Philadelphia Developers Are Of 2 Minds On Spec Deals
Developers in Philadelphia aren't pursuing ground-up spec office projects and probably won't be interested in doing so anytime soon because of the risks involved. When it comes to laboratory/office space, however, it's a totally different story.
At least that's the view of market participants and experts heading into Bisnow's Philadelphia State of the Office event March 26.
Though developers in Texas, Colorado, New York and North Carolina, among others, are willing to gamble on starting office developments without significant preleasing, their counterparts in Philadelphia are taking a pass on building without anchor tenants lined up because of the city's low office rents and high construction costs.
Parkway Corp.'s proposed 19-story, $200M office tower is a case in point. Had law firm Morgan, Lewis & Bockius not agreed to lease the company's yet-to-be-built 305K SF space, the project would have never been financed, according to CEO Robert Zaritsky, who is speaking at the event.
"We could not have built or financed spec office space," he said. "There are very few, if any, markets you could do spec office space. It's too risky."
Brandywine Realty secured Sparks Therapeutics' headquarters to be the anchor tenant for an office building that is part of the $3.5B Schuykill Yards products it is developing near Drexel University in West Philadelphia.
New office buildings are attractive thanks to the 20% rise in Philadephia's office rents over the past five years, which helps soften the blow of the city's rising construction costs.
Office development, with or without an anchor tenant in place, has been rare in Philadelphia. Parkway's property, formally known as 2222 Market St., will be the first ground-up office building constructed in Center City since the Comcast Tower opened its doors in 2008.
The next youngest office building in Center City opened its doors in 1992, according to Casandra Dominguez, director of research at Cushman & Wakefield's Philadelphia office.
But the market may start to shake loose an increased pace of development.
"Trophy and high-end market rents are starting to approach new construction rent," Domingeuz said. "They are getting close enough that tenants are starting to consider paying a premium for new construction because of the lack of big blocks of space and trophy assets in downtown Philadelphia."
Lubert-Adler Real Estate and PMC Property Group, owners of 2400 Market, added five stories to the building for anchor tenant Aramark to relocate there a few years ago. The food service giant occupies the first five floors of the building.
Developers nervous about going spec could try to tie down one of at least two potential anchor tenants searching the market for large blocks.
Parkway and Brandywine Realty Trust reportedly are courting insurance giant Chubb for their developments. Chubb reportedly wants to consolidate its operations in the 361K SF office building it owns and in nearby One Washington Square, where it leases about 140K SF from Keystone Property Group.
Meanwhile, law firm Blank Rome LLP is testing the Philadelphia office market as it faces the 2022 expiration of its 200K SF lease with Brandywine Realty Trust's One Logan Plaza property in Philadelphia.
A Blank Rome spokeswoman confirmed to Bisnow in an email that "we are currently exploring our options moving forward." She declined to elaborate further. Brandywine also declined to comment.
Founded in 1946, Blank Rome is one of the country's largest law firms, with offices in 14 locations. The firm last year relocated its New York City office from the Chrysler Building to 1271 Avenue of the Americas, formerly known as the Time & Life Building, in Rockefeller Center. Developers in Philadelphia will also be eager to win the firm's business because of its potential to become a stable anchor tenant taking at least 50% of a building's space.
"They are not going to be going out of business," Dominguez said. "They also can sign long-term leases."
Office developers courting biotech users are much more comfortable building on spec.
Biotech firms are booming in West Philadelphia, which also is the home to the University of Pennsylvania. Wexford Science + Technology and Venta built their first spec 400K SF laboratory and office building in 2018. The building, part of their uCity Square development, is now fully leased. They broke ground on their second lab/office complex in January and have rented out two out of the property's 13 floors, according to Cushman & Wakefield Senior Director Paul Garvey.
"We have more than enough prospects right now to full that building one and a half times," he said in an interview. "We're not going to convert all of those prospects into leases, but we're confident that we'll fill it up in due course. Cell and gene therapy is an incredibly strong market."
The developer has plans for two other spec buildings in the works.