With Downtown Pittsburgh office space tight, is new skyscraper on horizon?
By Mark Belko / Pittsburgh Post-Gazette

Even with two new office buildings in the works Downtown, there just might be room for a third.

With office vacancies at a 30-year low and demand high, conditions could be aligning for a developer to take a chance on building another skyscraper in the Golden Triangle, local real estate experts say.

“It would fill up, I think,” said Gerry McLaughlin, the Newmark Grubb Knight Frank executive managing director who has worked in the market for 35 years. “Yeah, I do think there probably is a need for additional space Downtown. How much, I’m not sure.”

The Jones Lang LaSalle real estate firm has called Pittsburgh one of the tightest office markets in the country. The Class A office vacancy rate Downtown was a mere 5.6 percent at the end of last year and a fraction lower at 4.9 percent at the end of the first quarter — the lowest since the early 1980s, according to Mr. McLaughlin.

And with many of the major office towers ranging from 92 to 99 percent full, the two new buildings in the pipeline — the Tower at PNC Plaza and the Gardens at Market Square — may not be enough to satisfy demand.

PG graphic: Downtown Rental Rates
(Click image for larger version)

The $400 million Tower at PNC Plaza being built on Wood Street will be used exclusively by PNC Financial Services Group as its headquarters, although some employees may transfer into the 33-story skyscraper from other buildings Downtown.

A half block away on Forbes Avenue, the Gardens project will contain 125,000 square feet of new Class A office space and a 197-room hotel. Turner Construction already has committed to taking one floor of office space, but the rest is available.

While construction of a third office building sounds enticing in theory, it may not be so easy in reality, as Oxford Development Co. is finding out.

The Pittsburgh developer announced last May that it wanted to build that third skyscraper — a $238 million, 33-story tower that would occupy a block of Smithfield Street between Forbes and Fifth avenues.

Eleven months later, it still hasn’t pulled the trigger, as it has yet to reach a deal with a tenant willing to commit to taking 40 to 60 percent of the space in the proposed 772,000-square-foot building.

And there’s the rub, not only for Oxford but any developer thinking about building a high-rise Downtown.

As a result of the real estate crash and the Great Recession, banks most likely won’t lend cash for an office project unless the developer has pre-leased at least 40 to 50 percent of the building.

Speculative building — construction without a tenant in hand — produced its share of empty office towers, particularly after the recession hit, said Peter Sukernek, vice president and general manager of Howard Hanna Commercial Real Estate Services.

“They call them ‘see-through buildings.’ There’s nobody in them,” he said.

No one sees banks loosening the purse strings anytime soon, making it difficult for developers to start projects without their own stash of cash.

“In my opinion, on a purely speculative basis, you can’t do it,” said Aaron Stauber, president of Rugby Realty, which has extensive property holdings in the city. “Unless you’re prepared to pay all cash, I don’t see lenders stepping up to do it.”

Whether there’s a large enough tenant out there willing to commit to taking half of the space in a new high-rise — that would be 366,000 square feet in a 772,000-square-foot skyscraper like the one Oxford has proposed — is an open question.

Oxford has talked to both national and local companies about anchoring its project. It also has spoken to a number of energy companies. So far, most of those firms have chosen to locate in the suburbs, spurring building in places such as Southpointe and the Parkway West corridor.

One company that could be looking for a big chunk of office space Downtown is U.S. Steel, which is considering a move from U.S. Steel Tower, its home for more than four decades, when its lease expires in 2017.

The Post-Gazette reported last September that the corporation was considering a 37-acre tract in the Strip District owned by the Buncher Co. and a 116-acre property off McClaren Road in Findlay for a potential relocation. It also has not ruled out remaining in its current home on Grant Street, where it occupies 471,000 square feet of space.

Nonetheless, some believe it could be a candidate to occupy a new office building, or that a developer may be able to lure an anchor tenant from the suburbs or even from another skyscraper Downtown.

“We have so many different opportunities. I think in a relatively short period of time you will see another office building being built,” said Richard Beynon, president of Beynon & Co., a Downtown real estate firm.

But even if there is high interest in such a project, there’s another obstacle that could prevent its construction — cost.

To pay for the construction, a developer probably would have to charge tenants $38 to $40 a square foot or perhaps more to lease the space.

Such rents are higher than what tenants are paying now at the most prestigious office addresses Downtown.

For example, first-quarter asking rents ranged from $28 to $35 a square foot at BNY Mellon Center; $28.75 to $31.50 at U.S. Steel Tower; $29.50 to $32.50 at One Oxford Centre; $28 to $34.50 at EQT Plaza; and $27 to $31 at One PPG Place, according to Newmark Grubb.

While asking rents of $31 to $35 a square foot appear to be the highest ever for the Downtown market, the gap between those rates and what it would cost to move into a new office tower still may be too great for a potential tenant to justify the expense.

But that could change.

Jeffrey Ackerman, managing director of CBRE’s Pittsburgh office, said he sees the Downtown office market continuing to tighten, which, in turn, could send rates for existing space even higher.

At some point, the gap between what it costs to rent that space versus what it would cost to move into a new building may narrow enough to prompt a tenant to commit to anchoring a new office tower.

Likewise, Mr. Stauber said a company coming into the market for the first time — perhaps like Chevron, which is looking for a headquarters in the region — may look at the existing rental rates and the scarcity of space and decide it makes more sense to build Downtown. Chevron reportedly is considering a site in Moon.

“It’s feasible that a tenant like Chevron is not going to find a block of space in a quality building. The amount it would pay [for existing space] versus paying a developer to do a new building may not be a big spread,” he said.

Mr. Beynon said history may be on the side of another skyscraper. He said that when occupancy rates Downtown have gone above 92 percent, new skyscrapers have been built.

For instance, in the early 1980s, when office occupancy rates were as high as 98.4 percent, One Oxford Centre, PPG Place and BNY Mellon Center were built. A few years later, construction of Fifth Avenue Place and EQT Plaza followed.

Of course, there are other factors that could work against another new building. If U.S. Steel moves to the suburbs, for instance, it would leave a large chunk of empty space in U.S. Steel Tower to fill, even with the plans by UPMC to move another 1,400 employees into the building and take another eight floors for a total of 23 by October.

PNC’s conversion of the former Lord & Taylor department store on Smithfield and the Tower at PNC Plaza also could open up office space in other buildings and reduce the need for new construction.

But despite the obstacles and potential setbacks, it wouldn’t be surprising to see at least one more new office tower pierce the city’s skyline in the next five to seven years.

“Every time I bet against Pittsburgh or have been somewhat negative, Pittsburgh always comes back to surprise me with a complete rebirth. At this juncture in my career, I would say, yeah, there’s a good chance. I’m not betting against it anymore,” said Jon Harrigan, CEO of Pennsylvania Commercial Real Estate Inc., Downtown.

Mark Belko: mbelko@post-gazette.com or 412-263-1262.
First Published April 21, 2013 12:00 am

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