'Knock It Down': Philly CRE Leaders Ponder Future Of Center City’s Struggling Office Towers

The Philadelphia office sector is a mixed bag at the moment.

While the return to office and rightsizing trends have been kind to some landlords, others are struggling with stubbornly high vacancy and looming debt obligations. Some say this could be the year ignoring those issues comes to an end.

“Every lender has been sort of kicking the can,” Buccini/Pollin Group co-President Chris Buccini said during Bisnow’s State of Philadelphia's Office Market event in the Lits Building Thursday.

“I think this is the year where a lot of CMBS lenders say, ‘We’re done. Let’s just get on with it.’”

Residential conversions have been a saving grace for many vintage Center City office towers, but there is still a large volume of hulking mid-20th-century buildings with few prospects. The lack of natural light stemming from their large floor plates make the structures a challenge to reimagine as apartments or hotel rooms.

“What the heck do you do with a post-1975 urban office building that’s more than mid-rise?” Buccini said. “I think you just knock it down.”

Such buildings account for a large portion of the vacancy rate in the city's central business district, which rose to 22.9% last quarter, according to a report from CBRE.

“There’s big blocks of space, but they’re in a few buildings in the market,” CBRE Senior Vice President Ashley Parillo said.

Roughly half of all vacancies in Philly’s Class-A office sector are concentrated in just 10 buildings, she said.

But even a relatively high occupancy rate isn’t enough to keep some landlords out of trouble. 

“A big challenge today is really not so much an occupancy problem in a lot of these assets, it’s a debt issue,” Wolf Commercial Real Estate Executive Vice President Todd Monahan said.

Troubled buildings are particularly common in Market West. Monahan identified two Shorenstein Properties sites, 1700 Market St. and 1818 Market St., as prime examples.

“The rents are relatively stable. They’re 80% occupied,” Duane Morris LLP partner Brad Molotsky said. “But those rents don’t derive enough debt service to meet an 8% or 9% handle on the refinancing.”

While it’s hard to ignore the obvious headwinds the Philly office sector is facing, not everybody is in trouble.

Regionwide, Parrillo said CBRE just wrapped up its best office leasing quarter since 2022. The brokerage helped its clients sign 1.2M SF of leases, up from a postpandemic average of roughly 850K SF.

Silverstein Properties is also having an easy time leasing its building at 1735 Market St.

“The lens I’ve been looking through is pretty rosy,” Silverstein Senior Vice President of Leasing Keith Cody said.

The tower is currently 90% occupied. He expects to rent out another 100K SF before the end of the second quarter. 

“There’s a good pipeline behind that, frankly,” Cody said. “I wish we had another 1735 Market St.”

Rents in the building can get as high as $40 per SF, he said, well above the average Class-A asking rent of $32 cited in the CBRE report.

Center City District Vice President of Economic Development Clint Randall said the entire neighborhood is getting busier.

“February of this year was the first time we got back above an average of 400,000 people a day in Center City,” he said, up from the trough of about 120,000 visitors in the early days of the pandemic.

But that foot traffic recovery is fragile and deeply dependent on the health of the Southeastern Pennsylvania Transportation Authority, Randall said.

The agency recently proposed what Randall called an “absolutely cataclysmic” budget proposal that indicates it’s facing a potential “death spiral.”

SEPTA is preparing for a 45% service cut by May 2026, which would include the elimination of several dozen bus routes and five regional rail lines.

“We have a lot of work to do in the few months to ensure that a stable funding strategy can be put in place,” Randall said.

“If you think it’s hard to get an out-of-town tenant to consider Philadelphia, imagine a world where you can’t offer public transit as one of those amenities.”