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Drilling ban likely thorn for Downtown office space projects

| Friday, May 25, 2012, 9:50 p.m.

Whether Pittsburgh experiences a new renaissance of skyscrapers and premium office space could depend on whether the city can convince Marcellus shale drillers that they're really welcome here.

As top-quality Downtown office space grows increasingly scarce, developers are looking to build projects such as the "350 Fifth" tower that Oxford Development Co. proposed this week. Speculation about tenants there and at other sites has centered on several big-name energy companies that could be reluctant to invest in the city, which passed a ban on drilling in 2010.

"It was very unfortunate timing, putting that ban in place at the time when companies were making location decisions," said Kathryn Klaber, president of the Marcellus Shale Coalition, which advocates on behalf of natural gas companies. "If something doesn't happen soon, that could be an irreversible problem for Pittsburgh."

Mayor Luke Ravenstahl's office, which opposed the ban, has talked with City Council to no avail about reversing it, said Ravenstahl's chief of staff, Yarone Zober. Several council members said they were not inclined to support dropping it.

"I would hope that the industry would agree that there are certain places such as cities where drilling is not appropriate," said Councilman Bill Peduto.

Besides Oxford, developers looking to add office space to the central business district include the Penguins hockey team in the Lower Hill District, Continental Real Estate on the North Shore, Burns & Scalo along Fort Pitt Boulevard and The Buncher Co. in the Strip District.

Potential anchor tenants whose names have surfaced include gas companies Chevron Corp., Royal Dutch Shell plc and Exxon Mobil Corp., along with Pittsburgh companies such as U.S. Steel Corp. and GNC. Chevron has looked at Downtown, among other sites, a company spokesman said.

"The real estate community is trying to capitalize on the pretty significant demand for Class A office space in the central business district," said Pat Morosetti, a commercial real estate agent with Fourth River Development. "You've seen a strong, sustained focus from the local leadership, which is starting to pay off in terms of what we hope and want Pittsburgh to be."

While Pittsburgh could be on the verge of a development breakthrough, the largely symbolic ban on gas drilling has made it harder to draw energy companies to the city, said David Morehouse, president of the Penguins, which hold development rights to the 28-acre site of the former Civic Arena.

The hockey team has plans for up to 1.5 million square feet of offices, 1,100 housing units and 350,000 square feet of retail and entertainment space. The Penguins have hired an owner's representative and started informal talks with a potential major tenant.

"What we can offer with our site is that you can be located in the central business district and still have a campus-like environment that includes office, housing and retail," Morehouse said. "That's the unique aspect of our development."

Demand for quality office space is driving Buncher's plans for Two Waterfront Place, a planned 120,000-square-foot office tower in the Strip District, said CEO Tom Balestrieri. "This is what we do," he said.

Barbara McNees, president of the Greater Pittsburgh Chamber of Commerce, said demand for Class A office space Downtown is at a premium. The vacancy rate in the first quarter of this year was 6.9 percent, she said, which is considered very low.

The distinction of Class A office space is subjective, said Hoddy Hanna, chairman and CEO of Howard Hanna Real Estate. It typically means either a newer building with large windows and modern amenities, or an older building with a distinctive presence, he said.

Oxford has proposed two possibilities: a $238 million, 33-story skyscraper on the site of the former Frank and Seder department store at 441 Smithfield St., or a $40 million renovation of the seven-story, World War I-era building. President and Chief Operating Officer Steve Guy said the choice would depend on Oxford's ability to land a high-profile tenant.

Both options would require a public subsidy, Guy said. Oxford spokeswoman Angela Churchill said the company has not determined what type of subsidy it might require.

Robert Rubinstein, acting executive director of the Urban Redevelopment Authority of Pittsburgh, said URA awards financial assistance based on a project's ability to add jobs and tax revenue and whether it can be built without government assistance. Oxford has not discussed its project with the URA, he added.

"Not every project needs a subsidy," Rubinstein said. "Investors and developers are not going to invest in a project if they don't get their returns. We need to make sure those returns are not excessive, that they're reasonable. The reality, particularly in an urban environment where you have additional infrastructure cost, is that projects may need help."

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