A policy disaster in the making?

A policy disaster in the making?

Is this soon to be a Pittsburgh problem? Is it already? And might it lead to yet another Pittsburgh public policy disaster?

Bloomberg news reports that office buildings in the United States “face a $1.1 trillion obsolescence problem.” As the news service explains:

“One of the tallest office towers in St. Louis lost 96 percent of its appraised value. Denver’s former World Trade Center complex faces foreclosure. An oil company’s vacant Houston workplace sold this year at a $67.4 million loss to lenders.

“Those properties are among the 30 percent of U.S. office buildings — worth an estimated $1.1 trillion — that are at high risk of becoming obsolete as tenants’ tastes change in the hybrid-work era, according to Randall Zisler, an independent consultant and former head of real estate research at Goldman Sachs.”

Bloomberg notes that while some companies are scaling back their space, others “are gravitating to newly developed or recently overhauled offices that are environmentally friendly, with plenty of fresh air and natural light, fitness rooms and food courts.”

“Left behind are older buildings that would be expensive to renovate to today’s standards,” the report continues. “As values for those properties slide, some landlords are walking away.”

Might this be a red flag for old stock Pittsburgh office space that has been plagued by quite high vacancy rates since well before the coronavirus pandemic?

One analysis projects that, nationally, demand for in-person office space might fall 15 percent from pre-COVID levels over the next five years as remote or hybrid schedules become more common.

And how might meddling government officials (especially those in Pittsburgh) react in an attempt to command a reverse of the trend? If it’s with public subsidies, in any form, that would be a public policy disaster.

But it also might be a trend to which Pittsburgh officials already are contributing: Consider how the public is helping to bankroll, to the tune of $10 million, the new FNB Corp. tower on the old Civic Arena site.

Citing data from Jones Lang LaSalle (JLL), Bloomberg reports that buildings opened since 2015 recorded more than 51 million square feet of occupancy gains since COVID hit, while vacancies swelled elsewhere.

And that “divide is most pronounced in big-city markets where more than 70 percent of office stock is at least three decades old,” JLL says, specifically citing markets in New York, San Francisco, Los Angeles, Boston, Chicago and Philadelphia.

Pittsburgh is not specifically cited. But it would be shortsighted to believe that Pittsburgh somehow is immune to this trend.

“We’re not saying bulldozers are arriving en masse,” Goldman Sachs’ Zisler clarifies. “But you’re going to see a repricing and, in some cases, reuse of these buildings.”

But even then, there already are cautionary tales. There have been reports out of Philadelphia suggesting that the much-trumpeted repurposing trend might be overstated.

Stay tuned.

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).