If we build it they will come. Really. If we build it, they will really, really come. Seriously. Promise this time.

Here is a fascinating take on the vacancy rate for office space in downtown Pittsburgh. Seems that there are more empty offices today than there were a year ago. Which is troublesome. But fear not:

But things could be improving Downtown, said Grubb & Ellis spokeswoman Pamela Lowery. "There are some large users looking."

One of those is the University of Pittsburgh Medical Center, which has expressed an interest in taking 200,000 square feet or more of Downtown space for administrative operations. Such a move could by itself shave a full percentage point from Downtown's vacancy rate.

OK. That is probably a good thing. But not obviously so. Does this amount to 200,000 extra square feet for UPMC? Or are they moving downtown from elsewhere in the city? If it is the latter, who cares? The only benefit might be some illusory boom in terms of "downtown vitality" that would seem to be counteracted by the lack of vitality in whichever neighborhood loses UPMC as a tenant. Of course, given UPMC's growth, I can see it being space for new offices. Or at least offices brought in from outside the city. The article doesn't say.

But here's the really interesting part:

Then there is the redevelopment of the Fifth-Forbes corridor, finally receiving a kickstart with the construction of PNC Financial Group's massive office/residential complex now under way. Together with Millcraft Industries' reworking of the former Lazarus and G.C. Murphy stores into mixed-use complexes, it could spark a Downtown resurgence that would make a 20 percent vacancy a thing of the past.

Umm... I hate to point out the obvious, but...

The construction of a "massive" office complex in a city that is currently hemorrhaging (or at least bleeding) office tenants might indeed "make a 20 percent vacancy a thing of the past." Unfortunately, it might do so by making a 22 percent vacancy a thing of the present.

Or pick your own number. Either way, is it completely clear to everyone that the answer to an office glut is to subsidize the construction of more office space? I guess so, if you think that the new space is going to create "buzz," which will in turn draw in tenants who have refused to put their offices in downtown Pittsburgh lo these many years. Which of course sounds a lot like... sing along with me now...

If you build it...

They will come.

I don't know. That sounds so 1990 to me. (And 1980. And 1970. And 1960. And 1950.)

And guess what? They still haven't come.

Perhaps if we elect Kevin Costner as mayor. He can bring in James Earl Jones to head the URA, Ray Liotta to be head of planning.

What could go wrong? We already have the stadiums.

Comments

[Cope]

Great post and something I argued until I was blue in the face while working in Pittsburgh. The same tricks work for all sorts of regional boosterism (i.e. job creation, office space, new housing, etc.)

Keep up the good work...

[Silva]

I totally agree. This runs along the concept: private interests. We are having the same problem in OC with the extension of the SR241, they want to build the thing through a State Park. It will destroy 60% of wildlife with a Toll Road. Can you say crazy?

[Jonathan Potts]

Damnit, you blogged this before I could. Very well stated. This is just batty.

[sean mcdaniel]

Hi Sam,

I've been lost in Flickr world lately. But no one argues over there. Very boring. Only comments are what setting? Which lens? Wow!

Anyway, one slight point of disagreement.

No one was building too much of anything Downtown during the 50s, 60s and 70s. Yes, I know a few structure went up. But guess what? Downtown was the region's business hub then. And people were coming.

The decline started in the 80s. Just around the time of the so-called second renaissance. Which it wasn't. I could name my next 10 kids Derek Jeter and they'll never play shortstop for the Yankees. Wishful thinking in both cases.

As for that first renaissance. it was about cleaning up. not building up. that's always been the difference. back then, no one ever really imagined downtown looking the way it does today.

hell, even i'm starting to worry about downtown's future. do you guys know that the barnes & noble there closed at the end of 2006? does anyone know if macy's still has a book department? if not that means you can buy anything much beyond a mass market best seller from eckard in the heart of the city's cultural center.

now that's the real shame of the city.

[Pittsburgh Jack]

Great post. I have been thinking and saying the exact same thing with regards to our dying downtown for several years now.

Yeah -- Macy's does still have the bookstore on the ninth floor, but it's really anyone's guess before that one decides to fold, too.

[Sam M]

Sean,

We might have had a similar discussion in the past, but I do think the first Renaissance was a bit more ambitious than cleaning up. I pointed to a speech by David L. Lawrence here:

http://antirust.typepad.com/my_weblog/2007/01/redevelopment_r.html

Here's a sample:

"Our grand design in Pittsburgh has been the acceptance of a belief that a city is worth saving; that a successful organism in the plan of nature must have a head and nerve center; that the people of a city can take pride and glory in it in our own times as the Athenians did under Pericles or the Florentines under Lorenzo.
Perhaps we are all wrong. Perhaps the city is technologically obsolete. Perhaps the world of tomorrow will belong not even to the suburbanite, but to his kinsman, one step removed, the exurbanite.
But, in our design, we don't think so. We think that civilization cannot be a string of country villas, or a sprawl across the landscape of incomplete satellites revolving around nothing. We think there must be a center where the highest skills may congregate and exchange ideas and services, where the rare and the beautiful may be exalted, where the art of administration may be practiced to meet the increasing complexities of both industry and government; where the human need for mingling with one's fellows can be met. That has been the philosophy of our design for Pittsburgh."

Note a few keywords here. Grand design. Philosophy. Sprawl. Suburbs. Exurbs. Doesn't sound all that different than the debate going on now. The scariest part, for me, is the discussion about Periclean Athens. Is that a good model? If it is, what is Pericles known for? Lots. But in the popular mind, he's the guy who built the MONUMENTS. The grand things.

Last, take a look at this: In Lawrence's mind, the "clean up" was largely done by 1956 when he made the speech, but OTHER ASPECTS of the Renaissance were in full swing:

"We feel that we have largely conquered the nuisance of smoke and air pollution, and just last week, we began the physical construction of a $100,000,000 sewage system. But the most obvious things--the symbols, the attention drawers--are buildings and new land uses."

See that? The "symbols." The image. It all sounds familiar. New buildings and land uses.

Oy!

[Mark Rauterkus]

I can't agree with this statement posted above:
"No one was building too much of anything Downtown during the 50s, 60s and 70s. Yes, I know a few structure went up. But guess what? Downtown was the region's business hub then. And people were coming."

That's at odds with the truth, IMHO.

But.... Kevin Costner for mayor. That's what I wanted to jump on. What party is he running on? :)

Did you see the movie, "The Guardian?" That was great. It comes out on DVD soon. Perhaps we should pick-up on the theme and take his scripts (outtakes) on the campaign trails in 2007.

[C. Briem]

Is it not a little simplistic to compare what is going on today with what happened in the 1950's. In just sheer scale the difference is palpable. It also makes light of what happened to the lower hill district if nothing else.

The UPMC space if anything is displacing out of Oakland, but that is a different issue altogether. Not any slack at all in Oakland office space as it is. Note that even the entire space that will be left over by the movement of entire Children's Hospital to lawrenceville is being deeply coveted because space there is so short. I actually think the movement downtown is kind of a beachhead for them and if it works out they will wind up moving even more down there or nearby.

There are some other things going on. State wants to sell the state office building downtown. What if it becomes residential as is the craze these days. That will be an even larger impact on the downtown office market than the entire UPMC impact. Even Westinghouse, which is not going to come DOwntown I suspect could have secondary impacts that increase some demand in the city. So the state of the downtown office market may be in transition.

My only real comment is that people who infer the downtown office vacancy rate as meaning downtown is dying overlook history altogether. It has not been that long since both banks built net new additions with large office centers downtown which is probably the source of any disproportionate vacany rates. I bet there are as many people actually working downtown as there ever has been at any point. So 'dying' would be a an odd description of what is the trend in economic activity downtown. If someone really thinks that employment downtown is going down I would like to see the evidence of that.

[Sam M]

Chris,

No, there is not a direct comparison between today and 1950. But I think there are some similarities.

And I am not trying to argue that downtown is "dying." Which is why I pulled back from "hemorrhaging" to "bleeding" in terms of office tenants. I think that's fair. Twenty percent vacancy is not really all that good. And it is slightly worse than last year. So... bleeding.

Like I said, I think the UPMC thing could be a good development. And probably is. But I would like to see a bit more analysis in the paper. You offer some good stuff in that regard. I know the paper has limited space, but I do think something more than what they offered is necessary if people are going to make a judgement.

Same with the throw-away at the end of the article about how the PNC tower is a way to "kickstart" development. OK. Great. But I also think it is fair to at least ASK whether the addition of a massive office complex makes sense given the current market.

Just like with the housing. It doesn't seem like anyone is asking. Which strikes me as really strange.

And if no one IS asking, it does seem like little more than Field of Dreams.

So... Is anyone asking? Is anyone in charge taking a good, close look at that sort of thing? I hope that the Post-Gazette will do so eventually. They have a lot of really good reporters.

Note that the Trib basically ran this same story, except they did not run the final bit about the PNC and Millcraft projects kickstarting development. I might have expected them to take the opposite line, especially given their views on the PNC project. But that didn't show up. Which I think is probably good in a business story.

So in the PG version, was the "kickstarting" line from the Grubb Ellis report, or something from the reporter?

I don't know. It's hard to say. But hindsight being 20-20, if I had been a reporter assigned to this piece and someone said that the addition of a massive office project is going to help the office vacancy rate, I might have asked, "Any chance it could affect the market in the opposite direction?"

And to intentioally beat a dead horse... If the office market in Oakland is so strong that it is pushing UPMC downtown and elsewhere looking for space, and other forces are working to make downtown Pittsburgh a hot market for office space, why exactly does PNC need subsidies to build its tower? Seems like a great investment.

[C. Briem]

Someone made the point about downtown dying. Granted it was not you but one of my points is that there is not even "bleeding" when it comes to downtown tenants. You imply that because vacancy rates are up, there has been some exodus of tenants from downtown. That is baseless in that it ignores the entire supply side of the issue. The surge in downtown vacancy rates over the last year is mostly the result of consolidation of bank usage at their new centers. How much office space was added downtown just with the two bank centers? A million sq feet? More? When did they redeliver their previous space back into the market? If as I speculate, downtown employment is actually up or at the very least stable, what verb is appropriate?

[Mark Rauterkus]

Perhaps Brashier High School should be moved into six to ten floors of the USX Tower. Might as well put the high school downtown because the kids can't get to schools located in the neighborhoods due to all the bus schedule cuts.

[Sam M]

Chris,

Is it really due to consolidation? That much? The rate went from 17.3 percent to 20 percent. My math says that's an increase of almost 13 percent in the vacancy rate.

But OK. Let's say that you are correct, and that the vacancy rate is a lot higher because there is a hot market. I don't get it. But let's assume that's right.

Can you explain how adding more office space is going to drive the vacancy rate down? because that is waht the end of the article hypothesizes. Add more supply... to drive down the vacancy rate.

You mention the supply side of things. Well, we are in the process of getting more supply. And as far as I can tell, the argument seems to be that this development will "kickstart" tenant interest in moving down there.

Which sounds a lot like "If you build it they will come."

In addition, if these people are all clamoring to get downtown anyways, either because Oakland is running out of space or because of the BoNY-Mellon merger or whatever, the question still remains: Why subsidize more office space? Why not let the vacancy rate fall, say, in half. At which stage it would be in line with some other cities mentioned in the article. At which stage sharp-eyed developers would invest their own money.

Right?

Either way, I just don't see how adding space decreases vacancy.

[Sam M]

Also

"If as I speculate, downtown employment is actually up or at the very least stable, what verb is appropriate?"

I don't recall saying anything about employment. I could envinsion a situaion in which employment goes up by 20 percent bet the vacancy rate goes up. You know, maybe companies are cramming more people into less space.

Either way, you end up with more vacant space.

So great. Employment is up. Cool. Good for the economy and the city and all that.

But you still have an increase in the vacancy rate. And i don;t see how adding more space reverses that.

[C. Briem]

you said downtown is bleeding tenants. Can't have that happening if employment is not going down as well. and no, I am quite sure there is not some big sudden shift in office workers per square foot over the course of a year.

You throw out there so many different issues it's hard to respond. You have left hanging out there some idea that downtown is diminishing in whatever metric of economic activity you wish to use: tenants, employment, people walking the streets if you wish. You just can't ignore the supply side of the issue. This has nothing to do with what policy you want to argue for or against with regards to subsidies. You can argue that or not but you are so set on that you are propagating a completely false (or at the very least baseless) fact that business activity (tenants, people, employees, whatever) are leaving downtown. You can't draw that conclusion because the vacancy rate went up.

but you question whether the numbers could be consident with consolidation of the banks' footprints in town? Let's play with some round numbers. probably 20 million square feet of downtown proper office space. I bet the two bank centers alone are over a million square feet. How this worked out out in reality I do not know, but they would seem to account for 5% of the market. That in itself could be the difference between a 15 and 20% vacancy rate. PNC was years ago, but I think the Mellon space only went back to the market last year technically. So half that is the difference between 20% and say 17.5%.. which pretty much tracks the numbers in the story. back of the envelope for sure but the numbers seem to work out.

So part of the story is that the numbers may reflect the recent loss of a big tenant downtown. Large blocks of space do not refill quickly in any market. We will see.

[Sam M]

"You have left hanging out there some idea that downtown is diminishing in whatever metric of economic activity you wish to use."

I didn't choose any metric of economic activity. Grubb and Ellis did. They chose to measure vacancy rates. And it seems like that is a fairly common metric to use. The reporter was able to pretty quickly get comparable data from several other cities. According to the data reported, Pittsburgh was worse than many of those other cities in 2005. And got measurably worse in 2006. For whatever reason, people care enough about this to measure it and write newspaper stories about it and look for ways to make it better.

So in the meantime, let's assume you are correct and that the number of workers and the office space they occupy downtown is on the rise. or doing something other than "bleeding." Heck. Let's assume there is an enormous boom in those things. And let's assume that the only reason the vacancy rate went up was because we started counting office space we weren't counting last year. I apologize for messing up numbers and jumping to conclusions and all the rest. Bad AntiRust.

After all that: Tell me how the last paragraph in that article makes any sense. Tell me how adding a massive office project is going to reduce the office vacancy rate. There must be a theory.

And do you believe that theory to be true?

Because it doesn't seem to have worked last year. All this extra office space supposedly came back onto the market. And the vacancy rate went up 13 percent.

But then I get a bit confused when you write: "So part of the story is that the numbers may reflect the recent loss of a big tenant downtown."

So there was the loss of a big tenant? Why doesn't that count as bleeding?

But we will, as you suggest, pick another phrase. "Recent loss" seems objective enough. So.. in terms of the "recent loss," how will adding a massive office project help reduce the vacancy rate?

I am not asking these questions rhetorically. I want to know: Is there some theory to explain how extra office space reduces the vacancy rate? A theory other than "If you build it they will come"?

[C. Briem]

Lets take this point:

""But then I get a bit confused when you write: "So part of the story is that the numbers may reflect the recent loss of a big tenant downtown.""

yes, the big downtown tenant(s) was RETAINED downtown! in a sense that further refutes any idea that this data should be extended to how downtown as a whole is on a negative path.

Grubb and Ellis talked about vacancy rates. Any (over)interpretation about what that means for the overall size of downtown economic activity is not coming from them. Trust me they know full well why their vacancy rates are up, and rental rates up only marginally. I challenge anyone to find a major downtown tenant who moved out of town and into some other part of the region over the last year which is the focus of the story.

On the story. I am sure I could pick on Elwin's writeup on this. But you are pretty quick to criticize how the media portrays this yet equally willing to accept other pieces. Elwin did not talk about the movement of Mellon as playing into this story. If I find fault with the tacked on point about fifth/forbes whatever, I would say it also missed the main point about how the vacancy rates arose in the first place. My main critique is that like so many others, in this he confused retail issues with overall downtown issues.

but let's agree on something sort of. Yes, building into a market with high vacancy will probably push up vacancy rates higher. Still does not make it correct to say there is any bleeding of tenants from downtown in any way. As an aside it is worth pointing out that you also must disagree with all supply side economics by that logic.

there is an even more important issue worth noting and why this all gets too simplistic. the PNC building is 300K or more in office space and that is supposedly pre-leased for the most part to Reed Smith. So in itself there is not some flood of . What happens to Reed Smith's old space is a real issue but may not be a true complement to the space coming online. Lots of downtowns have an issue of bifurcated markets between older and newer buildings. I am not sure Reed Smiths current space will compete for the same A tenants that it is losing. Just something more to think about.

[Sam M]

Chris,

Lots of BS coming up. (What's new?) So you might want to skip to the end for the discussion of net absorption. I am not really sure what it means, but the data is there. Might be worth a look. For now, back to the BS:

I noted that I was confused when you wrote that: "So part of the story is that the numbers may reflect the recent loss of a big tenant downtown."

You responded: "yes, the big downtown tenant(s) was RETAINED downtown! in a sense that further refutes any idea that this data should be extended to how downtown as a whole is on a negative path."

I am still confused. Was the big tenant lost or retained? Both, somehow? Are you saying it doesn't count as a loss because the companies retained jobs, but consolidated into less space? I am not saying that is your point. I am asking.

But if that is what you are saying, it still counts as a loss of a tenant for the real estate company with the empty office space. For instance, say I live in an apartment next to my girlfriend. We get married, so I move out of my apartment into hers. Same number of people in the building, but the landlord effectively lost a tenant.

And if this is what you are saying, (an again, it might not be) then I guess we just disagree. Particularly over this: "you said downtown is bleeding tenants. Can't have that happening if employment is not going down as well."

Sure you can. Let's say I ran an office that employed 1,000 people 20 years ago. I hit hard times in the 90s and laid off half of them by 1996, when things stabilized. But due to a long term lease, inefficiency, corporate infighting and a host of other issues, I have run my business out of the same space. But last year I finally got thing straightened out and consolidated into half the space.

So... the employment rate did not go down. Economic activity did not go down. But office vacancy went up. I suppose the NUMBER of tenants is the same downtown. I am still one company. But in terms of my landlord, he doesn't care. Maybe no one should care about the landlord. But someone obviously does. That's one of the reasons people measure office vacancy rates, I am guessing.

I am not saying that is what happened. But it is certainly possible to envision a scenario in which the office market is bleeding tenants without bleeding jobs and economic activity, at lest if you are looking at it from the landlord's perspective. Maybe that's splitting hairs. Maybe all we care about is the NUMBER of people renting and not how much they space they are leasing. And maybe in this case it would be wrong to say that the market is bleeding tenants. Fair enough. I'll plead guilty.

At any rate, I suppose we can discover exactly how much of this shift was demand side and how much was supply side. The recent Grubb & Ellis report says that Pittsburgh's CBD has 21,346,5999 square feet of office space. I suppose we could look at how much was available in previous years. Maybe at one, five and 10 year intervals, to see if if the vacancy rate is really due to supply side issues. I am willing to concede that it might be. I will cast about for the reports.

In the meantime, here's another number worth exploring: The report says that the CBD's net absorption over the past year was -500,599 square feet.

Now, I am no real estate magnate. I am sure you know what net absorption means, but I had to cast about for a definition to be sure. And I discovered it means pretty much what it sounds like. Here's how one source puts it:

"Net Absorption: The square feet leased in a specific geographic area over a fixed period-of-time after deducting space vacated in the same area during the same period."

By this definition, for net absorption in Pittsburgh's CBD to be negative 500,000 SF, that means that the square footage vacated in Pittsburgh's CBD was 500,000 SF greater than the amount leased. Maybe "bleeding" is an unfair characterization, but something, somewhere, is being vacated. Whether that is due to consolidation, exits from the market, kickstarting that hasn't kicked in yet, or some kind of supply-side shock, I don't know. But if I have a good definition of net absorption, SF vacated > SF leased in 2006. make of that what you will.

Again, I am no real estate magnate. And this might be a really crappy definition of net absorption, or I might be applying it erroneously. Etc. Etc. Etc. But the number is probably worth a look.

[Sam M]

I doubt anyone is still checking this post, but here is some interesting analysis from the Wall Street Journal. It's a bit long in the tooth (2005). But it deals with Pittsburgh. And seems to makes some common-sensical assumptions about what new office capacity might do to the local real estate market. Pay special attention to the first and last lines:

Continued building doesn't help matters. About 700,000 square feet of new office space is scheduled to come on line this year, even as some large employers are vacating offices, PPR says. US Airways decided to relocate its suburban Pittsburgh call center to North Carolina and Mellon Financial Corp. announced this year that it would move workers out of 320,000 square feet of space at Two Mellon Center. "I feel sorry for a lot of the building owners because they're getting really beat up," says Jon Harrigan, chief executive of Colliers Penn, a corporate real-estate brokerage company that represents both tenants and landlords. Office space in One Oliver Plaza, a so-called class B office building can be sublet for as little as $9 a square foot, Mr. Harrigan says. (Class B buildings are seen as less desirable.) The original 10-year lease on the space was signed in 2000 at about $20 a square foot. The retail sector is more promising, with rental rates rising in the first quarter and vacancies falling from the year earlier. But new construction could hurt the market.

http://www.realestatejournal.com/propertyreport/office/20050714-blueprint.html?refresh=on

[washington dc apartments]

It's really fun reading your posts, especially this one "Perhaps if we elect Kevin Costner as mayor. He can bring in James Earl Jones to head the URA, Ray Liotta to be the head of planning." it almost gave me a heart attack. I hope building apartments would be easy.

-Sam