U.S. Steel Tower tenants stand to benefit from company's relocation

U.S. Steel's plan to move its headquarters could give Downtown office tenants more bargaining power and drive down lease rates until U.S. Steel Tower's owners find tenants to replace the steelmaker, real estate agents predict.

Before UPMC moved into the 64-story skyscraper in 2008, its occupancy rate hovered around 80 percent.

“That was always a cloud on the market,” said Brad Totten, senior vice president at commercial real estate firm Avison Young, noting the high volume of vacant space helped keep lease rates in check.

As Randy McCombs, executive vice president of Grant Street Associates, said, “If you were a large tenant in another building, that was always a veiled threat you could use — that you could go to the U.S. Steel Tower.”

But the occupancy rate in Downtown's tallest building soared to 96 percent as the health care giant expanded its presence there, taking away tenants' biggest bargaining chip.

Tenants in the Golden Triangle and those in the U.S. Steel Tower could regain some leverage when U.S. Steel's lease expires in 2017 and it vacates 425,000 square feet of office space — the equivalent of nearly 10 acres.

The steelmaker announced Monday that it will move 800 workers into a five-story corporate headquarters that a developer will build on the former Civic Arena site in Uptown. The company will lease the building for at least 18 years from a partnership that includes the Penguins and Chicago-based developer Clayco. Construction could begin next summer.

The Golden Triangle has nearly 13 million square feet of Class A or high-end office space, with a vacancy rate of 7 percent, according to data from the commercial real estate firm Jones Lang LaSalle. About 2.3 million square feet are in the U.S. Steel Tower.

The building has attributes that might attract tenants: its central location on Grant Street; a T station and three-level underground garage; a child care center; a bank; and several restaurants and coffee shops.

Dan Adamski, a managing director at Jones Lang LaSalle, said Pittsburgh trails only Manhattan and San Francisco in demand for office space.

The tight market has contributed to rising lease rates, real estate agents say. A Pittsburgh Downtown Partnership study released in May said leases for high-end Downtown office space averaged $26.38 per square foot in this year's first quarter, up from $23.70 per square foot in the first quarter of 2010 — an 11.3 percent jump.

U.S. Steel's impending move “may result in slowing down or putting a damper on the increase in rental rates,” McCombs said.

Totten added: “If you're a tenant and renegotiating a lease or looking at alternatives, (U.S. Steel's move) is a positive. If you're a landlord, you're not as excited about it.”

Jones Lang LaSalle's study says an additional 928,000 square feet of Class A office space is under construction or renovation in the business district. Several real estate agents noted that a lease PNC Financial Services Group Inc. has on an undetermined amount of office space in the U.S. Steel Tower expires in 2018. PNC declined to comment.

Mark Karasick, a New York real estate investor who leads a partnership that bought the U.S. Steel Tower for $250 million in 2011, did not return a message.

The building's general manager, Thomas Harrington of Winthrop Management LP, said on Monday that he was “disappointed” to learn of U.S. Steel's relocation plans but added, “We look forward to working with the city, county and state economic development partners to attract new tenants to the building and contribute to growth in the region.”

The company would not comment further on Tuesday.

Dennis Davin, director of economic development for Allegheny County, said, “In terms of funding, there's not a lot that we could provide. If a new company comes to Pennsylvania, the state conceivably could provide tax credits.”

Davin and commercial real estate agents say they are confident U.S. Steel's space will fill back up. They predict multiple tenants will occupy it.

“I think the building will do well. It's still recognized as an iconic building. It's not going to happen overnight, but I'm confident it will” fill, Totten said.

Tom Fontaine is a Trib Total Media staff writer. Reach him at 412-320-7847 or tfontaine@tribweb.com.