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Friday, February 27, 2009

Landlords, tenants bluff to a stalemate

For the past year, as real estate markets in most of the country have collapsed, Philadelphia commercial real estate people have kept telling each other, in quarterly surveys and industry gatherings, that, since the market didn't get too hot here, it doesn't have to get too cold, either. And that vacancies are still below 10%. And that maybe things will turn around soon.

I asked my old schoolmate Andy Margolis, of A Margolis Realty Co, if that's really so. He sent me to Cushman & Wakefield Inc.'s William J. Hirschfeld, listing agent for One Liberty Place, and Roger McManimon, listing agent for the Verizon tower at 1717 Arch, both of whom also represent tenants, for a reality check.

"It's tough to really pinpoint lease comparables, because leases aren't getting closed," said Hirschfeld. "There's such a total lack of activity, not only in the leasing market, but in the sale market also.

"Landlords are pointing to the last available statistics and saying, 'We're in a great spot. No reason to reduce rental rates.' But the tenants read the newspapers, and they know it's all doom and gloom in the national market. They assume the market in Philadelphia must be a mirror image of that. What results is a large disconnect."

It's all too familiar in Philadelphia, where rents haven't much changed in 20 years, so there's been little incentive to build new towers. The "trophy" or "A+" buildings like One Liberty and 1717 Arch have leased suites in the mid-$30s per square foot, which is a little below the $36-38 Liberty Place asked when it opened in 1986. By contrast, many other Center City buildings are stuck in the mid-to-high $20s.

"We've both been doing this for 20 years," said McManimon. "Whenever the market weakened, tenant brokers always advised tenants to wait til the last minute. The landlords would be throwing concessions. The longer you waited, the better deal you got. Then, when the market peaked, they'd tell their clients they could lose the deal, there were other tenants looking.

"Well, now we're betwixt and between." As long as there aren't too many vacancies, landlords still hope they can boost rents a little, and make it possible to attract new construction at higher rental rates. Meanwhile, tenants aren't moving; they hope if they hold on a little, they can get a better deal. It's like the banks and investment houses, where everyone knows their loans and bonds aren't worth what they paid, but they'd still like to postpone the day of reckoning, hoping prices will come back before they have to write off losses. 

Said McManimon, "Everyone is waiting for something to happen." No wonder we're slowing down.

 

 
 

 

 

 
Posted by Joseph N. DiStefano @ 2:12 PM  Permalink | Post a comment
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About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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