Philly office-to-apartment conversions surge: report

SSH Real Estate, the Center City-based property investment/management/sales group run by Jeff Seligsohn and Peter Soens, has put out a report marking where the action is in Philly-area real estate: the continued conversion of old Philly offices into apartments, a slow revival in the suburbs, plus a few spectacular proposals that aren't happening yet. Highlights:

- Who's looking: Frugal chemical-maker FMC Corp. is looking for a bloc of around 200,000 sq ft to consolidate its several headquarters and support offices in Center City. Law firm Pepper Hamilton needs at least that much. Beneficial Bank and the nonprofit Pennsylvania Health Management Corp. are each looking for around 100,000 sq ft.

- What they're paying: Rentals for occupied offices in Center City's not quite 50 million sq ft average $25.90/sq ft, with 10.6% of the space currently vacant. Suburban rents average below $22/sq ft ft except in a few high-end enclaves like Radnor and West Conshohocken.

- Who's building: "SSH is currently tracking 18 new apartment projects" which will add 2,700 new rentals to the 40,000 already in Center City. Residential rents went up nearly 9% last year. 180,000 people now live in Center City, up 10% since 2000.

- Office to home: Center City "Class A" apartment vacancies are under 2%, while office vacancies are over 10%.

Sign of those times: Center City landlords have converted 7.7 million sq ft of office space into apartments over the past 20 years, including the recent 110-unit Arch (ex-Robert Morris Building) by 806 Capital and Federal Capital Partners, 281-unit (82% leased) 2040 Market St. (ex-AAA building) by PMC Property Group, 100+-unit Tower Place (State Office Building) at Broad and Spring Garden by Bart Blatstein's Tower Investments.

Not surprising: while Liberty Property Trust wants to build a 370,000 sq ft office tower in the 1900 block of Arch St. -- if it can find a tenant willing to help finance $500/sq ft construction while $20/sq ft space is available -- otherwise it's all apartments/hotels/residential, e.g.:

- Chestlen Development is making arrangements to borrow $400 million to build "a 50-story hotel project," including 500 rooms in a W Hotel and an Element by Westin, at 1441 Chestnut St.

- Brandywine Realty Trust wants nearly 300 apartments at 1919 Market St.

- Peal Properties is building 100+ apartments in the 1600 block of Sansom.

- At 901 Market/the Gallery, PREIT has agreed to buy the building from Vornado Realty Trust at $140/sq ft, a fraction of successful suburban mall prices. Longterm plans unclear.

- University City rents remain the city's highest, at nearly $31/sq ft. Still the University City Science Center's latest project out there is for apartments, not offices or labs, and Penn/Brandywine Property Trust apparently plans student housing on what was to have been an office tower site in the 2900 block of Chestnut St.

- Out in the burbs, besides Shire Plc's new 600,000 sq ft headquarters at Atwater in Malvern, there's not a lot doing yet (though Vanguard Group's planned $55 million building in Liberty Property Trust's Great Valley Corporate Center broke too late for the SSH report). MIM-Hayden Real Estate, Time Equity and other suburban investors are buying up extensive properties for under $120/sq ft -- sometimes a lot under -- which means they can make money even if rents stay low.

- Medical space is different: LaSalle Investment Management managed a "suburban record"  sale at $388 sq ft for Main Line Health Center at Ellis Preserve next to SAP AG headquarters in Newtown Square.

- BioMed Realty Trust has applied to Radnor Township for permission to knock down the former Wyeth labs on King of Prussia Road and build 900,000 sq ft of "office and lab space."