Building a Hollow Skyline

America's skylines once stood as stirring symbols of progress and prosperity. Yet in many cities the glass-and-steel monuments have now come to represent wretched excess. During the past five years, U.S. developers have constructed a breathtaking surplus of office towers, condominium complexes and hotels. In Los Angeles, a rusting, 17-story framework of steel girders on Wilshire Boulevard has stood idle for three years because of collapsed condo prices. Denver's tallest building, the 56-story Republic Plaza office tower, is only half rented despite such amenities as a concierge, an Italian-marble lobby, a car wash and computerized climate control. Florida's $197 million Le Pavillion hotel, part of a posh development called Miami Center, is usually only about 15% occupied.

Backed by eager investors and generous banks, developers failed to realize that they were collectively building too much. The amount of office space available and under construction in the 22 largest U.S. cities has reached 318 million sq. ft., or about as much as 150 Empire State Buildings. The glut has rocked the real estate business and the financial system by sending rents and property values plummeting. "We have overbuilt in this country on an unprecedented scale," says J. McDonald Williams, managing partner of Trammell Crow, the largest U.S. developer.

The most widespread surplus plagues the office-building market: more than 16% of total space is empty, compared with 3.5% in 1980. The vacancy rate continues to rise, in part because the building of offices is running 50% ahead of the growth in white-collar employment. Among the first cities to be hit by the glut were Denver and Houston, where demand for office space collapsed because of the downturn in the oil and gas industry. Hapless developers wound up with rows of "see-through buildings," thus named because they have so few occupants and interior fixtures. The developers of Houston's 34-story Phoenix Tower, who were unable to find any major tenants for the building, simply mothballed the structure to wait for better times.

The office-space surplus is rapidly spreading to other cities. Vacancy rates are reaching alarming levels in Fort Lauderdale (28.3%), Phoenix (24%), New Orleans (22.7%) and other Sunbelt cities, where the strong economic growth of recent years fanned real estate speculation. As soon as one city is glutted, developers move on to the next. Says Mack Taylor, an Atlanta developer: "When they realized the game was over in Denver and Houston, a lot of them came here."

The second shock to the real estate industry was the decline of the condominium market. Until only about a year ago, the U.S. was crazy for condos. More than 2.5 million units opened in a decade. But that produced a vast excess of supply, notably in California, Texas and Florida. Speculators who had bought condos in the hope of fast price appreciation saw the shakeout coming and dumped even more of them on the market. At the same time, demand was dampened by the maturing of baby boomers, many of whom now aspire to move from condos to split-level suburban homes with lawns. Many new condo projects, particularly luxury developments, have become virtual ghost towns. In March, Crocker National Bank repossessed a $28 million, 88-unit condo project in Glendale., Calif, because the builder had been able to sell only three apartments in two years.