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Landlord: Philly office tenants expect 3-6 months free rent

Brandywine negotiates freebies with scarce tenants

Philadelphia and Washington DC office tenants "want more free rent," George D. Johnstone, operations chief at Center City's dominant office landlord, Radnor-based Brandywine Realty Trust, told investors at an FBR Capital Markets conference today.

Well, who doesn't? But tenants are actually getting their freebies, Johnstone said, because landlords are afraid to lose them in today's weak market: "They basically want anywhere from three to six months of free rent... Our deals in 2010, about 42% of them had some element of free rent... For '11, about 60% of the deals would have some element of free rent."

That applies especially in suburban and small-building markets, where "B-minus" tenants are upgrading to Class A buildings, attracted by cheaper rents, and demanding sweeteners to pay for "moving cost, telephone cost, cabling cost, et cetera." By contrast, "we are not really seeing a day-to-day demand for high-end tenant improvement costs."

What's good for the tenant is good for the landlord: Brandywine investment chief Thomas E. Wirth said he wants to boost the company's BBB- just-above-junk-bond-quality debt ratings (Corrected) so they can cut its borrowing costs.

But he acknowledges the same banking slowdown that makes it tough for Brandywine to sell small suburban properties (because would-be buyers can't borrow the funds they need) will make it tough for Brandywine to get easier credit terms as soon as it would like.

Despite its big and growing investment in the Philadelphia area (lately expanded to include the ex-30th Street Post Office, Commerce Square, Bell Atlantic/Three Logan), Brandywine wants to sell more of its properties in South Jersey, Delaware, California, and other markets and concentrate on boosting its Washington DC area total from the current 25% of property to around 35%. Already Brandywine gets the largest proportion of its profits from the DC area.