Thursday, March 4, 2010

Brandywine Realty's Market View

These are encouraging signs from Jerry Sweeney (unless your market is South Jersey).

"Brandywine Realty Trust offered during its recent fourth-quarter conference call some glimpses into their view of how the office market is faring and what’s ahead.

What would the real estate investment trust buy in Center City? Trophy towers. 2000 Market is not a building it would have been interested in because it’s older and has some other issues, said Jerry Sweeney, CEO of Brandywine (NYSE:BDN). Though it will only consider top tier towers, the company has not programmed any acquisition or joint-venture activity into its business plan for this year.

As for Cira South, the company continues to talk with several large potential prospects, but would not be in a position to start either the Walnut or the Chestnut Street Tower without having a significant pre-lease commitment. The Internal Revenue Service is expected to occupy the Post Office conversion in University City this September. Once that happens, the federal government will become Brandywine’s largest single tenant, comprising 7.2 percent of its annual base rents.

South Jersey has been a challenge for Brandywine. Despite having positive absorption in South Jersey during the fourth quarter, the company expects the South Jersey office market to remain difficult for the rest of this year.

The company plans to invest about $16 million throughout the year to make capital improvements to buildings. The money will be spent on a range of upgrades including roof replacements, energy savings and sustainability initiatives, mechanical systems, public areas and building renovations. (This is expected to be a trend this year among those landlords who have strong financial footing to improve their competitive positions.)

“All of this investment is designed to take advantage of this market trough to reposition our well located properties,” Sweeney said.

In general, while overall market conditions remain challenging, Brandywine is seeing increased activity in some of its markets and believes, like Liberty Property Trust, that the market is reaching a bottom. Tenants downsizing has slowed and activity is perking up.

“So tenants are fortunately beginning to get into their cars, look at space, and when they make a decision, make that decision a little bit quicker,” Sweeney said. “Despite this there is no question that generally speaking there continues to be downward pressure on rents due to higher vacancy levels, tenant consolidations and generally lower leasing activity ...The major objective for 2010 is to lease office space, frankly nothing more complicated than that.”

The company expects rents to stay flat until job growth starts to pick up and 38 percent of the lease deals it strikes will have free rent, which is up from 27 percent last year."

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