One of the Northeast's largest office landlords is pulling out of the Philadelphia suburban office market, where rents remain stuck at the levels of 10 and 20 years ago, as weak corporate hiring and a shift to home offices and shared space has reduced demand for large office leases. Mack-Cali Realty, which controls 20 million sq ft of offices in north and central New Jersey, has agreed to sell its remaining 1.66 million sq ft in Philadelphia-area properties for $201 million in cash, a $10 million mortgage, and $22 milllion in "subordinated interests," to suburban re-developer Bill Glazer's Keystone Property Group. Mack-Cali will shift its local focus to developing residential rental apartments in the Bala Cynwyd area.
The price works out to around $140 a square foot, not including the value of the unbuilt land or Mack-Cali's remaining interests. That price "seems reasonable" for the market, Stifel & Co. real estate analyst John Guinee told me. It's below the portfolio's $253/sq ft replacement cost, or its $194/sq ft value adjusted for the buildings' partly "obsolescent" condition, according to a report Guinee sent clients July 18. Investors are unlikely to finance new offices in the region with prices so low.
The buildings Mack-Cali plans to sell include 1000-1235 Westlakes Drive, Berwyn; 100-300 Stevens Drive at the Airport Business Center, Lester; Rose Tree Corporate Center I and II, Media; 4 and 5 Sentry Park, Blue Bell; 150 Monument Road, Bala Cynwyd; 1000 Madison Ave., Lower Providence Township; and the landmark One Plymouth Meeting tower adjoining the Plymouth Meeting Mall near the Pennsylvania Turnpike north-south and east-west intersection, which is securing the $10 million mortgage. The deal also includes empty lots at Airport Business Center, Rose Tree, and Westlakes. Mack-Cali sold Moorestown Corporate Center (NJ) and 16 and 18 Sentry Park West to Keystone last year.
In a statement, Mack-Cali boss Mitchell E. Hersh said the company's Roseland subsidiary will now"develop additional luxury multi-family projects" in Bala Cynwyd, where Lower Merion Township has lately approved a string of rental apartment developments near City Line Ave. Glazer said he would put Keystone's "entrepreneurial redevelopment expertise" to work improving the buildings he is buying, and added that Keystone hopes to use its growing "economies of scale" to boost future rents in the region.
Philadelphia-area office rents top out around the mid-$30s/sq ft for high-end buildings in West Conshohocken, the Radnor Financial Center, and Center City's tallest Market Street towers, but more often range in the mid-$20s to as low as the high to mid $10s for older South Jersey and Montgomery County locations. That's a fraction of comparable rents in the New York, Washington and Boston metro areas.
With Mack-Cali and other publicly-traded real estate companies unloading suburban Philadelphia properties, and few companies building new offices, Keystone and other local investor groups are buying up the buildings at today's cheaper prices, making basic improvements and leasing vacant space to small and emerging tenants at modest rents. Mack-Cali has followed the locally-based Brandywine and Liberty real estate investment trusts in selling off older and higher-vacancy office complexes; Brandywine is also among the office landlords now planning residential development on property that has failed to attract new office tenants.