Monday, October 27, 2014

Are more towers on the horizon in Philly?

by Joseph N. DiStefano Staff writer for the Philadelphia Inquirer

Liberty Property Trust plans to spend $900 million putting up Comcast's second tower over the next three years. That works out to about $600 a square foot to build.

Last week, the owners of 2.0 University Place, a year-old green-roofed building west of the Drexel campus, put it up for sale at $46 million, or $469 a square foot.

That's not quite as much as the Comcast tower - but roughly three times what the city's dominant landlord, Brandywine Realty Trust, was paying for central Philadelphia office towers just a few years back.

When the price of existing buildings approaches the cost of new construction, that can get builders and civic boosters excited. How long until someone decides it makes sense to build more office towers?

At least in University City, where rents landlords are asking for Class A office buildings averaged $44.88 per square foot, highest in the Philadelphia area.

The regional average is $27.51, a couple bucks higher in Center City, mostly lower in the suburbs, according to NGKF, the broker offering 2.0 University Place for sale.

With Drexel University, Penn Medicine, and Children's Hospital of Philadelphia all expanding, with new apartment towers crowding Market Street, the office vacancy rate in the neighborhood was reported under 6 percent, less than half the rate for any neighborhood in Center City, and just a third of what's empty in some suburban markets.

But on the other side of the Schuylkill, the data and the prospects aren't so good, says Glenn D. Blumenfeld of tenant broker Tactix.

Arguing for his clients, Blumenfeld says 2.0 University Place "is a very unique situation," given the long-term lease from the federal immigration service, and the high, very local demand these days in the medical-scholarly quarter of town.

Yes, building prices are generally going up, and not just in University City, he says: "A lot of foreign money is coming into the U.S. seeking 'safe' investments, and they are buying up lots of real estate," even at prices that look high compared with local rents.

But those prices will prove profitable to buyers only if rents eventually rise enough to justify the sale premiums, Blumenfeld reminded me.

He listed Center City office spaces due to go vacant over the next few years: Cigna and BNY Mellon are cutting back, Sunoco is heading to Newtown Square, FMC and Comcast will pull out of rented space for their new headquarters towers, the former GlaxoSmithKline complex at Franklin Plaza is still vacant except for a school, and nobody has signed up yet for Cozen O'Connor's expired lease.

These emptying blocks add up to more than two million square feet, or a couple of high-rise towers' worth. "As general demand continues to shrink, rents should drop" instead of rising, and that makes new construction less likely, Blumenfeld concludes.

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