The 6 Storylines That Defined 2021 In Philadelphia CRE

Though Philadelphia is finishing 2021 with the pandemic in as serious a state as it was when the year began, the city's commercial real estate industry experienced a year of progress in several key areas.

The gene therapy and cell therapy industries have powered life sciences past the office market, initiatives inspired by the social justice reckoning of last summer took shape and Philly became a national model for keeping vulnerable people housed. The relationship between developers and government ... Well, that may have actually gotten worse.

1. Construction, Investment In Life Sciences Ramp Up

As federal and venture capital funding continued to flow into Philadelphia at record rates, both expanding local companies and out-of-market competitors looking to establish a foothold are desperate for new lab and production space. Developers all over Philadelphia are equally as desperate to deliver that space, both to beat competitors to potential tenants and to prevent the current boom from petering out.

Brandywine Realty Trust had already begun Schuylkill Yards, its long-promised, potentially transformational development district, by renovating a building for the new headquarters of Spark Therapeutics, the biggest success story for the city’s gene therapy industry so far. But in July, the developer broke ground on Schuylkill Yards’ first ground-up component, the $287M West Tower, planned to contain a mix of life sciences and apartments.

The next-biggest multiphase development in University City, uCity Square, topped off its latest phase in October. One uCity Square began construction last year on a speculative basis like the West Tower, but without the safety net of a residential component. Its leasing success might give way to another wave of speculative starts, a critical element of capturing the current moment for the region. 

Further west, University Place Associates broke ground on its 3.0 University Place development with the Wistar Institute already in place as anchor tenant, but only after securing venerable, out-of-market investors Silverstein Properties and Cantor Fitzgerald as majority equity investors.

As the gene and cell therapy boom that gave rise to the nickname “Cellicon Valley” awaits the infusion of new space, several office properties, including the Wanamaker Building and One South Broad Street, are being marketed by their landlords as potential life sciences conversions like Keystone Development + Investment’s The Curtis. Even newer, trophy-class office buildings like Brandywine’s Cira Centre have opted to convert parts of their buildings to lab space rather than attempt to backfill departing office tenants.

So far, proximity to Philadelphia’s population center and academic institutions has been a defining factor for developers courting life sciences tenants, but many such tenants are on the hunt for biomanufacturing capacity rather than more lab space. While The Discovery Labs secures commitments for its impressive square footage, the former Budd Co. plant is being marketed for life sciences manufacturing in an attempt to draw tenants to historically underserved North Philadelphia.

Of course, no discussion of life sciences in Philadelphia is complete without the next item on this list.

2. The Philadelphia Navy Yard's Next Phase Comes Into Focus

Mosaic Development Partners and Ensemble Real Estate Investments, the partnership selected by PIDC to be the Navy Yard’s next master developer, unveiled plans this year for its first project, a speculative lab building, with a biomanufacturing development awaiting an anchor tenant before proceeding.

But one of the major reasons Mosaic/Ensemble was tapped is for what comes after: a multifamily project that will be the first in a wave of development meant to turn the Navy Yard from a strictly commercial campus into a mixed-use neighborhood. Another key reason: The partnership’s billion-dollar pledge to advance racial diversity and equity in its hiring and contracting practices, which “set the bar” for developers who bid for deals with the city of Philadelphia.

Goings-on at the Navy Yard this year went beyond its new master developer. Gattuso Development Partners, founded by former Liberty Property Trust exec John Gattuso, broke ground in December on a speculative biomanufacturing project, while one of Liberty’s key achievements during its time as master developer is unraveling. 

GlaxoSmithKline, for which one of Philly’s most expensive office buildings was purpose-built, is exiting the space with years left on its lease for an office totaling less than 50K SF at FMC Tower in University City. One of the Navy Yard’s multi-tenant office buildings is the beneficiary of a similar move, with Rite Aid departing its rural Pennsylvania campus for a 24K SF headquarters meant more as a gathering place than a traditional office.

3. Social Justice Comes Into Foreground For Philly CRE

In addition to strengthening the diversity component of its requests for development proposals, the city of Philadelphia has taken a more direct approach to increasing representation for people of color in the real estate industry. In September, the Philadelphia Housing Development Corp. announced the launch of the Minority Developer Program, an initiative to help educate early stage companies in how to secure contracts with city agencies and increase access to the economic development conversation for minority-owned businesses of any size. Central to the program is the promise that city-owned, vacant lots will be awarded to some of the participants.

On Monday, PHDC announced in a press release that it had selected just under 70 businesses to participate in the first iteration of MDP, including West Powelton Development Corp., based in a majority-Black neighborhood that borders University City, with all the gentrification and displacement concerns that proximity entails. Other participants include BDFS Group, Benchmark Construction Group and SNB Investment Group, a PHDC spokesperson told Bisnow.

While the MDP was being conceived, a group of Black investment and development leaders formed The Collective, a combined trade group and private equity investment firm explicitly targeting real estate projects led by Black-owned companies. That firm, The Collective Investment Group, has already secured over $300M in commitments and is poised to carve out a more central place in the real estate industry of a 44% Black city that has always been overwhelmingly White.

4. Philly Leads Nation In Rental Assistance Distribution, Eviction Prevention

While both the public and private sectors were laying the groundwork for future advancement in social justice, a much more immediate crisis was playing out for low-income renters all over the city. With thousands of such renters having lost jobs to the pandemic and fallen behind on rent payments, only a federal eviction moratorium legally protected those tenants from eviction without direct action by local government. 

That action came in the form of the Eviction Diversion Program, an emergency initiative spearheaded by Councilmember Helen Gym. The program, launched last year, required landlords to undergo mediation with tenants before filing for eviction. As the federal moratorium ended, was resuscitated and then ultimately shut down for good by the Supreme Court, national housing advocates held up the Eviction Diversion Program as a model for other cities to follow for keeping as many people housed as possible.

But even eviction diversion programs can only do so much as long as tenants are behind on rent. To that effect, the federal government’s Emergency Rental Assistance program has been a key lifeline all over the country, though the speed at which it has been offered by cities and states has varied wildly. 

The Treasury Department, in laying out methods to accelerate the ERA program’s rollout, again held up Philadelphia as an example of one of the best-performing jurisdictions in the country in terms of distributing funds. The city now stands to gain some increased funding in the form of reallocations from the worst-performing jurisdictions, though city officials say it is unlikely to be enough to meet the demonstrated need.

Now, as the Eviction Diversion Program is set to expire at the end of the year, Gym and several fellow council members are taking steps to make it permanent, despite protests from area landlords.

5. City Council's Fight For More Control Over Development Escalates

If Philadelphia City Council and the private sector agree on the necessity for better progress toward racial equity in commercial real estate, they are bitterly divided on how to accomplish those aims. Beyond council's changes to the 10-year tax abatement long prized by developers, the body has launched multiple attempts to exert more direct control over zoning and land use this year.

Council members have used the tradition of councilmanic prerogative to pass zoning changes for districts they represent without pushback from the rest of council, and two uses of that privilege stood out. The first, in which Council President Darrell Clarke downzoned a stretch of Girard Avenue east of Broad Street, was a bolder version of anti-density decisions that Clarke and some of his colleagues have been making for years. The second was something new, and more alarming for private developers.

In October, Councilmember Jamie Gauthier proposed a zoning change to a key plot of land in University City where a low-density affordable housing development is set to lose its protected status next year. The new zoning would not only prevent commercial uses on the land, but it would mandate the presence of affordable housing and impose a construction moratorium for a full year.

The property's owner seeks to sell the land, which sits right on Market Street and could fetch north of $100M from life sciences developers, but if Gauthier's measure passes, such a sale would be impossible. 

City Council has also attempted to take more direct control over the disposition of vacant, city-owned plots of land multiple times over the years, including new changes in 2021, Philadelphia Director of Planning and Development Anne Fadullon said at a Bisnow event in December. This year, Clarke has also proposed a law that would allow council to nominate members to the Zoning Board of Adjustment, a five-member, mayor-appointed entity as currently constructed.

6. Amazon Expands Footprint In Region To Unheard-Of Levels

As with everywhere else in the country, industrial was the Philadelphia region's hottest asset class this year. The pandemic continued to increase Americans' reliance on e-commerce, and Amazon rode that wave to explosive growth.

In February, Amazon was reported to have approached 10M SF in the region with the lease of a last-mile distribution center in Northeast Philadelphia. By April, Amazon had blown past 10M SF, as updated reports revealed the company had leased 57 properties in the region.

Amazon's longstanding willingness to pay market-high rents, along with unprecedented demand for warehouse space from all corners, drove the expansion of the industrial sector within Philadelphia city limits, which had been considered unfeasible mere years ago. 

The market has become so strong that despite skyrocketing construction costs, developers who can find suitable land or redevelopment prospects are having no problem securing financing or tenants for speculative warehouse projects.