High Downtown vacancy rate could spur deals
As one of Pittsburgh’s biggest law firms hunts for new space, its timing could be impeccable.
With the vacancy rate for highend space in Downtown hovering near 17%, it could be a buyer’s market for firms like K&L Gates, which could be seeking as much as 150,000 square feet of space.
“It’s a perfect time for someone to be looking Downtown for space in a better building. It makes a lot of sense for people to explore their options right now. It should lead to better deals,” said Jonathan Bonime, senior vice president of Fischer and Co., a Golden Triangle real estate firm that represents tenants.
That’s particularly true given that the amount of empty space in Downtown’s top office towers and skyscrapers is at its highest point in a decade.
“It’s a good time for anybody really to be in the market for space because there is a fair amount of vacancy Downtown,” said Gerard McLaughlin, Newmark Knight Frank executive managing director.
K&L Gates has been in the market since the summer. According to real estate sources, it is seeking anywhere from 80,000 to 150,000 square feet in space. Its lease in the 39-story skyscraper on Sixth Avenue that bears its name expires in 2024.
Two of the places the law firm is said to be considering are the former Civic Arena site in the lower Hill District, where First National Bank has signed a deal to anchor a new 24-story office tower, and a new nine-story building in the Strip District at 15th and Smallman streets being developed by the Burns & Scalo real estate company and Bridgeville-based RDC Inc.
In a statement, Thomas Smith, managing partner of K&L Gates’ Pittsburgh office and co-managing partner for the U.S., confirmed that the firm is searching for space. But he provided few details.
“As we near the end of our lease terms in our various offices, we always consider other options available in the market, and we are currently doing so with respect to our Pittsburgh office space. We will not comment at this time on the specific locations we are considering, but we are pleased that a number of very attractive options are available,” he said.
Should K&L Gates opt to stay in Downtown in an existing class A building, plenty of choices could be available, given the current vacancy rate for such space is 16.9%, according to Newmark Knight Frank.
In its winter 2020 Pittsburgh Skyline report, the Jones Lang LaSalle real estate firm listed eight class A properties in Downtown with double-digit vacancy rates, including the U.S. Steel Tower at 11.8%; One Oxford Centre, 29.7%; 525 William Penn Place, 59.5%; 20 Stanwix, 33.8%; and 11 Stanwix, the former Westinghouse building, 29.5%.
All of them could accommodate all or most of the space K&L Gates reportedly is seeking.
The report also shows a 9.7% vacancy rate at EQT Plaza, but that does not count 257,000 square feet of space that EQT Corp. is seeking to sublease.
Mr. Bonime said one reason for all the empty space in Downtown is that more firms are moving into fringe markets like the Strip District, the North Shore, the East End and the South Side.
At the same time, there aren’t many out-of-town companies moving into Pittsburgh.
“It’s a shell game. Everyone’s
sort of moving around and there hasn’t been anyone new to the market in the core of the central business district that really needs space,” he said. “It’s cannibalization.
“Basically, there’s not the organic growth in Pittsburgh that would support all the space.”
In addition, law firms in particular have been downsizing the amount of space they are taking in office buildings, he said. For example, in moving from One Oxford Centre to the Union Trust Building, the Buchanan Ingersoll & Rooney law firm shed about 60,000 square feet.
K&L Gates now leases at least 200,000 square feet at its current location.
“I think there are people realizing that there are more and more people working from home or that the staff doesn’t require as much space,’ Mr. Bonime said.
That means the room for negotiation is also wide open. It could mean good deals on rent for those looking for space.
“Everybody wants to make a deal so landlords would be foolish not to negotiate to start filling those buildings up,” Mr. Bonime said. “They’ve got to horse trade.”
Another attractive option for K&L Gates might be to stay put. The vacancy rate at K&L Gates Center is 21.6%. The landlord has yet to fill the space that German software company SAP left last year to move to the North Shore, said Dan Adamski, JLL senior managing director. EDMC also has given up several floors.
As a result, “ownership is likely to get very aggressive to retain K&L Gates,” Mr. Adamski said.
Should K&L Gates opt for the Strip or another fringe market, it does not portend well for the Downtown real estate market, Mr. Adamski said.
“If they leave the central business district, it’s another crushing blow to a submarket that is already struggling with the highest vacancy rate in 10 years,” he said.