F E A T U R E
In contrast, the level of leisure and travel activity in downtown have returned almost entirely. Tourism recovered to between 80 and 90 percent during the 2021 football and holiday season, dropping off to the 70 percent range in recent months. The number of daily visitors to downtown has mostly recovered to pre-pandemic levels, however, suggesting that people from around the region are returning to enjoy the lifestyle amenities in downtown. One metric, the number of restaurant seats occupied, sits at 115 percent of the 2019 level. If you have visited downtown in the evening or on a weekend, the vibrance that was palpable in 2019 is there. During the day, however, the CBD does not have the hustle and bustle of three years ago. That has changed how landlords are operating. “Things are going to start changing and have changed already. The issue right now is that we don’t know what things are going to change to. There has to be a strong office market in Downtown Pittsburgh, and I think there will be. It will take some time to adjust,” says Gerard McLaughlin, executive managing director at Newmark. “If you own a building that is 80 percent occupied you should do everything in your power to attract tenants to your building. That means modernizing the building, adding amenities, and working with your leasing team to make the building as attractive as it can be.” McLaughlin notes that the shift to work from home swung the market in favor of the tenants, particularly the employees of tenants. The need to upgrade and “amenitize” buildings is a response to the challenge of retaining workers and attracting them to return to the office, even if on a hybrid basis. Tim Goetz sees corporate occupiers responding to the shift. “We are seeing longer term leases again. In return, tenants are looking for amenities for their employees. The process has been more democratic. They are asking their employees what they want to see after working from home for two years,” explains Goetz, who is managing director for Cushman Pittsburgh. “The landlords are committing to collaboration spaces, fitness centers, storage space, conference
rooms, and other amenities to attract credit worthy, quality tenants. Landlords are going to need to do that if they want to compete. If tenants are trying to retain and recruit, they will need workspaces that are attractive to workers.” The new balance of market power means that the decade-long upward trend in CBD rents is likely to end. Office rents in downtown were the highest in the region, but Class A buildings in Oakland and the Strip have commanded higher rents than those in the CBD for several years. Competition from those submarkets will continue and the focus on employee wants also has employers evaluating their space needs differently. “We don’t have a lot of new companies coming into downtown. When leases come up for renewal, companies are looking at how they are using their space and often now are looking at using less space,” notes McLaughlin. “We are seeing landlords provide contraction rights, so tenants have flexibility if they make a longer-term competitive commitment. We are seeing landlords be more aggressive to retain tenants. That will bring rates down a bit,” agrees Goetz. “On the other side of the coin, tenants that are moving and willing to make a long-term commitment understand that landlords are making a long-term investment and need market rates for that space.” Goetz emphasized that the market was still feeling its way through unknown territory and that tenants were still searching for what their needs will be as leases turn over. The way forward is unlikely to be known until that search ends. In the meantime, the conditions will challenge landlords to retain tenants and reward investors.
leads to higher unemployment, might make workers less comfortable about their absence from the office, while others believe that a reversal of the trend will come if working from home begins to feel like missing out – maybe literally when it comes to raises and promotions. It may also be that employees will not feel obliged to change unless they are compelled to by employers. “A return to the office will have to be driven by the big employers,” says Jim Scalo, CEO of Burns Scalo Real Estate. One trend that will not be driving occupancy downtown is new development. While there are speculative offices in development and under construction in Oakland and the Strip District, there are no plans for new
The Downtown Office Solution(s)
Few observers of the office market or Downtown Pittsburgh expect a solution to the underlying problem to emerge. While a miraculous return to office occupancy would be welcome, landlords in downtown would still be challenged with the long-term structural trends. It is difficult to suggest what might trigger a return to normal office occupancy again. Some suggest that a recession, which
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DEVELOPING PITTSBURGH | Fall 2022
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