Landlords stuck in slow-grow cities, burbs
It's "leasing musical chairs" for office landlords -- except the "MET" districts in NY, N. Cal.
Landlords stuck in slow-grow cities, burbs
Joseph N. DiStefano
The U.S. commercial real estate market has been reduced to "leasing musical chairs" in and around Philadelphia and most major office centers, writes John W. Guinee and his team at brokerage Stifel Nicolaus in a new look at office and industrial real estate investment trust (REIT) stocks. Almost the only places in America where office rents are rising are three "media, entertainment and technology" ("MET") centers: New York City's Midtown South (think Comcast-NBCU's Rockefeller Center); San Francisco's South of Market (SoMa); and Silicon Vally outside San Jose, California. (All Democratic areas. What's with that?)
Office space in midtown Manhattan is renting mostly in the $45-65-sq-ft range, which is double or more what space fetches in Center City. Even in lower Manhattan, financial services and back-office leasing remains "slow." So, generally, pricing for even fancy "trophy" buildings has "tightened" since a brief boom last year. What about our nation's capital, which was the only growing real estate and jobs market in the nation, early in Obama's term? "We are relatively pessimistic about a Washington, DC Metropolitan Staticial Area recovery" due to the political division that paralyzes Washington, Guinee writes.
When Obama's Democrats controlled Congress, US stimulus spending rose and the Iraq and Afghanistan wars were still burning many billions, which made for more government workers and contractors, and crowded office parks. But the GOP House win in 2010 froze Obama's agenda; the Iraq pullout and the pending Afghanistan pullout mean war layoffs (unless you build killer drones, maybe).
In this November's elections "the only possibility" of one-party rule will be under the Republicans -- and real estate pros say that "would likely result in Federal budget cuts soon," Guinee adds. More split government means more "stalemate;" DC-area "defense contractors still appear to be in contraction mode." A brighter spot, from landlords' point of view, is industrial leasing. Warehouse and factory companies have for now "decided to ignore the global economic noise and proceed with running their businesses," especially on the East Coast.
Bradywine Realty Trust, Radnor, has been selling suburban Washington properties and doubling down in Center City, where it's now owner or part-owner of more than half the Class A office buildings.
Since both areas are slow, "we expect near-term" profit "growth, if any, to come from occupancy gains" or cheaper borrowing costs "and not from rental rate growth," Guinee writes. "We do not believe [Brandywine] can grow the dividend" while trying to boost occupancy from the current 87% to the target mid-1990s, he adds.
In suburban Philadelphia as downtown, "most of the Brandywine markets are soft, with little opportunity to increase rents," except maybe at the Radnor Financial Center, Guinee concludes.
Similarly, at Liberty Properties Trust, "the vast majority of Liberty assets are in smaller, slow growth markets." No wonder Liberty is "slow(ly) shifting" out of small-market offices and into warehouse and industrial properties. At current prices, Stifel rates Liberty as "buy," and Brandywine as "hold."
You been to DC in the last 10 years? It's as if the taxpayers dropped a trillion dollars on building new buildings down there. Disgraceful.— Mr. Smith- Philadelphias best bet is Center City where the human energy acts as a vacuum to pull in outside businesses.When 4,000-5,000 Urban Outfitters/GSK jobs leave Center City for the secluded Navy Yard it has an overall negative impact on Philadelphia.
Similarly the sports stadiums absolutely had to be built in the Center City area. Upwards of 9M-10M people per year patronize those stadiums, thats 40 years worth of conventions impacting the businesses of Center City.— joe smith - Poor City Planning, a Corrupt City Government, Incompetent Public "workers", an unsafe environment, a murder a day, panhandlers, junkies, thugs infesting the streets.....let's see, why is Philly such a bad place to work and try to live?— Joe Nickels
- Joe Nickels you get downtown much? Center City is a nicer and a more populous place than it was 5, 10 or 20 years ago. Educated people keep moving there and to adjoining neighborhoods. Lotsa cool restaurants etc too. -- There is definitely a shortage of new office tenants however. Re Class A office space, corporate employers, law firms, etc., we don't grow, we don't shrink; the office center has been more or less flat for the past 20 years (banks got sold, Comcast moved in, law firms expanded, add all: it's a wash.) So here's your mystery: Where are all the new residents working? The burbs, the Navy Yard center, at home, even NYC... So, re office space, the "musical chairs" analogy fits Philly pretty well.— Joe D
- Corporations locate in areas where they can attract employees due to the lifestyle an area offers. That's why there is growth in NYC nad San Fran. World class cities. That's what Philadelphia provides in Pennsylvania. There would be no 202 corridor if it weren't for Philadelphia. Center city is better than it's been in 60 years or more.— MikeP
