Tuesday, October 17, 2006
Office Vacancy Rate Continues to Climb in Pittsburgh
As news reports continue to extol the building of residential units in the downtown corridor, the rising vacancy rate for office space goes strangely ignored for the most part. Thanks to a Tribune Review story about a recent real estate company survey we know the downtown office vacancy rate rose sharply to 20.4 percent by the end of the third quarter from 17.8 percent at the end of the second quarter.
Nationally, vacancy rates in central business districts had fallen to an average 13.9 percent at the end of the second quarter of 2006 and are going through a “classical recovery cycle.” However, analysts note that the generally accepted equilibrium is around 12 percent. Thus, the rate in Pittsburgh’s downtown market is nearly double the national equilibrium rate. But that is not stopping new taxpayer subsidized office construction by PNC.
This trend is likely to be maintained as office space continues to open up on the fringe of the Golden Triangle in places such as the North Side and Southside Works. Compounding the problem for the owners of the office buildings in the Golden Triangle is the competition from buildings that received taxpayer subsidies. The Southside Works, built with a tax increment financing plan and other large outlays of taxpayer money, has been trying to lure downtown office users to the Southside.
To make matters worse Mellon Financial has consolidated its office space, vacating the Union Trust Building and leaving only a few tenants in the 11-story building.
What can be done to lower the vacancy rate? The simple answer is to improve the business climate in the City. The new payroll preparation tax, which has replaced the mercantile tax and the business privilege tax, means that firms that were once exempt, such as financial and manufacturing firms may find it worthwhile to relocate. With a very high parking tax, many firms will choose to locate in suburban areas where parking is free.
Finally, the City needs to refrain from government driven development. Subsidies should not longer be doled out to every developer that comes asking. Subsidizing new developments at the expense of existing ones creates an over supply of office space and drives down the value of existing buildings. These buildings pay less in property taxes, reducing revenue to the City. And since the new buildings are not paying the full amount of property taxes to the taxing bodies, the City is put into a further bind and has to rely on other taxes, worsening the tax climate in the City.
Nationally, vacancy rates in central business districts had fallen to an average 13.9 percent at the end of the second quarter of 2006 and are going through a “classical recovery cycle.” However, analysts note that the generally accepted equilibrium is around 12 percent. Thus, the rate in Pittsburgh’s downtown market is nearly double the national equilibrium rate. But that is not stopping new taxpayer subsidized office construction by PNC.
This trend is likely to be maintained as office space continues to open up on the fringe of the Golden Triangle in places such as the North Side and Southside Works. Compounding the problem for the owners of the office buildings in the Golden Triangle is the competition from buildings that received taxpayer subsidies. The Southside Works, built with a tax increment financing plan and other large outlays of taxpayer money, has been trying to lure downtown office users to the Southside.
To make matters worse Mellon Financial has consolidated its office space, vacating the Union Trust Building and leaving only a few tenants in the 11-story building.
What can be done to lower the vacancy rate? The simple answer is to improve the business climate in the City. The new payroll preparation tax, which has replaced the mercantile tax and the business privilege tax, means that firms that were once exempt, such as financial and manufacturing firms may find it worthwhile to relocate. With a very high parking tax, many firms will choose to locate in suburban areas where parking is free.
Finally, the City needs to refrain from government driven development. Subsidies should not longer be doled out to every developer that comes asking. Subsidizing new developments at the expense of existing ones creates an over supply of office space and drives down the value of existing buildings. These buildings pay less in property taxes, reducing revenue to the City. And since the new buildings are not paying the full amount of property taxes to the taxing bodies, the City is put into a further bind and has to rely on other taxes, worsening the tax climate in the City.
