Philadelphia is too expensive -- and too cheap -- to attract big private property investors, says one of the biggest real estate moguls based here. "We've been looking in this city. We just can't make the numbers work," says Dan DiLella, chairman and CEO at Equus Capital Partners LLP. "As a result of a lack of job growth the rental income does not justify new office construction."
The firm boasts $3 billion in public, corporate, wealthy-family and union-pension funds invested in U.S. office buildings and other properties, mostly in the East and Midwest.
DiLella just raised a new investment fund -- the firm's 11th, worth $310 million. He's already invested one-third of it, and his team is looking for more places to buy. Too bad, he says, that "expenses in Philadelphia are double what you pay in the suburbs,” while rents in the city are lower than in nearby towns, and half or less of what building owners get in New York, Boston or Washington.
He figures taxes and other costs eat up as much as $10-14/square foot in the city, vs. around $6.50 on the Main Line – while rents in premium Radnor and Conshohocken buildings list in the low $30s a square foot, compared to the high $20s for similar space in Center City.
Only two of Philadelphia's modern skyscrapers were ever sold by their developers at a profit, he added.
That would be the black-glass “Darth Vader building” on Market St., where PNC Bank has its regional headquarters,and the Comcast Center, where builder Liberty Property Trust lured in German investors.
If it's a tough town for builders, it's a better town for bargain-hunters: Brandywine Realty Trust has been buying up skyscrapers like the old Bell Atlantic tower for one-half to one-third what they cost to build. Other patient, private investors have picked up dozens of suburban properties at a discount to historic values in recent years. DiLella's firm focuses on properties it can improve and sell within five years.
After high taxes and low rents, DiLella blamed the construction unions whose healthcare and retirement plans boost costs. DiLella says the costs force builders to demand city and state subsidies and new construction tax breaks.
Citing a recent report by Paul Levy's Center City District showing how Philadelphia employment has lagged other big East Coast cities, he said Mayor Nutter and City Council aren't the kind of leaders to make the changes needed to attract growth.
Equus's trophy properties include the former Charles Ellis School tract in Newtown Square. Once an all-female equivalent of Philadelphia's venerable but troubled Girard College, the school property is now among the region's top corporate headquarters address, home to SAP Americas and, soon, the new Sunoco headquarters.
With fewer corporations adding space, Equus has lately boosted its residential arm, Madison Apartment Group, which owns more than 18,000 apartments, about a quarter of them in the Philadelphia area. And like Liberty Property Trust, Equus is building more “logistics” or “fulfillment centers,” including a McKesson medical supply center it recently completed and sold in West Virginia. “We've tied up land from I-80 down to Virginia” for future centers, he told me.
Those big warehouses aren't rising in Philadelphia but at the metropolitan fringe, where land and labor is cheaper. It's a shame,” said DiLella.
DiLella endowed Villanova University's real estate business school program, working with former dean Jim Danko (now president at Butler University)and current dean Patrick Magitti. DiLella is to VU what Chicago real estate impresario Sam Zell is to Penn's Wharton School. “We've got a 25-person national real estate board,” DiLella told me. “Most of them are Villanova graduates.”