors has worked with a handful of clients looking to downsize. Law firms are a good example. In an age where everything is becoming digital, excessive storage and large libraries are becoming obsolete.

Pricing and accessibility are also problems when it comes to the Central Business District. The highest quoted rental rate in the CBD is $35/sf at the trophy building One Oxford Centre. With the average asking rate hovering not much lower around $25/sf (Class A near $30), many companies are looking for space on the fringe or in the suburbs that can also provide employees and staff with cheaper parking. Parking is more readily available outside of the CBD and is, often times, a fraction of the cost to park downtown.

So, are we seeing a shift to a tenant's market? There is some evidence which may support the idea. We are seeing quicker responses from Landlord brokers. This may result from bigger incentives for them to bring clients to certain spaces (higher commissions paid on the execution of leases in the CBD). Tenants are receiving their own incentives like months of free rent and higher tenant improvement allowances. Beyond this, there has been an overwhelming increase in the marketing push for available space in the Central Business District. One may believe that the ball is in the tenant's court when it comes to finding office space in the Golden Triangle.

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