In a shifting real estate landscape, cities like Pittsburgh are coping with change as best they can. Panelists at a recent ULI event talked about the region’s labor market and how rehabbing the suburbs to include more mixed-use amenities can drive retail transformation and denser development patterns. The discussion also touched on the findings in Emerging Trends in Real Estate® 2019.
In Pittsburgh’s case, that also has to do with having to deal with topography, which leads to streets like Canton Avenue in the Beechview neighborhood (with its 37 percent road grade) and more than 450 bridges. This additional thought process in development complicates the thinking regarding the infrastructure of an 18-hour city, retrofitting suburbs, and how millennials’ housing preferences will play out.
Panelists highlighted the city’s interesting movement over time from a manufacturing center to one that is extremely strong in education and medical research. Edward McMahon, senior resident fellow at ULI and longtime expert in sustainable development and environmental policy and featured speaker at the event, said that Pittsburgh and other cities are finding that “millennials and other age groups want in the suburbs what incorporates a lot of what they see in the urban areas.
“The development where we drive everywhere for everything is no longer the model,” he said. “What had become the 18-hour city—where you can get anything at virtually any time—is what people want now. Places that used to be thought of as bedroom communities now have to have mixed-use business and retail, walkability and other transportation options like bike trails, as well as good schools, too.
“But [walkable mixed use] is a major market that real estate developers in many cities are avoiding,” McMahon continued. “We have under-produced in all forms of housing except for luxury housing. That will become a crisis if we don’t do something about it.”
McMahon and the other panelists pointed out that Pittsburgh is scoring well in several key areas in the Emerging Trends in Real Estate® 2019 report, copublished by PwC and ULI. The city ranked 39th in overall real estate prospects, and ranked higher than adjacent midwestern cities in the office, retail, industrial, and housing sectors. Survey responses indicated, however, that Pittsburgh needs improvement in public/private investment capabilities.
“What Pittsburgh has, and many other cities in the Midwest do also, is a supply-side problem in terms of labor,” said panelist Mekael Teshome, vice president and senior regional officer for the Federal Reserve Bank of Cleveland. He says that mostly has to do with Pittsburgh’s population loss and the uncertainty of national policy issues regarding immigration.
“We can grow jobs [in Pittsburgh] in dribs and drabs, just can’t get the big bang,” Teshome continued. “The problem in getting big companies to relocate to places like Pittsburgh right now is they have labor uncertainty because of population age and training, and a stagnant growth factor. Unless we can get the supply side of that changed, we will continue to grow the lower end of business but have problems with the upper end.”
And what Teshome and the other panelist emphasized is that the development of housing and retail is a big part of changing that labor supply-side issue. “The traditional attractions of the suburbs—larger homes, good schools, and lots of green space—have not changed,” the ULI report said. “What is different is that amenities now in demand include access to mass transit and walkable neighborhoods in proximity to shopping and entertainment.”
“The first phase is millennials moving to the suburbs for larger, more affordable homes and access to schools, so adequate single-family and multifamily housing will be necessary,” a senior researcher for a U.S. bank said in the report. “Retail follows rooftops, so retail development to meet the new residents’ requirements will follow. Finally, you may begin to see more emphasis on employment centers as residents decide they want to work closer to where they live.”
But the geographical nature of Pittsburgh—a city with about 450 bridges (more than Venice, Italy) and the comfortable, closed-in development of downtown where the three rivers meet, have made it a metro area that is no longer thought of a manufacturing steelmaker. “Downtown has really changed,” said Bill Hunt, president and CEO of Elmhurst Group, a Pittsburgh-based company that invests in commercial real estate, hotels, and the electronic security industry. “We are seeing visitors from the suburbs who come to downtown Pittsburgh on the weekends like tourists, and that never used to happen.
“But what we are seeing in terms of economic business investment are the changes to the supply chain here,” Hunt said. “In the past, we were challenged by our geographic access to highways, and that mattered because of the big trucks needed to move such large shipments. But now those big manufacturing transportation needs have changed into smaller shipping by fulfillment centers, and we are well positioned to change our infrastructure to meet those needs.”
The ULI report points that out, emphasizing that cities need to have a new way of looking at e-commerce delivery. “Pittsburgh and Philadelphia offer the opportunity to invest at lower entry price points, but still be in proximity to a significant percentage of the U.S. population,” it says. “Pittsburgh also continues to look for ways to take advantage of the amount of technology research and development taking place in the city.”
Those transitions need to be made in housing as well, said Cynthia Kamin, a vice president in the CBRE Investment Properties Group. That includes “co-living” communities, where smaller and less expensive units are balanced by shared space and socialization amenities.
“Real estate developers have to see this as a business that treats their customers in different ways—not just market-rate price planning for apartments alone,” Kamin said. “The younger and older housing market—without children or needs for a huge house—now wants amenities that appeal to them besides how many square feet their living room is,” she said.
McMahon also said that U.S. cities are going to have to find ways to adhere better to environmental, social, and governance (ESG) criteria, a set of standards for a company or a city’s operations that socially conscious investors use to screen potential investments. That especially includes housing design and placement for an aging population. “The housing we build, and the environment that we put [it] in, impacts health greatly and will be a bigger and bigger factor in coming decades,” he said.
The ULI report emphasized the importance of ESG as well. “Sensitivity to ESG issues has increased for U.S. real estate with the public decision of the current U.S. administration, in 2017, to withdraw from the Paris Agreement, although this decision cannot be formally implemented until 2020,” the ULI report said. “Real estate has been proactive on sustainability issues for many years and—as a matter of self-interest as well as social responsibility—is moving ahead to advance its sustainability performance regardless of the direction of national policy.”
McMahon, who spent 14 years as the vice president and director of land use planning for the Conservation Fund in Arlington, Virginia, and where he helped protect more than 5 million acres (2 million ha) of land of historic or natural significance, said that going against sustainable building practices has not been a good response to the changing market.
“Pittsburgh is doing a good job of this,” McMahon said. “We are seeing old factories, shopping malls, and office complexes repositioned for better use in terms of where the market is going, but doing so where the repurposed building will be sustainable and marketable for a long time.
“When we started looking at this more so about 15 years ago, the real estate industry would always say things like, ‘Energy efficiency costs too much,’” McMahon said. “But now we are finding it no longer costs too much, but that the ones who live or office in those buildings want that energy efficiency. What used to be an add-on is now the standard. Future-thinking cities need to see it that way.”