Pittsburgh Remains Strong As Steel

One of the best compliments to give Pittsburgh is that it doesn’t look like what it is—an aging steel town. The city’s architects did well in locating the famed mills of Steel Valley out of view of the downtown skyline, an uncommon feat along the Rust Belt. The city shows lots of history but surprisingly little of that history. More recently, Pittsburgh has also done well in the quick evolution of its economy following the sharp decline in manufacturing beginning in the 1970s. Once a manual-labor stalwart, Pittsburgh now proudly pitches itself as a hub for “eds and meds,” short for education and medicine. Those two sectors, as well as the government, now dominate the local economy. That transformation has brought relative stability to the city’s employment and real estate markets. Pittsburgh’s unemployment rate, at 7.4 percent, is nearly two percentage points better than the U.S. average, and its single-family prices have nearly returned to pre-recession levels. As such, the metro’s apartment market ranks among the nation’s healthiest.

High on Occupancy

At the midpoint of 2011, Pittsburgh placed high in the national rankings for apartment occupancy and annual effective-rent growth. So high, in fact, that—by reputation, at least—it seems like the oddball in the group. At 96.7 percent, Pittsburgh tied Miami for the fourth spot in the national occupancy rankings, behind only San Jose, Calif.; New York; and Minneapolis/St. Paul, according to data from MPF Research. For annual same-store rent growth, Pittsburgh placed seventh, at 6.1 percent. And if one were to exclude the five major Pacific Northwest markets, Pittsburgh would rank second, behind only Austin, Texas.

Unlike Austin, of course, Pittsburgh is not exactly a growth market. The success of the apartment sector here does not trace to huge demand. Since the start of 2008, Pittsburgh has absorbed fewer than 1,000 units, on net. Instead, stability has been the key. Occupancy here never fell much, dropping as “low” as 95.6 percent, a mark hit several times, most recently in March 2010, according to MPF Research.

Pittsburgh avoided a sharp drop in occupancy thanks to its dependence on comparatively stable sectors such as health care, education, and government. (Plus, there was no real estate bubble here.) And the latest buzz is the discovery of natural gas deep below western Pennsylvania land in the expansive Marcellus Shale, which has spurred the birth of a new core industry.

Given this stability in leasing activity, Pittsburgh apartment owners were able to avoid the sharp declines in rental rates seen in most parts of the country during the Great Recession. And same-store rents were up 10.6 percent between Q4 2007 (prior to the recession) and Q2 2011. It’s helped that Pittsburgh is a market where new apartment supply of any sort is a rarity. The metro area has issued permits for only about 17,000 multifamily units since 1990, according to the Census Bureau. By comparison, Dallas/Fort Worth built more than that in 2009 alone. In Pittsburgh, local players group pretty much any property built over the past decade as “new supply.”

That’s not to say there aren’t some interesting projects going up. Developers just wrapped up converting South High School, originally built in 1898 and expanded in 1932, into a 76-unit apartment property dubbed the Residences at South High. Leasing began in August at the site, located along Carson Street, the heart of the hipster-trendy Southside neighborhood just south of downtown.

Conversion Craze

Renovations and conversions constitute a big chunk of Pittsburgh’s modest pipeline and transaction market. In December, Philadelphia-based PMC Property Group bought the 12-story Verizon office building downtown for $4.4 million, according to local media reports. The tower is being converted to 158 apartment units, with move-in starting last month. PMC has become a more active player of late in the Pittsburgh apartment market. In April 2011, the company reportedly paid $13.5 million for the 117-unit Penn Garrison apartment tower in downtown Pittsburgh’s Cultural District. Penn Garrison, sold by the Regional Industrial Development Corp. of Southwestern Pennsylvania, was converted into an apartment building about 10 years ago. It had previously been the corporate headquarters for General Nutrition Centers.

And in 2008, PMC bought the 245-unit Kenmawr apartments for $26 million, according to the Pittsburgh Business Times. That property is located in eastern Pittsburgh near Bakery Square, a former Nabisco plant converted into a mixed-use development that includes office space for Google—a factoid that well represents Pittsburgh’s transformation over the past couple decades. The surrounding area is, in some ways, the heart of new Pittsburgh’s “eds and meds” economy. East Pittsburgh’s Oakland neighborhood, in particular, is regarded as the city’s “other” downtown. Oakland is home to several universities, hospitals, museums, and historic sites. The University of Pittsburgh (with 27,000 students) and Carnegie Mellon University (10,000 students) are both located in Oakland. The University of Pittsburgh Medical Center (UPMC) was headquartered here, too, until a few years ago, when it moved into downtown Pittsburgh’s tallest tower, a 64-story building that had been occupied by U.S. Steel Corp. UPMC remains a major employer in Oakland.

Despite the large student presence, there’s very little institutional-grade apartment stock in Oakland or surrounding neighborhoods. Multifamily rentals in this area are predominantly smaller and aged by half a century or more. Locals report that high-quality vacancies are hard to come by. Of course, that’s also true even in Pittsburgh’s more-challenged neighborhoods farther east or in the southern sector.

In fact, for a city its size, there’s not much institutional-grade apartment stock anywhere in Pittsburgh. What is available is mostly located in and around the downtown area, such as the converted office towers bought by PMC Property Group. Factory conversions are also trendy. Outside of suburban areas such as Cranberry Township to the north, modern garden-style apartments are rare.

The most prominent exception is the 232-unit Morgan at North Shore, built in 1997 on the riverbank across from downtown and next to PNC Park, home to the Pittsburgh Pirates baseball team, in a revitalized part of town. That property was sold by Lincoln Properties Group to Morgan Communities in December 2009.

With occupancy rates always tight and institutional properties so rare, it would seem Pittsburgh might be primed for more development. But there’s good reason for the lack of developer interest. For all its positives, one thing Pittsburgh is not is a growth market. Yes, it successfully recast its image and avoided falling into the depressed state of other Rust Belt metros such as Detroit, but Pittsburgh still has its challenges. Chief among them: Its population is aging, and its numbers are slowly fading. Allegheny County (of which Pittsburgh is the principal city) saw its population drop from 1.33 million in 1990 to 1.28 million in 2000 and 1.22 million in 2010, according to the Census Bureau. At 42.6 years old, the median age of residents in the Pittsburgh metro area tops the U.S. average by more than five years.

For these reasons, Pittsburgh’s apartment sector is unlikely to continue ranking among the nation’s leaders for rent growth. But Pittsburgh has its place in the national spectrum. It has overcome the roller-coaster cycles of sharp growth and steep falls. Pittsburgh’s niche in multifamily is as a stable market that should underperform the U.S. averages in boom times and outperform the norms in rough times.