Philly Office Buildings Losing Value, But It 'Could Be Worse'
News that one Market Street building slipped in value from its appraisal three years ago is a sign that the city's office market is experiencing distress.
The good news is the valuation drops in some cities are far more dramatic. The bad news is the distress might be more widespread than in comparable metros.
A 1M SF office building at 1818 Market St. just reported a new appraised value of $211.3M, down 25% from its initial valuation of $282.1M in 2021, according to a Morningstar Credit report.
The roughly 80% occupied office space sponsored by Shorenstein Properties has been in special servicing for about a year, while another Shorenstein property down the road at 1700 Market St. was sent to special servicing earlier this year.
Both office towers have declined in value by at least one-fifth compared to previous valuations, but that kind of drop isn't entirely alarming, said David Putro, a senior vice president at Morningstar.
“We're seeing New York, Chicago and San Francisco’s offices with 70% drops from the original appraisal over time to the reappraisal,” he said. “So, it's not the end of the world.”
The valuation drops are “in the ‘could be worse’ category,” Putro added.
But a Kroll Bond Rating Agency report shared with Bisnow indicates that shallower drops aside, Philadelphia’s office market had a 52% office stress rate, the fourth-highest rate in the country as of the first quarter.
“We have concern with the future performance of roughly 52% of the $4.77B in Philadelphia office CMBS,” said Mike Brotschol, a managing director at KBRA Analytics.
Chicago posted the highest rate of CMBS office stress at 75%, followed by Denver's 65% and Houston's 57%. The stress rate measures loans that are in default or at higher risk of default.
1818 Market isn't the only troubled office property along Philadelphia's main east-west thoroughfare through the central business district. But some might have an easier time emerging from distress than others.
1515 Market St., a building that has fallen to 73% occupancy, has landed on a loan watchlist, servicer notes show. Temple University, which occupies a quarter of its total floor space, is still deciding whether it will renew, Morningstar Credit notes indicate.
1500 Market St., known as Centre Square, fell into receivership after seeing major firms exit and general occupancy decline in recent years, Putro said. Dilworth Paxson was the latest to leave, citing concerns about the property's future.
“In those spaces, financial services, professional services like those, tend to be the ones that are really evaluating their space needs,” Putro said. “So it's not a particular tenant, but it's sort of just the evolution of what is ‘back to work’ as a whole.”
Yet Lubert-Adler's 2400 Market St., which is also in special servicing, remains 99% occupied, servicer notes show. The largest tenant is Aramark, which occupies 297K SF of the 592K SF building and holds a lease that won't expire until 2034. Although revenue is off its peak, the building saw a slight increase to $24M in revenue at the end of last year.
“That building’s 2023 net cash flow was off by about 2% from the time [its loan was] underwritten,” Putro said. “I think most office owners at this moment would love to have a building that's only 2% down over three years.”
