Office towers going up; who will fill them?

Before the pandemic shut down businesses, a robust economy had powered a building boom, sending office towers skyward in urban areas across the United States. The coronavirus outbreak, though, has scrambled plans and sent jitters through the real estate industry.

Skyscrapers scheduled to open this year will remake skylines in cities such as Milwaukee, Nashville, Tenn., and Salt Lake City. Office vacancy rates, following a decade-long trend, had shrunk to 9.7% at the end of the third quarter of 2019, compared with 13% in the third quarter of 2010, according to Deloitte.

Developers were confident that the demand would remain strong. But the pandemic darkened the picture.

“There is a pause occurring as companies more broadly consider their real estate needs,” said Jim Berry, Deloitte’s U.S. real estate sector leader.

The timing is unfortunate for Mark F. Irgens, whose 25-story BMO Tower in Milwaukee opened in midapril at the peak of the statewide lockdown in Wisconsin. A month later, a small fraction of typical daytime foot traffic was passing by as most businesses adhered to the governor’s stay-at-home directive, which expired in May. A restaurant that was slated for the ground level was canceled, and three potential tenants have delayed their plans.

Instead of showing off the building’s sparkling Italian marble floors and panoramic vistas of Lake Michigan, Irgens is worrying about who is going to pull out next and what type of corporate landscape he might face when the pandemic finally ends.

“Development projects are different than making widgets,” he said. “You can’t stop; you can’t turn it off. You have to continue.”

Slowly, workers are filling their BMO offices. Managers,

who were scheduled to report Monday, constitute about 15% of the building’s occupancy. Irgens thinks it will be the end of the summer before it gets up to 50%. Without a coronavirus vaccine, it may be year’s end before the building approaches a “normal” occupancy, he said.

Other developers around the country are also dealing with the fallout, especially for towers with Class A space, regarded as the highest-quality real estate on the market. In most cases, new buildings are not fully occupied, and developers were counting on a strong economy to do the work for them.

If the economic pain drags on, there could be long-lasting changes to the way people work and how tenants want offices to be reimagined, said Joseph L. Pagliari Jr., clinical professor of real estate at the University of Chicago’s Booth School of Business. Some of the changes — such as more spacious elevators — could be costly to put into place, he said.

The pandemic could be a “pivot point,” Pagliari said, and that would be bad news for building owners. The office towers were designed to be “best in class,” he said, but the pandemic has suddenly made their most salable amenities — common areas, fitness centers and food courts — into potential liabilities.

The prospect that workers may want to continue working from home does not worry John O’donnell, chief executive of Riverside Investment and Development, which is developing a 55-story tower at 110 North Wacker Drive in Chicago. The tallest building erected in the city since 1990, it is scheduled to open in August and will be anchored by Bank of America. Other tenants include law firms, many of which are doing business from home.

“There is a need for collaboration, team building, common business cultures and a continuous desire to have social contact within a business,” O’donnell said.