Energy boosts U.S. office market as Pittsburgh rents jump

Leasing demand from natural-gas and other energy companies is helping to bolster the U.S. office (BBREOFPY) market and drive growth in cities such as Pittsburgh, where rents are at their highest in more than a decade.

Greater Pittsburgh, along with Houston and other cities with concentrations of energy-related workers, is outpacing national growth in rents and occupancy, according to a report today from Reis Inc., which showed U.S. office landlords had net gains in leased space for a second year in 2012, following three years of declines. Tenants in energy, along with technology, helped push the national vacancy rate to a three-year low.

In the fourth quarter, greater Pittsburgh office rents after landlord concessions climbed 1 percent from the previous three months, compared with 0.8 percent for the U.S., while the area’s vacancy rate held at 15.5 percent, below the national average of 17.1 percent, New York-based Reis said.

Pittsburgh tenants paid an average of $17.68 a square foot in the fourth quarter, the highest since 2000, ranking it 12th out of 79 markets for growth. In Houston, effective rents rose 1.7 percent, the fifth-most nationwide.

“In a market that’s been very choppy, the energy sector has been one of the bright spots,” said Dennis Friedrich, chief executive officer of Brookfield Office Properties Inc. (BPO), the New York-based owner of Houston’s Allen Center and properties in other energy-dominated markets, including Denver and Calgary.

The fourth-quarter U.S. office vacancy rate, down from 17.2 percent in the previous three months and 17.4 percent a year earlier, was the lowest since the end of 2009, Reis said.

Marcellus Shale

Of the top 10 markets for year-over-year growth in asking rents, seven were centered on technology or energy, according to the research company. San Francisco had the largest gain, at 6.6 percent.

In the Pittsburgh area, Williams Cos. (WMB), the third-largest U.S. pipeline operator, is expanding for work connected to the Marcellus Shale, a layer of gas-saturated rock that lies more than a mile underneath much of Pennsylvania.

The company, based in Tulsa, Oklahoma, plans to move about 240 employees to a bigger regional office about 17 miles (27 kilometers) southwest of Pittsburgh after outgrowing space nearby, said Julie Gentz, a spokeswoman. Williams agreed in June to rent 100,000 square feet (9,000 square meters) in the Southpointe business park in Washington County, where companies including Range Resources Corp. (RRC) and Consol Energy Inc. (CNX) have regional or national headquarters.

Revitalizing Economy

More than 50 companies began operations in the Pittsburgh area in 2011, helping to revitalize the economy three decades after the collapse of the steel industry, according to the Pittsburgh Regional Alliance, a group that seeks to attract capital investments to the 10-county region.

“All of a sudden, you have Texas and Oklahoma coming into rural Washington County,” said Jeanne Antonuccio, president of About Pittsburgh Inc., a relocation-services consultancy with clients in industries including energy, finance and health care. “Our business has increased significantly.”

Range Resources in November 2011 built a new regional headquarters in Southpointe that houses about 300 employees, said Matt Pitzarella, a spokesman. The Fort Worth, Texas-based company also leases another 110,000 square feet in Washington County as an operations center, he said.

Range was the first energy producer to successfully draw natural gas from the Marcellus formation, now the largest producing gas field in the U.S., according to the company.

Industry Growth

In 2007, when Range leased its first office in southwestern Pennsylvania, “we were the only drilling-related company in Southpointe,” Pitzarella said. “Today there are approximately 65 companies in the park who work in our industry, and almost all of them do work for Range.”

The company has about 5,000 people who work as full-time subcontractors in the region, plus another 1,000 subcontractors in other parts of the state, he said.

“Our entire western and southern submarkets are littered with firms out of Houston,” the center of the U.S. energy industry, said Jeremy Kronman, executive vice president for commercial broker CBRE Group Inc. (CBG) in Pittsburgh. “This has helped to push the region’s total employment past the heydays of the steel mills in the ’70s. Pittsburgh is now at an all-time employment high.”

Pennsylvania ranks second behind Texas in having the largest number of jobs in the unconventional energy industry — fuel extracted through methods other than wells, according to IHS Global Insight, an Englewood, Colorado-based provider of business information.

Hydraulic Fracturing

The Pittsburgh region — along with parts of North Dakota, Ohio, New York and West Virginia — is drawing energy-industry tenants because of new techniques such as horizontal drilling and hydraulic fracturing, or high-pressure water injections, that have made it possible to release the gas contained in shale. So-called fracking has raised objections from environmentalists partly because of possible contamination from the chemically treated water that’s used.

“With the focus on energy independence for the U.S., we are seeing growth within our major energy tenants” and ancillary service companies, said Brookfield’s Friedrich. The company forecasts rent growth of more than 5 percent this year in both Houston and Denver.

“With the continued positive net absorption, which not many markets have experienced, there’s also a very controlled supply pipeline in both markets,” said Friedrich, whose company is the biggest office landlord in the U.S., according to National Real Estate Investor.

2013 Outlook

New office construction in the U.S. totaled 3.17 million square feet in the fourth quarter, down from 3.82 million in the previous three months and 3.65 million a year earlier, Reis said.

Office landlords had a net increase in occupancy of 3.69 million square feet in the period, down from 4.82 million in the third quarter and 4.84 million a year earlier, according to Reis. That brought so-called net absorption for the year to 17.2 million square feet, down from 17.5 million in 2011.

“The outlook for 2013 is slightly better than what we experienced in 2012,” said Ryan Severino, senior economist at Reis. Still, job growth is far from robust, higher payroll and income taxes are likely to reduce consumption and the government is expected to implement spending cuts, he said.

“We expect an acceleration in both rent growth and vacancy compression,” Severino said. “But it is important to keep expectations aligned with reality.”