Birgo Capital's series of Heartland real estate market profiles have analyzed interesting markets for multifamily investors. This week, we’re bringing this series home to the Steel City, the City of Champions, the City of Bridges — you already know it, the ‘Burgh.
The Greatest City in the World
Pittsburgh was named in 1758, after William Pitt, a British statesman and Prime Minister. Standing at the confluence of three rivers — the headwaters of the Ohio — it’s no surprise that Pittsburgh, like some other cities we’ve profiled, rose to prominence as a mighty industrial center, advantaged by the ready availability of power and shipping lanes. Pittsburgh was formally designated as a city in 1816, by which point it was already renowned for iron exports.
Pittsburgh’s industrial might grew during the Civil War, as demand increased for iron and armaments.The ‘Burgh became the Steel City in 1875, when Andrew Carnegie (later to form Carnegie Steel with Henry Frick) introduced the Bessemer process, a then-revolutionary technique for mass-producing steel from pig iron. While Pittsburgh is no longer the steel titan it once was, Carnegie and Frick’s legacies live on in a multitude of cultural and economic touchstones visible around the city, including Carnegie Mellon University.
In the 1970s and 1980s, Pittsburgh industry fell victim to the same forces of deindustrialization and suburbanization that we’ve discussed throughout much of this series. However, Yinzers proved their mettle , and Pittsburgh emerged from economic crisis stronger than ever.
Today, Pittsburgh’s economy shares many of the hallmarks we’ve pointed out in the strongest Heartland markets: healthy diversification, a Meds and Eds bedrock, and exposure to the cutting edge of research and technology. The broader metro area plays host to 44 non-profit colleges and universities, lead by Carnegie Mellon, University of Pittsburgh (including the UPMC system), and Duquesne University. The city is also home to PNC, the nation’s 5th-largest bank, seven other Fortune 500 companies, including PPG, U.S. Steel, and Dick’s Sporting Goods, and strong presences from organizations like FedEx, Apple, Google, Facebook, Amazon, Microsoft, and others.
Pittsburgh’s economic base is thicker than a Primanti Bros. sandwich and busier than the Strip District on a Saturday morning, affording real estate investors serious opportunities.
Market Analysis
Pittsburgh isn’t a prospective investment for Birgo Capital: It’s our home. Birgo Capital investors and tenants already know it’s incredible, so we’re going to do this section a little differently and summarize its opportunities for the benefit of non-Yinzers.
Pittsburgh benefits from many of the same forces as the strongest markets we’ve profiled so far.
A diversified, balanced economy with significant upside exposure.
Pittsburgh’s economy retains some of the industrial presence that defined the city during much of its history, but the sheer diversity of the regional economy, in tandem with presence from strong B2B brands and tech research, creates an optimal index of the global economy.
Professional services establishes a strong logistical base for growing firms, and trade and transportation exposed the city to upside during the pandemic months. It certainly helps that the Port of Pittsburgh is the second-busiest inland port in the country.
While employment is up in virtually every sector, because the latest BLS data was issued in May 2021— and thus compares present employment in the city to the lowest pointof Spring 2020 — there are a few especially promising notes. First, leisure and hospitality took a beating last year, but it’s coming back with a vengeance. Second, education and health care have been the stable presence that we hoped they would be. Third, Pittsburgh’s employment recovery — tracking closely with the nation’s — reaffirms our thesis that a diverse economy is well-positioned to withstand the effects of localized and systemic recession.
The presence of tech firms, energy firms, and medical research grants Pittsburgh’s economy access to some of the fastest-growing economic sectors nationwide, attracting workers to the city and improving income statistics. With 44.6% of 25-and-older residents holding bachelor’s degrees or higher, the city is well-positioned to continue to attract investment from firms in these sectors.
Meds and Eds is disproportionately prominent, insulating the market from recessionary forces.
We’ve spilled plenty of ink on the benefits of Meds and Eds. Both sectors benefit from resilient demand in the face of recession, because both service fundamental economic essentials Universities with strong teaching hospitals weathered the pandemic particularly well, as increasing demand for health services and health technology research lent a much-needed boost to the most cutting-edge institutions.
In Pittsburgh, Meds and Eds is the largest market segment by a significant margin; the city’s largest employer, UPMC, employed 46,000 workers in the metro area prior to the onset of the pandemic, and cleanly doubled its year-over-year revenue-after-expenses in 2020.
The housing market is well-optimized for multifamily investors.
Let’s start with a statistical rundown.
- In 2019, Pittsburgh median rent as a fraction of median income was 16.23%, versus 17.98% statewide and 20.03% nationwide (ACS). It’s an affordable city for renters.
- In 2019, Pittsburgh’s rental vacancy rate was 4.72%, down from 8.9% in 2010 — indicating rapidly-increasing demand and economic growth in the market (ACS).
- Pittsburgh’s price-to-rent ratio is 11.14.
- In 2019, Pittsburgh’s owner-occupied housing rate was 47.2%.
- Pre-pandemic, Pittsburgh’s 3.2% apartment vacancy rate suggested a tight market and signaled potential rent increases.
- As of June 2021, average rent had increased 6% year-over-year, affirming that thesis.
- While Pittsburgh’s population has decreased since 2000, the rate of decline has slowed considerably, and while population stabilizes, per-capita income increased 24% between 2000 and 2018.
Rent in the city has increased steadily over time, but remained impressively affordable compared to the rest of Pennsylvania.
Like we’ve discussed before, comparatively affordable rents attract employers and workers — including remote workers — to the city, and rising incomes create a margin for property owners to capture economic growth by increasing rents by a few percent of median tenant income, while still preserving the metro’s comparative affordability advantage.
Although Pittsburgh has historically been a fairly affordable city for single-family residents, the durable renter fraction over time implies that renting remains an attractive option in the metro even when home prices are low. Meanwhile, as has been the case everywhere else, the 2021 single-family market is hotter than Point Park on a windless afternoon in August — inclining more residents to rent.
- Median list price in Pittsburgh for 2021 is nearly $240,000.
- That figure has increased by 19.8% over the past year.
- Meanwhile, total listings are down more than 35% year-over-year.
The compression of the single-family market usually directly correlates with an increase in demand for rentals. iIn a low-vacancy environment, the demand pressure tends to cause rent increases. Like we pointed out, that thesis has remained true for Pittsburgh in 2021, with year-over-year average rent up 6%.
As systemic trends like relocation to lower-cost-of-living metros and work-from-home continue, balanced economic centers that can offer competitive living costs should continue to see growing housing demand.
What we’re watching
Pittsburgh may be the greatest city in the world (call us biased; we don’t mind), but that isn’t to say there aren’t a couple of trends to watch in the mid-term. One general comment worth making is that evaluating a market from a bird's-eye statistical view isn't the same as being in the trenches — we've been invested in Pittsburgh long enough to understand that the difference between theoretical and actual performance is as much about a great tenant base and a strong team as any number of spreadsheets.
But, we'd be remiss not to mention two quick analytical points.
First, while Pittsburgh’s population decline — which was most precipitous during the 70s and 80s — may have subsided and stabilized since the year 2000, the city nevertheless lost around 1.5% of its population between 2010 and 2019. Over the long run, though, we think economic performance is a surer indicator of investment viability than population. Workforce multifamily just isn’t trying to attract every demographic — plenty of people prefer single-family homes, for instance. We think two demographic forces can help protect demand for affordable multifamily housing, broader population trends notwithstanding. First, Pittsburgh’s senior population is expanding, to just over 20% of the population in 2019. Second, Pittsburgh’s economic expansion, diversified economy, and affordable cost-of-living has attracted millennial migrants — especially in particular neighborhoods. Demographics that historically rent in large proportions, and an acquisitions focus that identifies the neighborhoods most likely to attract them, can continue to expand investors’ tenant base — population decline notwithstanding.
Second, Pittsburgh’s attractive fundamentals don’t guarantee that investors will be able to access the market, much less the market’s deepest value-creation opportunities. “Can I get exposure to the market?” is a real question real estate investors need to ask themselves, and in the Pittsburgh real estate market over the past five years — and particularly over the last 18-24 months — the answer to that question has probably become “no.” Cap rates have compressed, institutional investors are competing for a larger share of acquisitions, and deal size has generally decreased. For investors already in the market, there’s plenty of reason to be excited about where Pittsburgh is going, but acquiring attractive deals isn’t always easy in a bull market.
Concluding thoughts
We might be biased, but we think Pittsburgh multifamily provides exposure to all the things we like about real estate from a fundamental standpoint, at relatively little risk.
We couldn't be more excited for what the future holds, because, at the end of the day, we bleed black and gold.
