Peaks & Valleys: Despite energy’s downturn, Southpointe’s occupancy rate still shines

August 7, 2016

Michael Bradwell
Observer Reporter

On a warm spring evening in early May 2010, a group of Washington County business leaders, local politicians and economic development organizations met on stage at the Hilton Garden Inn ballroom in Southpointe to usher in a new business slogan.

Before a crowd of several hundred people, the group announced the county would be known as “The Energy Capital of the East.”

The name bore credence because of the county’s historical connection to the century-old coal mining and natural gas exploration, as well as a much more recent development – the exploration and development of the Marcellus Shale strata that began here in 2005, and by the time of the evening’s ceremony, was proving that the growing abundance of natural gas from shale was more than a passing event.

The choice of Southpointe as the location for the night’s proclamation couldn’t have been more appropriate. On that evening, there were more than 50 energy-related companies in the mixed-use business park, one of the largest and most successful in Pennsylvania.

The companies included CONSOL Energy Inc.; Range Resources Appalachia, the leading driller for natural gas in Southwestern Pennsylvania; Columbia Gas of Pennsylvania; Chesapeake Energy Corp.; Halliburton; Baker Hughes; and Williams Production Appalachia.

In the next couple of years, those companies would be joined by others in the industry including Noble Energy and Rice Energy – competitors to be sure – but also following a desire to be part of a growing corporate hub of oil and gas drillers and their supply chain partners – a true energy center for the region and beyond.

By 2013, most of the property in the 220-acre Southpointe II site was sold, a result of the intense demand for space by energy companies.

A downturn countered

When the industry overproduced as a result of the increasing efficiencies of unconventional drilling, and prices for the fuel fell drastically, drilling slowed to a crawl at the beginning of 2015, and the need by energy companies for space in the park fell off.

But real estate professionals say Southpointe’s occupancy rates have barely declined, nor has its status as an energy center. They have, however, seen a shift to non-energy tenants who aren’t impacted by energy’s downturn.

“Oil and gas is down a little, but the average daily rate is steady,” said Lucas Piatt, president of Millcraft Investments, during a recent interview at Jacksons Restaurant + Bar adjacent to the Hilton Garden Inn, two of several properties Millcraft owns in Southpointe.

“We are handling energy tenants that call and ask to downsize or terminate leases, but we’re able to backfill those spaces with tenants from other industries,” Piatt said. “There are challenges for Southpointe, but with the amount of supply, we are still able to do well.”

Dan Adamski, managing director of the Pittsburgh office of JLL, a national commercial real estate company, agrees with Piatt’s assessment.

One of JLL’s services is to show corporate clients the availability of office sites in Western Pennsylvania. Adamski said Southpointe is always at the top of their list.

“Everyone wants to be in Southpointe, or they at least consider it,” he said. “Southpointe has had no issue attracting companies.”

Both men point to the non-energy tenants in the park – namely generic pharmaceutical giant Mylan N.V.; cellular phone tower operations company Crown Communications; urgent care center operator MedExpress; and engineering software simulation developer ANSYS Inc. – as examples of companies that have continued to demand additional space as energy companies’ space demands were waning.

“Crown Castle is growing at an exponential rate,” Piatt said of the company, which two years ago purchased Mylan’s former headquarters building in the original Southpointe and connected it to Crown’s offices at the end of Corporate Drive. Earlier this year, Crown Castle Midwest Area President Ken Boben told members of the Washington County Chamber of Commerce that the Houston-based company, which owns and manages 40,000 cellular telephone towers across North America, has grown its Southpointe operations to five separate locations in the park, where it now employs more than 860 people.

Horizon Properties, which was the lead developer for Southpointe II, and ushered in many of the energy-related companies that remain there today, was also instrumental in bringing CONSOL to the park, marking the beginning of the energy rush.

“We’re not too worried about the downturn in oil and gas, with all of the other companies that are interested in Southpointe,” Horizon Properties spokesman Nate Tovornick said last week.

He noted that while Noble Energy scaled back the space in its building, Horizon placed Confluence Financial Partners in some of the remaining space in the building.

Kelley Hoover Heckathorne, who places companies for landlords of 10 different buildings in Southpointe, including Burns & Scalo Real Estate Service’s Zenith Ridge project, said last week that interest in the office park has never waned.

“Space that comes on the market continues to get leased,” Heckathorne said. While she couldn’t be specific about names, she said current interest is coming from technology companies and yes, those from oil and gas.

The Zenith Ridge project, which Burns & Scalo recently completed, includes a 186,000-square-foot building that contains the new headquarters for ANSYS; a second 150,000-square-foot “mixed-tenant” building; and another 150,000-square-foot building for Rice Energy’s new headquarters, which it entered this spring.

Heckathorne said only the mixed tenant building has unleased space – about 43,000 square feet.

Mylan’s new project

In late June, Cecil Township Zoning Hearing Board approved Mylan’s plans for a 188,000-square-foot office building it plans to build and connect to its 280,000-square-foot headquarters, which opened in December 2013, with about 500 employees.

A Mylan spokesman said in an email earlier this week that the total number of employees at the 1000 Mylan Boulevard address when the new office structure is added will rise to 800, a net gain of 300 people.

Jeff Kotula, president of the Washington County Chamber of Commerce, which moved its offices to Southpointe in 2014, noted that while energy is in a downturn, Southpointe’s occupancy rate continues to shine.

“The slowdown in the energy sector has lowered Southpointe’s occupancy level from a rate of approximately 98 percent at the beginning of 2015 to a rate of just around 89 percent currently,” he said, citing commercial real estate operator CBRE’s second quarter 2016 report. “However, I would argue that not many markets ever experience 98 percent occupancy and we are now closer to common occupancy rate averages typically seen in the region. For instance the current occupancy rate in Pittsburgh (Downtown Fringe) is approximately 90 percent, which is in line with what Southpointe is now experiencing.”

An energy rebound

Kotula described the last 10 years as a prosperous time when companies such as CONSOL, Range Resources, Rice Energy and Noble Energy selected Washington County as the place where they wanted to locate operations.

“But we also understand the business of these dynamic energy companies, as in any business, is cyclical,” he said. “There will be times of expansion and contraction over the years. We welcome those dynamics because we know the companies serving the energy industry have the same long-term vision that we do and the county looks forward to the inevitable improvement in the energy business.”

Like Piatt and Adamski, he noted that the business diversification within the park has kept it from being singularly focused on one industry, noting that ANSYS, Mylan, and Crown Communications all chose to stay in the park when they needed to expand.

While those who follow the energy industry see natural gas activity returning to normal levels in the region by mid-2017, Adamski believes the June announcement by Shell Oil that it will build an ethane cracker plant in Beaver County means that Southpointe will continue to benefit from the many energy connections it began making in the last decade.

“A tidal wave of development is coming because of this cracker plant,” Adamski said, adding that JLL is projecting that capital investment on related projects in the region could be three to four times the estimated $2 billion to $6 billion Shell is expected to spend on the plant.

“Southpointe’s only limitation to date has been a limited space” for further development, he said.