Redevelopments, Big Leases And A Hot Debt Market Keep Philly Growing

Major renovations near Independence Mall and major developments on both sides of the Schuylkill River have combined to stretch the notion of the central business district far beyond where it used to be. Similar goings-on in the suburbs mean that investors have more enticing options than ever in Greater Philadelphia.

Center City

Keystone Property Group’s properties at The Curtis and the former Dow building on Independence Mall West have landed major tenants, and lease-up has been quick at MRP Realty’s grouping of buildings on the east side of the historic square. Much of that activity came in concert with the major renovations each developer undertook, from building systems and the office space itself to innovative retail spaces on the ground floor.

MRP recently debuted its reinvention of the Bourse building’s food court (to some acclaim), and Keystone has made a hit with the Independence Beer Garden and La Colombe at the base of 100 South Independence Mall West. That building will soon be renamed for its new anchor office tenant, Macquarie.

At The Curtis, a coworking space, apartments and 80% office occupancy have come from a renovated atrium and a two-story P.J. Clarke’s, a New York institution that bills itself as “The Cathedral of Saloons.”

“We think there’s going to be a shift, a refocus, and more of a willingness for companies to consider Market East or the Independence Mall submarket when searching for locations,” Keystone Property Group Regional Director Todd Monahan said.

But HFF Senior Managing Director Doug Rodio believes that the growth of Philly office is about more than Independence Hall.

“I think that Philadelphia has always been a city of small neighborhoods, [but that] has changed,” Rodio said. “There are real demand drivers as far east as the Delaware River and as far west as University City. That didn’t exist five years ago.”

Monahan and Rodio will be joined by a diverse group of panelists (plus Mayor Jim Kenney as keynote speaker) at Bisnow’s 2019 Forecast event at Yards Brewery on Dec. 18 to discuss development, investment and Qualified Opportunity Zones. Those have driven significant investor interest, but are not the cause for the greater diversity of office opportunities in the city.

In University City, the FMC Tower is fully leased up, uCity Square’s 3675 Market St. held its grand opening this year, and Brandywine Realty Trust is months away from completing the first projects in its Schuylkill Yards megaproject. Lubert-Adler and PMC Property Group have leased up nearly all of 2400 Market St. across the river as it approaches completion.

Combined with East Market, Jefferson’s impending move into the former Aramark building and others, all of these major deals have expanded the geographical scope of what could be called core assets in Philadelphia.

“Thankfully, between 15th and 20th streets on Market is no longer the only place for Class-A, institutional tenants,” Rodio said.

Philly's suburbs

That expansion of possibility has also affected the suburbs. King of Prussia has been the nexus of considerable development and redevelopment, bringing it closer to joining Radnor and Conshohocken as the top suburban submarkets in the region. All three have the live-work-play dynamic that serves as a potent recruitment tool for employers, but investor interest has expanded even beyond those parameters.

Chesterbrook Corporate Center will soon suffer the departure of AmerisourceBergen as it relocates to Keystone’s build-to-suit project in Conshohocken, SORA West. Yet Rubenstein Partners is reportedly close to purchasing the center, along with nearby Glenhardie Corporate Center, from Pitcairn Properties for $190M ($60M less than Pitcairn paid before the recession).

Both Chesterbrook and Glenhardie represent a type of office asset that has fallen out of vogue — office parks separated from any sort of downtown or walkable entertainment, left behind in terms of modern amenities.

Rubenstein is well-versed in value-add plays, both in suburbs on the western and eastern side of Philly and smack dab in Center City, where it is nearing completion on the $10M first phase of renovations to the Wanamaker building. If Rubenstein can turn the quintessential outdated office campus into a modern Class-A complex ready for institutional investment, then it will have proven the notion that location is not a zero-sum game in Greater Philadelphia.

“I’ve done enough business with Rubenstein to respect their investment decisions, and I am very confident that with their expertise in placemaking and amenitizing, that they can bring those locations back to what they were,” Rodio said.

Rodio and Monahan told Bisnow they believe the Route 202 corridor running south of King of Prussia to be a growing opportunity in office. The Plymouth Meeting/Blue Bell submarket also has several valuable developments, Rodio said, without accounting for the new office building Brandywine is planning.

Investment environment

Though Monahan said that the Curtis and 100 Independence Mall West are long-term holds, MRP and Rubenstein historically prefer to renovate their acquisitions, stabilize tenant rosters and look to flip the assets. According to Wells Fargo Managing Director Michael Petrizzi, that has become an increasingly popular method of investment as the current period of recovery begins to stretch into its second decade.

“A lot of investors are looking for assets with real short-term upside rather than capitalizing on lower-cap rate, fixed-rate executions that are long-term holds,” Petrizzi said.

No one quite knows when the other shoe will drop economically — Rodio believes it will be years away — but Petrizzi sees behavior on the capital markets side indicating that the market is already bracing for a downturn. Though billions of dollars in liquidity is still there for the taking, more and more investors are looking to the debt market, rather than equity, to deploy capital.

Within that debt market, short-term, floating-rate loans are most popular right now, as rising interest rates have livened up the market for property owners to refinance their loans before rates increase further, Petrizzi said. Lenders are happy to work on those terms, but the space has become fiercely competitive in recent years.

“That [competition] has been creating spread compression on the floating-rate side, and I think that’s going to continue into 2019, because no one wants to be the one to buy a stabilized asset at the top of the market at the absolute lowest cap rate when the rents are fixed and you’re in a holding pattern for the next few years,” Petrizzi said.

With capital markets as active as they are, Philadelphia can count itself lucky that the scope of worthwhile investments has grown the way it has these past few years. Center City, with its expanded CBD, is seen by investors as having more momentum than many other urban markets, Petrizzi said.

With its new designation as a federal opportunity zone, North Broad Street will likely see the activity it had already generated these past couple of years accelerate even faster. Broadening the scope of investment-grade properties can only be good for Philly’s real estate market, Rodio said, adding that rising interest rates and another year of the current cycle have not dampened investor appetites one bit.

“I continue to have meetings [where] people are planning for next year just as aggressively as they did last year,” Rodio said. “The investors that I speak to on a day-to-day basis are bullish on where things are going in the next couple of years.”

Come see Rodio, Petrizzi and Monahan discuss the year that was and the year to come at Bisnow's 2019 Forecast event at Yards Brewery Dec. 18.