PhillyDeals: Brandywine Realty Trust invests more in Center City

Brandywine Realty Trust

invested more millions in high-rise Center City office towers Wednesday, boosting its share of the stalled Philadelphia property market.

The Radnor landlord agreed to pay $25 million for a 25 percent equity interest in graystone Commerce Square, the twin 41-story Market Street towers built for International Business Machines Corp., in 1987, and the former Conrail Inc., in 1992.

Brandywine's investment "is a good sign for these buildings. They were out of cash, and this stabilizes them," said Robert Fahey, executive vice president at real estate investment broker CB Richard Ellis Group Inc., of Philadelphia.

It's also a turnaround: "A year-and-a-half ago, Brandywine and all these real estate trusts were up against the wall," unable to borrow as building values fell, Fahey added. "But now Brandywine is providing what the industry is referring to as 'rescue capital.' "

Also in the high-rise district west of City Hall, Brandywine owns Cira Centre at 30th and JFK; One Logan and Two Logan at 18th and JFK; the massive former 30th Street Post Office, which Brandywine is converting into the Internal Revenue Service's Philadelphia home; and 1717 Arch St., which it bought earlier this month.

"We've made a big investment in Philadelphia's central business district and University City on the expectation Philadelphia will continue to improve over time," though conditions remain "challenging" for now, Brandywine chief executive officer Gerard Sweeney told me.

The city's "impediments to growth include Philadelphia's high living and business costs, weak immigration trends, aging infrastructure, and mature industrial structure," analysts at Realpoint L.L.C., of Horsham, wrote in a recent report on the Commerce towers' debt load.

Commerce includes 1.9 million square feet of Class A office space, with a walled plaza in between, in the 2000 block of Market Street.

The deal values the buildings at $178 a square foot, said Sweeney - if you add the $100 million equity value, implied by Brandywine's investment, to the $238 million debt still owed on the towers by publicly traded Thomas Properties Group Inc., of Los Angeles, successor to the firm that built Commerce.

"We think that's the bottom of the range of an appropriate valuation," Randy Scott, Philadelphia-based national portfolio manager for Thomas, told me.

The deal follows Brandywine's $129 million ($125 per square foot) purchase of the former Bell Atlantic tower at 1717 Arch St., in a stock deal with Blackstone Group L.P., of New York.

Because of the depressed market, these deals are going through at a fraction of the cost of Center City's last big tower, the $400-per-square-foot Comcast Center, built by Philadelphia-based Liberty Property Trust in the mid-2000s.

Thomas says the Commerce towers are 89 percent leased. Tenants include Delaware Investments, Ernst & Young L.L.P., Grant Thornton L.L.P., and Wolters Kluwer Health Inc., among others.

Not everyone is boosting their Center City bets. Liberty Property Trust has been more active lately in the vast warehouse districts of east-central and south-central Pennsylvania,

James J. Mazzarelli Jr.

, Liberty's regional director for southeast Pennsylvania, told me recently.

Office demand is driven by employment, which is down. Warehouse demand, by contrast, depends on goods being exported and imports being purchased by consumers and companies - and those areas are still healthy, Mazzarelli said.

Endurance Group L.L.C., of Bala Cynwyd, paid $15.9 million ($41 per square foot) earlier this month for a 385,000-square-foot warehouse in Arcadia West Industrial Park in Weisenberg Township in the Lehigh Valley near I-78 and I-81.

New warehouses start to look attractive when the price tops $50 per square foot.

Endurance partner Ben Cohen says he's noticed a welcoming attitude lately by upstate farm townships. Many towns used to oppose industrial development and support tax breaks for keeping land in pasture and under the plow.

"Nowadays they'd love to have the jobs and tax ratables" from warehouses, Cohen told me.