REPORT: 3 Of Philly's Most Prominent Office Buildings May Be Underwater On Their Loans

A handful of office buildings totaling over 3M SF between them could be staring down dire debt situations.

The 207K SF former GlaxoSmithKline headquarters at 5 Crescent Drive in the Philadelphia Navy Yard and the 1.8M SF former Centre Square complex now known simply as 1500 Market St. both have loans that were transferred to special servicers in the back half of last year, according to a report released Wednesday by Morningstar Credit Information & Analytics. Both have outstanding loan balances worth at least 125% of their value, according to Morningstar.

One South Broad, a 464K SF office building, was also transferred to a special servicer in September with a loan-to-value ratio estimated by Morningstar to be 94%. Less than a block away, the loan backed by the 1.4M SF Wanamaker Building's office component hasn't been transferred to special servicing but has been on Morningstar's debt watchlist since 2020. Morningstar estimates its loan-to-value ratio has risen to 110%.

All four buildings are dealing with large blocks of either direct vacancy, shadow vacancy in the form of sublease availability or both as the only leases being signed in the city are for much smaller spaces. GlaxoSmithKline departed 5 Crescent Drive for less than 50K SF at the FMC Tower in 2021, though its lease at the Navy Yard lasts until 2028.

JLL has been marketing the building for sublease, offering both the entire building and each of the four 52K SF floors individually, but owner Korea Investment Management Co. is negotiating with GSK to buy out the remainder of its lease, Morningstar reports.

The glassy building has two equally weighted CMBS loans with a combined balance of $85.2M, which matured in November 2022 and was placed into special servicing as a result. KIM is also negotiating with its special servicer on a 12-month extension, Morningstar reports. KIM didn't respond to a request for comment by press time.

A joint venture of Nightingale Properties and Wafra Capital owns 1500 Market St. and owes $368M on a $388M loan it originally took out in 2019 as a refinancing after its 2017 acquisition for $327M. The JV sought a second of three possible 12-month extensions in October, but at only 69% occupancy, the building failed to hit the debt yield threshold needed to automatically qualify, Morningstar reports. The analytics firm estimates 1500 Market to be worth less than $294M.

The JV is still negotiating a potential extension with special servicer KeyBank National Association, but its cash flow was 33% less than its underwritten amount in 2021, Morningstar reports. Nightingale Properties didn't respond to requests for comment by press time. 

One South Broad, owned by New York's Aion Partners, lost Wells Fargo as a tenant in 2020 and has been marketing the 108K SF the bank left behind as a potential lab space conversion since March 2021, the Philadelphia Business Journal reports. Aion didn't respond to a request for comment by press time.

Rubenstein Partners also has marketed the vacant portion of the Wanamaker Building for potential life sciences redevelopment as it has tried to sell the 950K SF office condo it owns at the property. The Macy's department store that occupies the first three floors of the building was split off and sold in 2019 for $40M, PBJ reports. Rubenstein Properties didn't respond to a request for comment at press time.

All four buildings also have debt packaged into commercial mortgage-backed securities that are more transparent than privately owned loans, allowing for a peek into an office market that still hasn't recovered to even half the in-person work levels it saw before the pandemic, according to Kastle Systems data.

In the first week Kastle's national average occupancy cracked 50% since the pandemic began, Philadelphia buildings averaged 42% of rear ends in seats — better than only San Jose among the 10 cities Kastle tracks. Where there is interest in office space, the flight to quality has made expensive new developments more appealing than backfilling in older stock. The owners of the Wanamaker Building and 1500 Market both tried to mitigate that effect by plowing millions of dollars into renovations the past few years, but so far to little effect. 

Even in cities with better in-person work numbers than Philly, office properties have been bleeding value whenever official appraisals are released. Vornado Realty Trust wrote off $600M from its New York-heavy office portfolio in a Securities and Exchange Commission disclosure on Wednesday.