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US office towers are still going up, but who will fill them?

The pandemic could be a pivot point on changes to the way people work and how tenants want their offices

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The new 25-storey BMO Tower in Milwaukee, across from the historic City Hall building (right), opened in mid-April at the peak of the statewide lockdown in Wisconsin.

New York

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 like Milwaukee; Nashville, Tennessee; and Salt Lake City.

Office vacancy rates, following a decade-long trend, had shrunk to 9.7 per cent at the end of the third quarter of 2019, compared with 13 per cent in the third quarter of 2010, according to Deloitte.

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

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"There is a pause occurring as companies more broadly consider their real estate needs," said Jim Berry, Deloitte's US real estate sector leader.

The timing is unfortunate for Mark Irgens, whose 25-storey BMO Tower in Milwaukee opened in mid-April 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 last week.

A restaurant that was slated for the ground level was cancelled, 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, Mr 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. But he is not putting on the brakes. The BMO had been planned for five years, and he has leases to negotiate, investors to please, tenants to woo and loans to pay off.

"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 reported to work this week, constitute about 15 per cent of the building's occupancy. Mr Irgens thinks it will be the end of the summer before it gets up to 50 per cent. 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. For instance, the BMO Tower was 55 per cent leased before the pandemic.

The question facing the owners of office towers is: Will anyone still want the space when the coronavirus crisis fades?

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 Pagliari, a 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", Mr 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 centres and food courts - into potential liabilities.

The economic crisis could also spur high interest rates on debt, which would cause building values to fall, he said. That may happen even if the crisis diminishes in the weeks ahead. "The current pandemic has raised perceptions about the likelihood and consequences of future pandemics," he said.

Developers who can factor in such events will gain an advantage, but any skyscrapers that are built with pandemic fears in mind are years away.

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-storey tower 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," Mr O'Donnell said. The building is 80 per cent leased ahead of its August opening. One tenant signed for 40,000 square feet of office space at the height of the lockdown, which Mr O'Donnell took as an encouraging sign.

The building is already being adjusted to meet post-pandemic needs, something he said that newer structures were better able to do. Amenities are being updated to be touch-free. Owners are talking with tenants about walk-through thermal imaging to monitor workers and visitors for fevers.

The pandemic will result in a demand for more office space, not less, said Paul Layne, chief executive of the Howard Hughes Corp, a national commercial real estate developer based in Houston. Developers will move away from the industry-standard 125 square feet per person toward roomier workplaces.

But others say it is too early to tell when demand for office space will return. Jamil Alam, managing principal of Endeavor Real Estate Group, said the situation would vary by city. "There will be winners and losers," he said, explaining that he thinks denser metro areas like New York and Boston, which have been ravaged by the coronavirus, could find their lustre lost in favour of smaller markets.

There will be an appetite for urban, walkable, mixed-use office environments, he said, and changes will need to be made in buildings over time, like fewer touch points on handles and elevator buttons.

But projects that have not been started yet will be paused, said Chris Kirk, managing principal of the Salt Lake City office of Colliers, the commercial real estate brokerage firm.

"If you are a developer or landlord or chief financial officer, you are concerned," he said. "Everyone is feeling the impact." NYTIMES

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