Upheaval and losses hurt, but Downtown Pittsburgh emerged from economic turmoil renewed

A tide of change: Last in a series on how our economy has transformed since bottoming out a generation ago


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In 1983, shoppers browsed three major department stores in Downtown. Tony retailer Saks Fifth Avenue had moved into a new building on Smithfield Street only seven years earlier. Downtown offices were filled to the brim, with new skyscrapers on the way. And Pittsburgh was home to 15 Fortune 500 companies, many of them headquartered in the city center.

Thirty years later, two of the department stores -- Gimbels and Joseph Horne Co. -- are gone. Kaufmann's has become a downsized Macy's. Saks closed for good March 17. And the number of Fortune 500 companies in the region has dropped from 15 to nine.

But this is no lament for a dying Downtown. Rather than failing, local real estate experts say, Downtown is coming back strong. In fact, some believe it's better than ever, despite the loss of the department stores and corporate titans like Gulf and Rockwell International.

They point to a robust office market nearly as good as it was 30 years ago; new corporate leaders like PNC Financial Services Group fueling a more diversified, service-oriented economy; and a residential renaissance unheard of in the early 1980s.

"It's really been an unbelievable ride to see Pittsburgh go from the depths of despair to what it is today, a blossoming city," said Gerry McLaughlin, the Newmark Grubb Knight Frank executive managing director who has worked in the market for 35 years.


A TIDE OF CHANGE


Last in a series on how our economy has transformed since bottoming out a generation ago.

Our regional economy barely resembles the one from 30 years ago. A full generation has passed since January 1983, when the southwestern Pennsylvania economy was at its nadir and unemployment was at its all-time peak.

Sunday: In desperate 1983, there was nowhere for the economy to go but up

Monday: Foundations are credited with resurrecting Pittsburgh's economy after the 1980s' collapse

Tuesday: Industry drawn again to Pittsburgh by resources that once supported steel mills

Wednesday: Local manufacturer learns to adapt and thrive

Thursday: What's the single biggest difference between the region's workforce today and our workforce from a generation ago? In a word: women.

Friday: In the 1980s, investing in technology didn't seem like a way to replace the region's lost jobs. Also, a Latrobe family practice sees a future in an old-fashioned medical care model even as the industry has changed.

Saturday: Of the top 25 retail banks in the seven-county Pittsburgh region in the 1980s, just nine are in business today. Although they survived the 1983 collapse, they couldn't survive regulatory changes and the most recent financial meltdown.

Today: Gimbels, Horne's and Kaufmann's may be gone, but Downtown is livelier than ever, with office occupancy rates near all-time peaks.


At the start of 1983, the regional economy was bottoming out, but Downtown itself was still in the midst of its second renaissance. Gleaming 46-story One Oxford Centre had just opened, and two other new office towers -- PPG Place and One Mellon Center -- were nearing completion. There was no lack of demand -- the class A office occupancy rate in the third quarter of 1982 was 98.4 percent, and the rate for all classes of space was 96.8 percent.

The retail market was just as healthy with department stores Kaufmann's, Gimbels and the Joseph Horne Co. anchoring a commercial corridor that included the likes of Saks, G.C. Murphy, Lerner Shops and National Record Mart.

But it wasn't long before the bottom fell out. The collapse of the steel industry soon caused ripple effects throughout the local economy. Gulf merged with Chevron and sold its Downtown headquarters. Climate-controlled shopping malls in Monroeville and later Ross lured shoppers from Downtown to the suburbs, where the parking was free. Some businesses headed the same way.

"It became the American way to shop, to go to the mall, to stay near your neighborhood. The mall became the social place to be," said Peter Sukernek, vice president and general manager of Howard Hanna Commercial Real Estate Services.

Pittsburgh was not unique in that respect. Outside of New York, Chicago, Boston and San Francisco, many downtowns experienced the same kind of upheaval, said Christopher B. Leinberger, a senior fellow at the Brookings Institution and a professor at George Washington University.

"It was a progression that took place in every metro area in the country," he said. "We basically abandoned our cities. We threw them away."

In Pittsburgh, a succession of mayors tried to shake Downtown from its malaise, particularly on the retail side.

Way back in 1990, former Mayor Sophie Masloff pitched a plan for $18 million in improvements to the Downtown retail corridor and an offer of free parking on Saturdays in a bid to compete with suburban malls.

Mayor Tom Murphy tried for years to jump-start a Fifth and Forbes corridor riddled with vacant storefronts and discount retailers. He generated much controversy with plans to use eminent domain to demolish some Downtown properties to make way for grand retail developments. The plans eventually collapsed.

Mr. Murphy succeeded in bringing Lazarus -- which was co-branded as Lazarus-Macy's from 2003 to 2005, when the Lazarus nameplate was retired -- and Lord & Taylor department stores to Downtown, but both left after several years, leaving heavily subsidized developments in their wake. One of those developments was a new building built specifically for Lazarus, and the other was an elegant Mellon Bank gutted on the inside over the protests of preservationists.

On the office side, buildings like One Oxford Centre and PPG Place and later Fifth Avenue Place and EQT Plaza came on line just as the steel industry was collapsing and other major corporations were being bought out or leaving the city, Mr. McLaughlin said.

That left a glut of office space for some time. For example, a third-quarter 2002 report listed the class A vacancy rate Downtown at 15.1 percent and the overall vacancy rate at 15.9 percent.

But over the last five years, the tide has turned, Mr. McLaughlin said. Perhaps there's no better barometer of Downtown's resurgence than the office market.

In the third quarter of 2012, the class A occupancy rate stood at 94.5 percent and asking rents were $26.78 a square foot -- more than $6 higher than the rates from 30 years ago. The occupancy rate for all classes of space was 85.6 percent compared with 96.8 percent three decades ago. However, asking rates for all classes of space were more than $3 higher.

Mr. McLaughlin said one reason for the tightening office market was the move of UPMC's headquarters into U.S. Steel Tower. Another is the number of former office buildings being converted into apartments or condos, taking that space off the market.

He believes Downtown, at least on the office side, finally has bounced back to where it was 30 years ago.

"I don't think we're ahead, but we've caught up. It's pretty unbelievable when you think about it. I doubt any other city in the country has lost what Pittsburgh lost and has made a comeback the way we have," he said.

Mr. Sukernek agreed. "The Downtown office market right now is as strong as it's been probably since that '82 mark."

Just like the second renaissance produced three new skyscrapers, the latest revival has generated its share as well. PNC Financial Services Group opened the 23-story, $170 million plus Three PNC Plaza in 2009 and is now building the 33-story, $400 million Tower at PNC Plaza a half-block away on Wood Street. PNC also is redeveloping the former Lord & Taylor store into office space.

Washington County developer Millcraft Industries has turned the former Lazarus building into condos and retail; the former G.C. Murphy store into apartments, retail and fitness space; and the former State Office Building into apartments. Millcraft is now building an $81.8 million office, hotel and retail high-rise on Forbes Avenue near Market Square.

Oxford Development Co. also is contemplating the construction of a $238 million, 33-story skyscraper on Smithfield Street.

But the biggest change has been on the residential side. Thirty years ago, when the Central Business District was the hub of retail and industry, few envisioned a time when it would become a housing enclave.

In 1983, Downtown was the home to a half-dozen apartment or condo buildings and about 3,500 people. Today, there are more than a dozen apartment or condo buildings, with more on the way, and nearly 8,000 residents. Most of the units have sprouted up within the last seven or so years.

"Living Downtown transforms the Golden Triangle into a neighborhood as well as an office component. I think it's making us one of the most exciting cities in the country," Mr. Sukernek said. "It makes Downtown a much more lively and exciting place to be at night and on the weekends. Back in '82, on weekends, there was nobody Downtown. Now you see people walking their dogs, out running. These are the people who are living Downtown."

Mr. Leinberger said the same type of phenomenon is occurring in other cities. It is being driven mainly by younger people and retiring baby boomers, both of whom are returning to downtowns in big numbers.

"We are just at the beginning of this," he said. "This is what I refer to as a structural shift. This is not a cyclical change."

As more people move into downtowns, businesses seeking to accommodate their employees will follow, he said. That in turn will bring more retail -- in essence, reversing the flight that occurred decades ago.

Mr. Leinberger, who visited Pittsburgh last year, gives Downtown a B grade. He said there's a need for more housing, better urban entertainment and more residential-related retail, such as grocery and drugstores.

Nonetheless, local brokers say retail Downtown is improving -- and may even be better and more balanced than it was 30 years ago.

"Downtown has an array of restaurants now that it didn't have 30 years ago," said David Glickman, director of retail services for Newmark Grubb Knight Frank. "The streets are cleaner. Downtown is safer.

"The Cultural District is substantially nicer. The Cultural District is a whole different place than it was 30 years ago. It used to be intermingled with crime, adult movie theaters. That stuff is all gone."

Perhaps nowhere is the change more evident than in Market Square, which is teeming with restaurants, many of them new. It has gone from dying to thriving in a matter of several years with the help of a $5 million makeover.

"Market Square used to scare people. Now it's one of the hottest spots in Western Pennsylvania," Mr. Glickman said.

The loss of all but one upscale department store, he asserted, is not an indictment of Downtown. He said department stores, in general, are experiencing problems as a result of competition from retailers such as Wal-Mart, Kohl's and Target.

He believes the future of retail in the Golden Triangle rests with specialty retailers, restaurants and entertainment -- not in replicating the offerings of suburban shopping malls.

In that regard, he sees the need for more specialty retail, particularly women's fashions and jewelry stores. He said the residential boom eventually should help retail to thrive. Mr. Sukernek envisions retail not only geared for residents, but unique enough to attract shoppers in from the suburbs.

To Herky Pollock, the CBRE executive vice president who has been a retail broker since 1986, the Downtown he sees today boasts "the best retail environment in my history in commercial real estate."

He said he neither measures the success of the corridor in department stores nor trendy retailers like Crate & Barrel or Williams-Sonoma, but in a mix of shops and restaurants that appeal to a broad base of consumers.

"If you look at the Downtown retail space as it exists today, there is virtually no vacant spaces to speak of for expanding retail or restaurant clients. To me, that's a measure of success," he said.

Still, no one's ready to call Downtown Pittsburgh a 24-hour part of the city at this point.

But then again, maybe that's not so important.

"I don't think Pittsburgh will ever be a 24-hour city like New York or Chicago. But, boy, we're probably getting to be an 18-hour city," Mr. McLaughlin said.

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Mark Belko: mbelko@post-gazette.com or 412-263-1262.


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