Wednesday, July 6, 2011

Drug-industry exodus leaves suburban offices vacant

By Joseph N. DiStefano

"Center City's office market is still lots weaker and cheaper than New York's. But vacancies have slipped lower for three quarters in a row, to 14 percent at the end of June, from 15 percent three months earlier.

It's worse in the suburbs, where the drug industry, whose glass offices and labs stud the U.S. 202 corridor south to Wilmington, have lately been abandoning space, instead of renting new offices and hiring people.

In the city's Pennsylvania suburbs, and in northern Delaware, vacancies edged up to nearly 18 percent, as drug companies cut back. GlaxoSmithKline, which is consolidating its Center City space to a smaller Navy Yard location, has also given up space at 600 Park Ave., King of Prussia. Locus Pharmaceuticals Inc. shut its Blue Bell facility. In Delaware, AstraZeneca is vacating buildings at its Fairfax complex.

South Jersey vacancies are similar, though banks and other financial companies there have started leasing new space, for the first time since the recession started.

Sunoco Inc., which last year put all 10 floors of its headquarters at 1735 Market St. up for rent as it sold plants and business lines, has done better than expected in filling space. It won new tenants for three floors, including Brazil-based Braskem, which last year bought Sunoco's polypropylene plant in Marcus Hook. The growing multinational chemical-maker FMC Corp. is staying put in four floors and will sublet an additional three.

Urban bargains?
As we noted last week, Standard & Poor's cut credit ratings for Toll Bros., citing the fact that the Horsham-based homebuilder was still buying land, despite the still-sluggish market for new homes.
"We don't think we're spending too much on land at all. We think it's a great time to buy" for future homes, chief financial officer Marty Connor told me.

He acknowledged, as S&P and Moody's have pointed out, that Toll has at least 13 years' worth of lots to build on - at the company's current sales rate of about 2,600 homes a year. But if the market rebounds, the supply "shrinks dramatically," Connor said. (Toll peaked at 8,600 homes a year before the 2007 meltdown.) Plus, in the Northeast, Toll's home market, "it takes a long time to get land approved - five to seven years in New Jersey," Connor said.

"We are sensitive to paying too much for land. We did that in 2005 and 2006," then wrote down more than $2 billion in land values from 2007-10, as property prices dropped 80 percent in Las Vegas and Phoenix, Connor said.

But Toll gets back up to 30 cents per lost dollar by claiming the drop against federal income taxes. That cuts the loss to maybe 50 percent, "which is a good recovery," compared with what other investors lost in the bubble, Connor added.

Wells Fargo & Co. economists warned last month that the home-construction market in the Northeast might not recover for a generation or more, given the region's slow growth.

No, says Connor: "The housing stock is aging," and more homes have been demolished than built lately. Already there are hot pockets, he said. "We're encouraged by what we see up in New York. We've raised prices 10 percent, year over year, in Hoboken and Brooklyn and Manhattan."

Sales are up at Toll's gated Naval Square development in Southwest Center City since the reopening of the South Street Bridge last fall, Connor said.

Toll has sold all but 12 of the 493 completed rowhouses and condos at Naval Square. "We just started digging the foundations" of the last 126 units that will be built at Naval Square, he added, to be offered at prices from $289,000 to $750,000.

Who are buying? Professionals working at Penn and Children's Hospital, both of which are expanding from University City into Center City. When Naval Square is done, Toll will break ground on 122 units to be built at 2400 South St. Emmons expects work to start by January."

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