4.0 INDUSTRY Driving Demand - Tall Timber Group
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Spring 2021
INDUSTRY
4.0
Driving
Demand
THE RIVIERA
INDUSTRIAL
SPACE FORCE!
Ambridge Regional Distribution and Manufacturing
Facilities Provide Office, Manufacturing and
Distribution Space for Lease
• We Provide Warehousing and
Distribution Services
• We provide Rail/Truck Transloading
• We Facilitate Barge Transloading
• We are Over 30-years Young
• We are the Speedy Answer to Many
of Your Problems
Let’s Talk!
724-266-4661
vfisher@vp-ambridge.com
www.vp-ambridge.com
setting the
performance
standard
since 1991
One Call. One Source. Complete Satisfaction.
Burchick Construction Company, Inc.
500 Lowries Run Road • Pittsburgh, Pennsylvania 15237
Telephone: 412.369.9700 • Fax: 412.369.9991 • www.burchick.com
CONTENTS | Spring 2021
05 President’s
Message
07 Executive Director’s
Message
29 Developing Trend
The Long-Term Trend in
Industrial Demand
35 Eye On the
Economy
08 Feature
Industry 4.0: Driving Demand 41 Office Market
Update
CBRE
45 Industrial Market
Update
Colliers Pittsburgh
51 Capital Market
Update
55 Legal/Legislative
The Pitfalls of Litigation
to the Bitter End
57 Benchmarks
21 Development Profile Revisiting Two “Next
Hot Neighborhoods”
The Riviera
65 Voices
Designers Share Ideas
About the Post-COVID
About the Cover: Office
The Riviera. Photo
by Elliot Cramer 69 News from the
Photography Counties
81 People / Events
www.developingpittsburgh.com 3
WWW.MCKAMISH.COM | (412) 781-6262
WHAT WE DO
Located in Pittsburgh, PA, McKamish is a full service
mechanical construction company specializing in
commercial HVAC, plumbing, piping, custom metal
fabrication, service and maintenance.
Building McKamish dedicates ourselves to “Building Excellence”
on every project that we build. With a dedicated team
of employees who are committed to our customers,
Excellence you can feel confident that your project will be handled
with integrity. A family-owned company with deep roots
in the Pittsburgh community, our goal is to surpass
We challenge ourselves to excellence and to be customers’ expectations and provide top quality service
the leader in the mechanical contracting industry. in everything we do.
PUBLISHER
Tall Timber Group President’s Message
www.talltimbergroup.com
EDITOR
Jeff Burd
412-366-1857
A
jburd@talltimbergroup.com bout this time last year, eight and other markets have been
NAIOP Pittsburgh chapter devastated. Our fight is to help those
PRODUCTION leaders were attending the specific development industries, and
Carson Publishing, Inc. NAIOP National Chapter Leadership the greater economy, recover as
Kevin J. Gordon and Legislative Retreat in Washington quickly as possible. Our fight is to
kgordon@carsonpublishing.com DC. At the final awards presentation help the Pittsburgh area economy
Pittsburgh was a finalist for Chapter recover. Our fight is to bring jobs and
GRAPHIC DESIGN of the Year award. Tom Bisacquino people from high-cost areas such
was holding the award…. Drum roll… as California, Boston, New York, and
321Blink
the winner is…. NAIOP NEW MEXICO!! Chicago to the City of Champions!!
CONTRIBUTING PHOTOGRAPHY Before the applause started, there was How can we get our friends back to
a second or two pause as those in work, developing great spaces in the
Elliot Cramer Photography
attendance processed it. At our table, Pittsburgh region NOW?!?
RIDC during the brief silence, someone
Al. Neyer LLC Under the long, slow, hard work of
quietly said what I was thinking: Rats! previous board members, officers, and
Mike Crist Photography
Trinity Commercial Development New Mexico is a great chapter; staff, NAIOP Pittsburgh has grown to
however, Pittsburgh is a City of be the voice of commercial real estate
Tall Timber Group
Champions. “Yinzers” are not tolerant in Pittsburgh. If ever there was a time
of losing. Yes, we may be gracious in that our industry needed a loud, clear,
CONTRIBUTING EDITORS
defeat to worthy competitors but what consistent voice it is NOW!
Karen Kukish
do we need to do to win? Now is the time, to loudly advocate
ADVERTISING SALES Earlier that night Brandon Mendoza for improved: planning, zoning,
Karen Kukish won the Executive Director of the permitting, tax policy, infrastructure,
412-837-6971 Year. Don Smith won Chapter transportation, and economic
kkukish@talltimbergroup.com President of the Year. We were development funding.
recognized as the Fastest Growing NAIOP Pittsburgh’s advocacy
MORE INFORMATION: Chapter. Our Developing Leaders committee is working hard on these
DevelopingPittsburghTM is published by were finalists for their programs. Brian issues and will be imploring all
Tall Timber Group for NAIOP Pittsburgh Walker was named the treasurer of members to assist with sending emails
NAIOP National. Our legislative affairs and calling national, state, and local
412-928-8303
efforts for state and local advocacy elected officials to effect legislation
www.naioppittsburgh.com were also recognized. Several of our and policies that affect our jobs.
members were appointed to national
No part of this magazine may be committees. Pittsburgh’s Bill Hunt NOW IS THE TIME TO MAKE YOUR
reproduced without written permission recently served as NAIOP national VOICE HEARD! NAIOP Pittsburgh
by the Publisher. president. NAIOP Pittsburgh is truly an is the organization to combine your
All rights reserved. outstanding professional organization voice with the thousands of other
and held in high regard by NAIOP like-minded individuals and channel
This information is carefully gathered Corporate and our peers. them to those who can most effect
and compiled in such a manner as to our industry.
One year later, our fight continues. We
ensure maximum accuracy. We cannot,
have a fight, but it’s not to win Chapter
and do not, guarantee either the cor- of the Year or any other NAIOP
rectness of all information furnished national award.
nor the complete absence of errors and
omissions. Hence, responsibility for same We have a fight to restart development
projects that drive our industry and
neither can be, nor is, assumed.
our region. If you are reading this, you
Keep up with regional construction know the devastation that COVID is Jamie White
having on the commercial real estate NAIOP
and real estate events at:
industry. NAIOP-related industries Pittsburgh
www.buildingpittsburgh.com provide meaningful jobs. We are 30 President
percent of the economy! Yet, many of
us are now facing financial hardship.
We need to get back to work as
quickly as possible.
Some of us in the industrial, high
tech, and warehouse/distribution
markets are thriving. However, many
of us in the office, retail, hospitality,
www.developingpittsburgh.com 5
EXECUTIVE DIRECTOR’S MESSAGE
A
lmost one year ago, NAIOP employees, while also helping their of COVID’s economic impacts. Among
Pittsburgh was in was in our tenants with their own virtual work plans. many ways the CRE community helped,
nation’s capital to participate in Many of us were navigating this time with by working with tenants to allow their
the annual NAIOP Chapter Leadership our kids at home with us, further adding businesses to adjust and rebound, the
& Legislative Retreat. Our chapter was a layer to this flexibility. Nonetheless, our CRE community was integral to our
honored with various awards, including industry forged ahead. region’s bounce back economically.
Chapter President and Executive Director While we still have ways to go to get
of the year awards and Chapter Growth During a year with so much loss, it is back to pre-pandemic economic vitality,
of the Year award for 2019. While I was easy to imagine a scenario where we the CRE industry will be pivotal to our
proud of our efforts during 2019, and retreat to our own corners to protect region and nation’s path. We must
happy we received recognition for it, I am our own families and not help our continue to embrace flexibility and
even prouder of efforts in 2020. In a year communities get through it together, compassion to continue to lead our
of great challenges for our global world, but I am happy to say that the CRE region to recovery. This will no doubt
our nation, and our industry, NAIOP community did the opposite. While be a challenging year, but after seeing
Pittsburgh and our members did our navigating through 2020 and the our industry’s work in 2020, I am more
best work yet. In my opinion, 2020 was mayhem unleashed by COVID-19, our optimistic than ever. Please be safe and
characterized by three words: flexibility, members worked with their tenants to healthy. I hope to
compassion, and recovery. keep them in their spaces, offering rental see you at a NAIOP
assistance and other creative ways to event in 2021.
With emergence of COVID-19, the global help tenants. Additionally, I personally
economy was thrust into an international saw the great amount of philanthropy
race for flexibility. This flexibility was from many in the CRE community. That
needed from business, government, compassion will not show up in the
workers, and other institutions. At NAIOP balance sheets, but it is imperative for
Pittsburgh, we adopted early to digital our communities to continue to thrive.
programming, providing our members
with key information via our Developers’ Lastly, I witnessed how our members
and the broader CRE community led Brandon J. Mendoza
Roundtable events. Our members Executive Director
developed virtual work for most of their our region in its rebound from the worst
NAIOP Pittsburgh
LEASING NOW by the numbers
° 145,867 Rentable SF ° Highly Adaptable
and Efficient Design
° Six Floors —
Approximately
24,215 SF Per Floor
° 3 Common
Outdoor Plazas
° Designed to LEED®
Silver Standards
° Balcony Spaces
on Fifth and
or Greater Sixth Floors
° 108 Space
Underground
Parking Garage
° 604 Additional
Parking spaces
in The Stacks
Parking Garage
° Convenient Access
to I-376, I-279
and Rt. 28
F O R L E A S I N G I N F O R M AT I O N C O N TAC T :
Joe Tosi | 412.261.0200, ext. 3471
jtosi@OxfordRealtyServices.com w w w.OxfordDevelopment.com
www.developingpittsburgh.com 7
I N DUSTRY
4.0
DRIVING DEMAND
8 DEVELOPING PITTSBURGH | Spring 2021www.developingpittsburgh.com 9
F E A T U R E
A
merica’s primacy has been driven revolutions. In the 21st century, as new of those groundbreaking advances in
by its size, its foreign policy, its technologies are ushering in a fourth the applications of steel, aluminum, and
military might, its success as an revolution in the way things are produced, electrical power, Pittsburgh garnered
experiment in self-government, and its there are significant opportunities for benefits that placed the dirty backwater
system that rewards free enterprise. There Pittsburgh to be a region that benefits city at the center of 20th century society.
are a host of advantages, natural and disproportionately from this new wave. Population soared. Economic growth
man-made, that the U.S. has leveraged to Dubbed Industry 4.0 because it is driven lifted tens of thousands out of poverty.
create the world’s largest economy. Not by information technology, this fourth Immigrants built prosperous new lives.
least of these has been the leveraging industrial revolution has some of its roots Invention begat invention. But in less than
of the industrial revolutions that have in Pittsburgh and many of the fruits of the one century, Pittsburgh felt the pain of the
coincided (or perhaps not) with leaps new industries are ripening here. growing obsolescence of those industries.
forward for the U.S.
The roots of the earlier industrial Industry 4.0 is the convergence of
As a city that is nearly as old as the first revolutions were in Pittsburgh too. information technology and human
settlements on this continent, Pittsburgh Incredible new technologies arose from experience in ways that were science
has enjoyed a similar trajectory as the the factories and laboratories in Western fiction 20 years ago. Unlike earlier
U.S. in total because of those industrial PA that changed the world. As the home industrial revolutions, which were
10 DEVELOPING PITTSBURGH | Spring 2021F E A T U R E
focused on agricultural or manufacturing change how we “do” commercial real people used to produce. Advances in
technology, Industry 4.0 spans a broad estate, from development to leasing. It’s hand tools moved humans from hunting/
spectrum of human endeavors, including already clear that companies that are gathering to farming, and then from
agriculture and manufacturing. Advances embracing Industry 4.0 for real estate subsistence farming to agriculture as
in the ability to process data has led to are thriving in the face of uncertainty. a business. The industrial revolution,
technologies that are revolutionizing The open question is will the historically which began just before the American
medicine, transportation, construction, conservative commercial real estate Revolution and ended roughly 20 years
entertainment, meteorology, space travel, industry welcome Industry 4.0 for its before the Civil War, moved humans
and real estate. potential or resist it for its uncertainty. from hand production to machines
and processes. Water and steam were
If fortune smiles again on Pittsburgh, Defining the Revolution leveraged to create power for machines
Industry 4.0 will impact real estate that multiplied their output. Agriculture,
by creating robust job growth that The first industrial revolution represented which was still a dominant economic
attracts new people and businesses, a sea change in how humans worked. pillar, saw huge advances. These
generating the need for new space As mankind has progressed up the value advances meant fewer people were
for working and living. An information chain, the tipping points were often needed to farm the same amount of
revolution also has the potential to marked by the changes in the tools
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land, freeing up opportunities for new began adopting electromechanical applications that could compare that
professions and services. machines for counting, communications, analysis and make predictions about what
and controlling production. Over the data would come next. This capability –
At the turn of the 20th century, new next 50 years, those machines would get predictive analytics – could be repeated
discoveries and processes led to faster, smaller, and more ubiquitous. The until the device could “understand” the
multiplication of the productivity of wild claims by early computer pioneers patterns of the data and respond. What
the machines that served farming and made in the 1980s, of a computer in every we call machine learning or artificial
manufacturing since the first industrial house, became reality within two decades. intelligence (AI) is this data crunching and
revolution. Electricity became available Software changed the focus from the prediction that can be used to understand
for commercial and industrial use. Steel machines to applications. And the Internet what was previously thought to be
manufacturing was refined and improved, gave everyone a connection to everyone random. Combining AI with machine-to-
allowing for more durable and portable else, whether they wanted it or not. machine communication is at the heart of
products to be made. Industrialists figured Industry 4.0. It is what is commonly called
out how to increase productivity in large By the 2010s, computers became so the Internet of Things (IoT).
plants. The assembly line was born. powerful that they were able to calculate
The railroad system, which had linked and compare amounts of information that IoT connects the physical and the digital.
east and west coasts at the end of the were unimaginable just a few years earlier. Machines and devices that can be taught
19th century, became an integral part Processing became so small that devices to draw conclusions from repeated data
of a logistics system that allowed major of all kinds – phones, watches, music can do things like drive cars or select
industrial companies to arise. This era players – became computers. By the merchandise from warehouse shelves. It
also gave rise to a new, non-mechanical end of the decade, technology allowed can also adjust the chemistry of paint in
invention: the American corporation. almost anything to become an enabled an automotive line as the environment
device. WiFi speeds increased to the point changes, in real time. Information
Midway through the 20th century, the that those devices could communicate technology in Industry 4.0 will not be
quest for increased productivity led with each other and global systems, like confined to industry, of course. This
manufacturers to push for different satellites or the cloud. fourth industrial revolution is also a
technology, which would set the stage for cultural revolution of sorts.
the fourth revolution. Machines used to The incredible processing speeds of these
decode during World War II were refined devices permitted massive amounts of The impact on commercial real estate
to become the first computers. The data to be analyzed in microseconds, from Industry 4.0 will be both internal
integrated circuit was developed. Business which in turn paved the way for and external. Technology will be applied
Photo by Mike Christ Photography
www.developingpittsburgh.com 13F E A T U R E
to the commercial real estate industry. developed and implemented. Industry 4.0 & Wakefield, office vacancy was at
Mountains of data from occupiers is already influencing demand in Western 15.5 percent nationwide and rents
and developers will be used to create PA. In 2000, 15 percent of Pittsburgh averaged $35.10 per square foot. Those
better decision-making processes, payrolls were from 4.0 companies; in numbers would represent a significant
evaluate properties, and manage the 2020, that share was 35 percent. That’s an improvement for the Pittsburgh market.
built environment. Uncertain aspects increase of 200,000 jobs in a region with In January, JLL reported that Class A rents
of the industry, like managing the risk little or no net job growth. in Pittsburgh averaged $29.75 per square
of financing a deal, will be made more foot and vacancy was above 19 percent.
certain by better understanding why How important is this fourth industrial CBRE reported that the average rent per
defaults occur or leasing takes more time revolution to Pittsburgh? A region square foot for the total Pittsburgh office
in a specific market. without population growth and with an market was $26.45. Newmark Knight
aging workforce has fewer tools to build Frank reported total vacancy at 19.3
As IoT and AI become pervasive, there economic growth. Pittsburgh’s declining percent, with net absorption more than
will be disruptions to the workforce. labor force limits the opportunities 135,000 square feet negative compared
New jobs will develop and entire careers to build a new manufacturing base to the fourth quarter of 2019.
will be disrupted or eliminated. That or expand the service economy. An
means that the demand for real estate economic revolution built on leveraging This is data that suggests that a fresh
will be disrupted too. If the commercial exceptional talent gets around those source of office demand is needed to
real estate in question is located in a demographic obstacles and, in fact, may reverse the long-term trend of lower
place where the technology driving eliminate them if Pittsburgh can establish office utilization, especially in Pittsburgh’s
Industry 4.0 is being created, demand a beachhead of new companies that Central Business District. Even assuming
will be increased by the institutions and would draw workers from outside the that the disruption caused by COVID-19
companies doing the creating. And if region. brings about no long-term reduction in
some of those companies become the office utilization – an assumption that
Google or Apple of Industry 4.0, a boom The latter development would be seems likely to be wrong – the health of
will follow. welcome and might help with the Pittsburgh’s office market depends on
negative trends in the office market job creation. Such job creation is more
Industry 4.0: The Future of that Pittsburgh is experiencing again. likely to come from new sources than
Demand in Pittsburgh As 2020 ended, the pandemic-induced from Pittsburgh’s legacy corporations
Pittsburgh is one of those locations where change in office utilization hurt the U.S. expanding robustly.
the technology of Industry 4.0 is being office market. According to Cushman
14 DEVELOPING PITTSBURGH | Spring 2021Photo courtesy of Ed
The real estate
Massery Photography
development
life cycle
Civil, Geotechnical, Structural, and Transportation Engineering
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www.developingpittsburgh.com 15F E A T U R E
That dynamic has been the case in the industrial market. Order
fulfillment and business-to-business distribution have driven
more than three million square feet of industrial development
since the mid-2010s. That industrial expansion has created
thousands of jobs, but it has also created more than one
million square feet of automated warehouse space. These
“smart warehouses” utilize robotic and IoT-enabled devices to
store material most efficiently. The warehouses “learn” turnover
patterns and manage inventory accordingly.
Companies that provide robots that pick and transport goods
VALUED have been developing here for decades because of the research
done at Carnegie Mellon University and the National Robotics
RELATIONSHIPS
Engineering Center. McKesson, for example, automated the
picking of prescriptions two decades ago. As the integration of
IoT technologies accelerated, the development of automated
warehouses increased. Robotics firms like Seegrid, IAM Robotics,
...built on our commitment and Aethon have grown rapidly by developing devices that can
move independently around factories, warehouses, and hospitals,
to client service. taking material where it’s needed for value-added services
performed by humans.
The Pittsburgh Robotics Network estimates that between 75 and
• Construction 100 companies are working on developing robotics technology
into new products, with more than 100 doing robotics research.
• Corporate & Business Law That’s a cluster of companies that rivals Boston or Austin.
• Creditors’ Rights & Bankruptcy Including the burgeoning autonomous vehicle industry, there are
roughly 8,000 people working in robotics in Western PA.
• Employee Benefits
Pittsburgh is also home to another Industry 4.0 cluster, life
• Employment Law sciences. With a rich history of medical research that includes
• Energy, Utilities & Mineral Rights life-changing discoveries by people like Jonas Salk and
Thomas Starzl, the University of Pittsburgh and now UPMC
• Immigration devote billions of dollars to advancing life sciences. With the
• Insurance Coverage integration of information technology from Carnegie Mellon,
and other institutions, life science research is now using AI
• Intellectual Property for diagnostics, pathology analysis, outcome prediction,
and pharmaceutical development. Advanced manufacturing
• International Law has emerged to play a significant role in the development
• Litigation & Dispute Resolution and production of prosthetic devices. And the COVID-19
pandemic has been a catalyst for the use of big data and AI in
• Private Clients epidemiology and the discovery of vaccines.
• Real Estate & Lending
• Sustainable Development
Henry W. Oliver Building
535 Smithfield Street, Suite 1300
Pittsburgh, PA 15222
412.456.2800 | muslaw.com
16 DEVELOPING PITTSBURGH | Spring 2021F E A T U R E
“It will be the firms that
don't rush to change their
real estate solution, or
that are willing to expand
it, which will be the ones
that come to the top.”
COVID-19 has been an accelerant for the robotics industry as
well. Mitigation measures taken to halt the virus’s spread stifled
in-person activities and accelerated the growth trend in online
shopping. Estimates of E-commerce growth run as high as 40
percent from 2019 to 2020. That boosted demand for robotic
distribution equipment in the same way the pandemic boosted
demand for fulfillment space. Carnegie Robotics LLC developed
a robot for disinfecting and cleaning large facilities like arenas
and airports.
Taking all of the Industry 4.0 businesses into account, this fourth
revolution has already created at least five million square feet of
absorption in the Pittsburgh office and industrial market. Given
that the shift in business towards Industry 4.0 is in its infancy, it’s
not unreasonable to imagine how the expansion of the myriad
new technologies will spur an era of growth in Pittsburgh that
matches what has occurred in cities like Austin, Nashville, or
Denver over the past decade. Growing jobs five percent or
more each year seems like a pipe dream for Pittsburgh, but that
would not match the growth in those cities. Before the euphoria
overtakes you, bear in mind that there are some considerable
barriers to unfettered growth.
Some of these barriers are well-known. Pennsylvania’s
corporate tax applies to companies in Pittsburgh too. The
workforce is shrinking, along with the population, in Western
PA. The cost of construction and land is higher here than in
southern and western regions. There’s also a tech-specific
issue. Of the capital investment in 4.0 companies, 70 percent
comes from outside Pittsburgh.
Whether Industry 4.0 is the catalyst that drives employment
and population growth in Pittsburgh in the way other
industrial revolutions have, or Pittsburgh is the home for
intellectual capital and the jobs go elsewhere, the fourth
industrial revolution has already had a significant impact on
commercial real estate demand. Very little new space is being
developed that isn’t related to the emerging technologies
of the next revolution. It should come as no surprise that as
tenants, Industry 4.0 firms have different expectations than
previous occupants.
A couple of recent developments have become centers for
Industry 4.0 tenants. In Hazelwood Green, RIDC’s Mill 19 was
www.developingpittsburgh.com 17F E A T U R E
developed with the intention of being a startups closing their doors, much like into real estate. They want it going into
center for robotics in manufacturing. Its what happened in the dot.com era. research. They don’t have the credit to do
tenants include the Advanced Robotics Emerging technology companies that a first-generation build out.”
for Manufacturing Institute, CMU’s succeed grow rapidly. They are also often
Manufacturing Futures initiative, and formed to be acquired, which leads to Thomas Watson, director and senior
autonomous vehicle company APTIV. relocation and downsizing. Those aren’t consultant for private equity firm Blue
A mile or so to the west of Hazelwood always happy endings for landlords. Water Growth, agrees with Scalo,
Green, Burns Scalo has succeeded in noting that the real estate should be
attracting life science research tenants Uber’s autonomous vehicle business complementary to a business purpose.
like UPMC Hillman Cancer Center, Blue arrived in Pittsburgh in 2015. By the end
Biosphere, Neubase Therapeutics, and of 2019, Uber occupied about 350,000 “I’m more involved with people that are
Novasenta to The Riviera by developing square feet of office and research space, starting up, working with early-stage
a speculative wet lab building (see page plus a test track in Hazelwood Green. money, and they definitely aren’t
21.) Having Industry 4.0 tenants present They had plans for a massive testing interested in real estate,” Watson says.
different challenges than traditional office facility in Westport Woods, including “The only time it can matter is if it’s a
or industrial users. about one million square feet of facilities. marketing ploy to make a big splash. At
One year later, Uber sold its Advanced some point the company needs to add
“One problem with the demand is that it’s Technologies Group to Aurora. The future people and grow an office. It becomes
generally smaller. The average deal is maybe of those facilities is uncertain. a necessity when it involves hiring
10,000 or 15,000 square feet,” explains people but that would be after they are
Jim Scalo. “That can change if you get a Another real estate challenge relates at the later stages of fundraising and are
university or hospital to master lease the to the funding sources for Industry 4.0 marginally profitable, or close to it. And
building. The risk in that is eventually you are companies, many of which are backed by clearly we don’t want startup companies
going to compete with them, because they private equity funds. buying real estate. We want them renting.”
would like to own their space.”
“There is a lot of private equity going That’s good news for landlords. But
Scalo’s last point gets to the volatility into life sciences companies. Those will these new technology occupants
of working with Industry 4.0 firms. It’s companies have a lot of money behind eventually dampen demand for commercial
estimated that 75 percent of the IoT them, but they don’t have credit behind real estate? If the goal of Industry 4.0
research projects fail currently. Those them,” says Scalo. “The private equity is to enable machines and devices to
kinds of ratios can lead to promising owners don’t want the money going communicate with each other or think for
Mill 19 at Hazelwood Green is occupied entirely by Industry 4.0 tenants. Photo by RIDC.
18 DEVELOPING PITTSBURGH | Spring 2021Always Evolving While Honoring Our Past.
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www.developingpittsburgh.com 19F E A T U R E
themselves, won’t the aggregate demand move humans further up the value chain. “Technology has always affected
for space decline? History suggests For more than 250 years, that virtuous commercial real estate,” says Sam McGill,
otherwise. Each of the previous industrial evolution has benefitted the U.S. economy senior vice president at Grant Street
revolutions resulted in significantly more and its workers. Associates | Cushman & Wakefield. “With
employment, higher wages, and a better the clients that we talk to, technology
standard of living. The Luddites built Industry 4.0 will disrupt the workplace is at the intersection of the C-suite, IT,
an entire movement upon fears that and commercial real estate, but emerging human resources, and real estate. We
machinery would put factory workers out of technology has been doing that for decades. have those conversations daily. The more
a job. Industrialization has always displaced The 1990s saw enormous leaps forward in technology affects all our lives, the more
some workers while creating opportunities information technology. That decade also it affects the way we work, and the way
for many times more. Industry 4.0 would saw enormous economic gains. we work affects real estate.”
The creative nature of Industry 4.0 may
even prove to be the remedy for the
uncertainty about future office utilization.
Evidence is piling up that work-from-
home may be reaching a point of
exhaustion for employers and employees;
however, it’s unlikely that some hybrid
solution will be tried once offices are
safe to re-occupy. Jim Ambrose, director
of business development for Desmone
Architects, believes successful companies
will value growth over belt-tightening.
“Companies that have consolidated the
square footage they are occupying will
inevitably be the laggards when it comes
to innovation during the next three to five
years. They will be effectively separating
all their people who need to collaborate,”
Ambrose says.
Ambrose notes that the opportunity to
work from home will allow those who
want to withdraw from creative office
situations to do so. He suggests that
such a trend could hinder the growth of
industry titans like Google or Amazon.
He believes the unorthodox path that
many of Industry 4.0 companies took to
success will lead others ahead.
“There was a lot of criticism of Industry
Electric Contractors in Pittsburgh & Greensburg 4.0 firms before the shutdown because
of the weird amenities in the office,
like game rooms and catering from
SERVING ALL OF OUR restaurants. But what was that? It
ultimately was the companies trying
CUSTOMERS RESIDENTIAL, to bring the comforts of home, the
distractions of home into the office,”
Ambrose says. “Creative people,
COMMERCIAL, INDUSTRIAL engineers, step away from the problem to
clear their heads. Having a conversation
AND DESIGN BUILD NEEDS
with a coworker in an unstructured
environment helps. By separating people,
innovation suffers. No great product or
service has been developed in a vacuum.
It will be the firms that don’t rush to
change their real estate solution, or that
1133 Woodward Dr, Greensburg PA 15601 are willing to expand it, that will be the
info@pellmanelectric.com 724.838.7150 412.431.5955 ones that come to the top.” DP
20 DEVELOPING PITTSBURGH | Spring 2021Development Profile
The Riviera
Photo by Mike Crist Photography.
I
t is an inherent risk in speculative doing a deal with UPMC for a vivarium. space in the market. UPMC Enterprises,
development. Developers are an UPMC said that they needed to know the recently formed non-profit investing
optimistic lot, so they might not what our long-term plan was for the $1 billion to develop new drugs,
talk much about it, but there is the risk building. They could not have us making diagnostics, and devices, was looking for
in every spec building that the market excess noise, dirt, and vibration from homes for several of its early research
won’t like it. Jim Scalo had no reason to construction after they occupied. That spinoff entities. It was the UPMC Hillman
think his Riviera project in the Pittsburgh really forced us to figure out the building Cancer Center, however, that opened
Technology Center wouldn’t lease up long term. So, the building is becoming a Burns Scalo’s eyes to the scope of what
quickly. The market told him otherwise, wet lab at a tremendous spend.” the pivot to wet lab construction entailed.
loudly and clearly, last year.
Scalo’s pivot from conventional “We’re primarily an office developer and
“I will never forget that conversation. office building started a cascade of we’ve become pretty good at it. It is not a
Jaime Cerilli from the University of changes, from the building’s design difficult product once you have mastered
Pittsburgh School of Medicine said to me and construction to the financing. The it,” says Steve Whittingham, director of
that they loved the building, but we were decision meant investing twice as much development for Burns Scalo Real Estate.
building the wrong building,” Scalo laughs. as the originally intended building use “Wet lab would be difficult in and of itself,
“The building is two and a half years from required. And it also meant taking a risk but to do a conversion from an office
the day we started and we’re just now on a market that Scalo admits he was product into a wet lab has been one of
taking occupancy in the building. Every unfamiliar with. Less than a year later, that the hardest things that I have ever done in
conventional office tenant that looked at risk has paid dividends. my professional career.”
it early on ended up in the Strip. I asked
[Cerilli] what to build and she said wet lab. Cerilli, the assistant vice chancellor The Hillman lease, which was for 12,408
I said OK not knowing what that was. for strategic space planning and square feet, included nine clean rooms
management for Pitt’s Health Sciences, and miscellaneous labs. At the time
“The tipping point came while we were was not the only potential user of wet lab the lease was executed, Riviera’s core
www.developingpittsburgh.com 21and shell were complete. The original • Two additional exhaust stacks with but RPA was designing the Hillman space.
design was an all-electric building with four fans in each stack, maintaining Parise says the firm’s pharmaceutical
one 4,000-amp service and two 210-ton 3,000 feet per minute discharge resume and comfort working with Burns
packaged rooftop HVAC units. UPMC velocity Scalo and NEXT Architecture, Riviera’s
Hillman’s requirements immediately architect, made the assignment logical.
• Two additional 80,000 cubic feet per
rendered The Riviera’s infrastructure minute make-up air units “We have worked with Chris and Steve
inadequate.
• Four 4,000 BTU per hour boilers quite often. We have served major
“I think the lay person, when they hear • One dedicated 200 kW lab exhaust pharmaceutical companies like GSK, Pfizer,
wet lab, thinks that there will be a need Johnson & Johnson, and others for about
generator
for additional water or additional gasses, 30 years. Because of that we have a lot of
but what gets missed in the whole Setting aside the additional time and experience with labs and clean rooms,”
equation is the amount of exhaust and money needed for the infrastructure Parise says. “Chris Pless and I were talking
make up air that is required to service upgrade, the biggest challenge was at lunch one day and he began asking
these labs and the additional power,” finding the space for the unplanned questions about labs and utilities, and
explains Whittingham. equipment and retrofitting the systems ultimately explained what happened at
into a building that was not designed The Riviera. We quickly realized they had
To meet UPMC Hillman’s needs Burns to accommodate it. Burns Scalo put its an infrastructure problem. We don’t like to
Scalo more than doubled the capacity be the bearer of bad news but once they
designers on an intense redesign.
and throughput for its mechanical and realized that we had the expertise and
electrical systems. Among the highlights Paul Parise, associate vice president of the experience, we were engaged to start
of the infrastructure upgrade were: Pittsburgh operations for RPA Engineering, transforming the building.”
was brought in to solve the infrastructure
• Additional 6,000-amp electrical service problem. Allen & Shariff engineers had Chris Pless, principal at NEXT Architecture,
• Two additional 500-ton chillers designed the core and shell infrastructure, was the project architect. He describes
Photo by Elliot Cramer
Photography
22 DEVELOPING PITTSBURGH | Spring 2021525 William Penn Place
Turner Construction Company
925 Liberty Avenue, 3rd Floor
Pittsburgh, PA 15222
Jodi Rennie, VP & General Manager
412-255-5400
www.turnerconstruction.com/pittsburghConverting The Riviera from spec office to life science didn’t mean giving up the amenity
spaces that new tenants want for talent retention. Photo by Elliot Cramer Photography
the problem as two distinctly different doing so in an ever-changing leasing structural modification) while tenant
challenges: capacity, and coordination. environment. improvements were underway.
“The task of converting from a “It’s been a giant puzzle because of “While we were doing all these structural
conventional office to wet labs is basically timing. Burns Scalo was proposing to improvements one of our tenants,
all I did for the last three months of 2020. tenants without fully understanding Hillman, is right next door. We’re
The planning was outrageously intense if there was sufficient infrastructure. working right next to a Class 1000 clean
because we were stopping all the way up The tenants didn’t know their full room lab as we put all this mechanical
stream,” he recalls. “Our limiting factors requirements either,” Pless says “We could infrastructure on the roof,” Whittingham
were how much power the building do test fits and verify that the tenant laughs. “We were doing this work while
could take and what could we get from would fit in the layout, but we needed we’re planning for the future needs of
Duquesne Light. I have to hand it to much more detail on the equipment to tenants we didn’t have.”
RPA Engineering. They came up with a be sure there was capacity. We’re moving
creative solution to get us through the forward with a two-phase approach. Our Redesigning a constructed new building
next 12 months and then the next 30 interim solution is adding a lot of exhaust before it was occupied for a different class
years of occupying the building.” infrastructure that can accommodate of use was only part of the developer’s
the tenants. The long-term solution is a challenge. The decision to double down
“What we really had to do was look huge spend that Burns Scalo is making to on The Riviera meant literally doubling the
at the incoming power. That was the upgrade the mechanical capacity. A first investment in the building. Scalo says that
biggest challenge. We looked at what phase will be done by April and a longer- the pro forma rents were convincing, as
was available currently and what could term solution will be right on its heels. was the idea of investing into one of the
possibly be available in the future,” This is the largest coordination exercise emerging growth engines of Western PA.
explains Parise. “We did an entire building I’ve ever been a part of.” But building another $30 million capital
analysis, looking at multiple scenarios for stack took more than a good idea.
percentage of lab versus office space to Whittingham says that the coordination
try to find the sweet spot. We were able headaches went beyond the planning. “It’s why you don’t see a lot of spec wet
to talk to Duquesne Light and get a level The first phase of converting the building lab space; it’s double the risk financially,”
of service that put them on target to would have to be implemented while Scalo says. “We got to the point where we
convert from office to lab.” Hillman was occupying the building. recognized that was where the market
The enhanced marketing of the building was for this specific building. The problem
Parise estimates the building will be about yielded new leasing opportunities and, was that we had to take the whole core
80 percent lab and 20 percent office. As potentially, the prospect of construction and shell to 100 percent wet lab for the
difficult as finding the capacity solution on upgrading the core and shell (including infrastructure. We couldn’t do it as we
was, the bigger challenge may have been signed individual leases. We decided that
24 DEVELOPING PITTSBURGH | Spring 2021THE RIVIERA | SOUTH OAKLAND BOARDWALK | NORTH FAYETTE TOWNSHIP
DIAMOND RIDGE | MOON TOWNSHIP THE VISION | STRIP DISTRICT
$330 MILLION IN PRIVATE CAPITAL
INVESTED IN PITTSBURGH OVER
THE PAST YEAR
A Luxury Real Estate Firm
burnsscalo.com | 412.250.3000Photo by Mike Crist Photography.
this was the trajectory of this building and equity companies. That creates different “Hillman chose the building because
did a forward pro forma on the balance challenges from a credit standpoint. It of recruitment. These top doctors and
of the building based upon the rents we creates questions about how you finance researchers write their own ticket, and
thought we could receive and the tenant the project,” Scalo notes. “Will the debt the times have changed,” Scalo says. “The
improvements allowances that were markets understand the numbers? Will old guard loves that Fifth and Forbes feel
required.” the buyer market pay for that value that for facilities, but the new guard does not.
has been created? These are numbers They would rather be down on the river,
“The decision was demand-driven and that Pittsburgh hasn’t seen. We don’t have alongside the trail. They like the amenities,
economics-driven,” he continues. “The comparables here. Naturally, the cash the coffee shop, and the gym. They like
average rent is between $60 and $70 per flows will be big, but can a buyer get the being across a bridge from South Side
square feet. There are some TI spends valuation that they need? It was really Works.”
that are near $1000 per square foot. important that we had credit and term
Our TI allowances are $250 or $300 per on those first leases. We needed to have Steve Whittingham is accustomed to
square foot.” strong paper to do those deals.” building offices that are designed to help
tenants attract talent. That concept has
Those kinds of numbers are unheard of Scalo explains that the additional costs been his boss’s mantra for several years.
in Pittsburgh’s commercial real estate and tenant improvements were financed It makes sense that the same concept of
market. The markets with significant life with a secondary note that amortizes with real estate as a magnet for talent would
science research deals are somewhat the term of the lease, which have been apply to one of Pittsburgh’s emerging
limited to Boston, San Diego, and San 10 and 15 years thus far. That structure sectors.
Francisco. Burns Scalo needed to go creates an asymmetrical return on leases
back to its investors and lenders for a that renew. Given the investment that the “We recognize that the future for this
second round of financing. While Jim tenants are making in the building, Scalo building is wet lab, and the future of this
Scalo was convinced that the investment believes the likelihood of renewal is higher region seems to be life sciences,” he
would bring good returns, the decision to than it might be for a vanilla office user. concludes. DP
proceed raised serious questions. He notes that UPMC Enterprises and Pitt
expressed interest for other reasons that
“In some cases, these tenants are public increase the likelihood of renewal.
companies and in some they are private
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A Drug-Free Equal Opportunity EmployerDeveloping Trend
The Long-Term Trend in Industrial Demand
NordLock’s new 128,000 square foot
distribution center in Clinton Commerce Park.
Photo courtesy Al. Neyer LLC
I
n late summer 2020, when commercial more than it has created new ones. This Neyer Company. “Those users require
real estate’s woes were reflecting has been true for the housing market, additional power, HVAC, parking,
the worst of the COVID-19 outbreak, E-commerce, and the industrial real and higher ceiling heights. There
Newmark’s Paul Griffith noted that a major estate market. While it is easy to point may be a distribution component to
distribution center deal had been struck in to heightened online shopping during these users but there is also research
Ohio that defined the trend. the pandemic as a driver of industrial and development, an element of
demand, the upward trend in industrial manufacturing, and probably above
“It was a portfolio of industrial properties property has been the result of changes normal office space. These buildings are
in Ohio that sold for $130 million after in several segments of the market. The not warehouses.”
selling for $100 million in 2016,” Griffith so-called Amazon effect is only part of
says. “The properties were 30 years old the story. And for every major Amazon “Amazon has obviously been a
with a weighted average remaining lease lease or build-to-suit that has been component of our success here, but
time of 3.5 years and only 20 percent announced in Western PA, there has been we are seeing demand from other
of the 80 tenants are credit. It was a development for these non-retail users. users for the typical Pittsburgh spec
marketed in late April and May, and had building of 150,000 square feet or so,”
multiple bidders. Everything about it is “We are seeing an uptick in activity from agrees Matt Virgin, senior vice president
average or below average and, in the specialty manufacturers, distributors, and of business development for Suncap
middle of COVID, they garnered a 30 life science companies. Particularly for Property Group. “We think that demand
percent increase from what it was worth specialty manufacturers and life sciences, will continue to be steady. For example,
in 2016.” it’s difficult to put them in an existing Komatsu [Suncap’s build-to-suit client at
building, even if one was available, Alta Vista Business Park] is a long-time
The pandemic has created a new because of their special requirements manufacturer in the region. We are in the
landscape for whole sectors of that aren’t necessarily found in a typical process of delivering four buildings in the
commercial real estate, but has, for the warehouse,” explains Brandon Snyder, Pittsburgh market and only one of them
most part, accelerated existing trends vice president of development for Al. has been for Amazon.”
www.developingpittsburgh.com 29The virtuous trend in industrial real estate of 4.8 percent. Each of the top 20 markets was delivered during the year. Newmark
has driven a boom in new construction in has experienced some degree of growth reported nearly 108,000 square feet of
Western PA, a region that has historically in average rent. Rent growth across the net absorption of industrial space in the
been lagging in development because board has performed better than all other fourth quarter, with the overall vacancy
of unfriendly topography and lack of commercial real estate sectors. rate at 6.4 percent.
pad-ready sites. During the last four
years, nearly all Pittsburgh’s commercial The increased demand for industrial It is not a surprise that these conditions
real estate developers have built at least space resulted in 228.4 million square feet have also been a boon to industrial
100,000 square feet of new space. Al. coming online in 2020, though most of property sales. Activity in 2020 and
Neyer has developed nearly 1.2 million the projects were well underway before early 2021 demonstrate the demand
square feet of spec industrial space the start of the pandemic. Despite the for industrial real estate from investors.
in Pittsburgh. A handful of national large inventory additions, net absorption Recent sales include the purchase of
developers have developed build-to- was 273 million square feet, according to the 430,000 square foot Thorn Hill
suit distribution centers of 400,000 Colliers International. E-commerce was a Distribution Center, three buildings
square feet or more for users like Shell big contributor, having grown to one-fifth totaling 393,000 square feet at Clinton
Lubricants, Niagara Bottling, and Gordon of all retail sales. However, industrial Commerce Park, and the aforementioned
Foods. And developers like the RIDC, inventories overall dipped nearly six Amazon facility at Chapman Westport, all
Imperial Land Company, and Chapman percent over the past 12 months. at prices above $100 per square foot.
Properties have consummated major
industrial land sales, with the latter landingThe sector finished off 2020 with a total “There is pent-up demand for commercial
the 1.4 million square foot Amazon sales volume equal to three-quarters of real estate in general, but it is focused on
fulfillment center at Chapman Westport. 2019’s, a small drop compared to other industrial because of what COVID has done
property types. The average price per to offices, retail, and hospitality. Interest
Favorable market conditions for industrial square foot of an industrial deal rose 7.1 rates and low cap rates are a big driver of
real estate are borne out in favorable market percent in 2020 to $92.89. the market,” says Steve Thomas, chairman
data, both in Pittsburgh and across the U.S. and CEO of Chapman Properties. “I think
Here in Pittsburgh, industrial properties the institutional market is looking at yield
Industrial rents have increased 4.8 percent have outperformed the market too. As and sees Pittsburgh as an opportunity
in the U.S. over the last year, averaging Snyder indicated, vacancy in industrial to get something above a 3.5 cap rate.
$6.38 per square foot in December. The properties has been declining for years. Suddenly, we’re kind of a darling here. It’s
pandemic has left tenants searching for Net absorption has been positive, even a nice time to be in the commercial real
new industrial space paying a premium. in a slower year like 2017. According to estate market and particularly in industrial in
The average rental rate for new leases CBRE’s year-end data, net absorption in the Pittsburgh market.”
signed over the past year was $7.26 per 2020 was 1.5 million square feet, even
square foot, with an average vacancy rate as 1.6 million square feet of new space Thomas jokes that being an industrial
developer is like being the “Rodney
Dangerfield of commercial real estate”
and contrasts the activity in Pittsburgh
today with the industrial activity of
Southern California, where he started his
career in real estate in the 1970s. Thomas
advises a bit of restraint in describing the
current market conditions. Others agree.
“Well, we’re ‘Pittsburgh hot’,” laughs Lou
Oliva, executive managing director for
Newmark. “We have a lot of assignments
right now, but we have to remember that
we are still seeing a fair number of WARN
notices and companies shutting down.
On balance we are only slightly positive.
“Things haven’t dramatically changed
over the last five years in terms of what’s
driving our market. We continue to be
more of a ‘move up’ market than a ‘move
in’ market,” Oliva continues. “Amazon is
clearly move in absorption. But Pittsburgh
is one of the last metropolitan markets to
see this. Clearly there are other projects of
significance in the works and that’s good.”
Source: Newmark Knight Frank Pittsburgh.
30 DEVELOPING PITTSBURGH | Spring 2021You can also read
