Pittsburgh’s circular office vacancy ‘logic’

Pittsburgh’s circular office vacancy ‘logic’

The latest vacancy rate for top-tier office space in Pittsburgh’s Golden Triangle remains quite high. Yet developers keep building it out, oftentimes with taxpayer subsidies.

The Jones Lang LaSalle (JLL) real estate firm’s 2021 Pittsburgh Skyline report says the vacancy rate at downtown Pittsburgh’s top eight “trophy” properties stands at 14.5 percent.

The trophy building with the highest vacancy rate Downtown is 525 William Penn Place – at just under an astounding 60 percent.

The overall Class A and Class B office vacancy rates now are 25.6 percent and 26.4 percent, respectively, JLL reports.

Do remember that occupancy rates were nothing to brag about before the coronavirus pandemic hit. And the experts are saying that if the pandemic-inspired work-at-home trend sticks – as it is expected to, at least to some degree – the vacancy rates will go higher as businesses seek to shed even more space.

Such a trend “could have multimillion-dollar implications for commercial real estate, city government budgets and the retail sectors,” a JLL official told the Post-Gazette.

“Pittsburgh’s skyline will be shaped by the post-COVID workplace strategies of Downtown’s largest employers. The impact of hybrid and work-from-home models will be determined in the coming years and will critically affect the heart of our region’s office market,” the real estate group’s analysis concludes.

But, again, the office vacancy rate slide existed long before the pandemic. Which makes all the more unsustainable those public subsidies for even more Class A office space.

Some folks never learn. And subsidy-seeking developers soon could be asking taxpayers to foot more of their bill. How’s that?

Well, as The Wall Street Journal reports it, “When it comes to loans, banks are (increasingly) wary of offices.”

In fact, the value of new office loans issued in the United States by banks in the first quarter of 2021 was 35 percent of levels in the same 2019 period, a Journal “Heard on the Street” column says.

That’s “a sharper pullback than for unloved retail assets such as malls,” the report says. And that’s saying a lot.

While default rates on office loans now remain below 1 percent, the work-at-home trend coupled with ending contracts could lead to even more oversupply of office space and even higher office vacancy rates.

Which could force developers to attempt to offload even more of the capital costs that they alone should bear onto taxpayers.

And that will come with an all-to-willing assist from government economic development agencies whose controlling-pols will argue that evermore top-notch office space is necessary to fuel economic “recovery” from the pandemic, leading us to the promised land of “renaissance.”

Despite the evidence, and common sense, to the substantial contrary.

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