Philadelphia's office buildings increasingly attract out-of-town investors

Philadelphia office buildings are drawing some of the strongest interest in decades from out-of-town investors, lured by rising demand for Center City space and a dearth of good real estate buys in more established markets.

Of the office-floor space that has changed hands this year, a bigger portion has gone to out-of-town entities than at any time since 2007, according to an Inquirer analysis based on data compiled by Colliers International, a commercial real estate services firm.

With some major office properties still in play, the city could be on track to see its biggest share of transfers to out-of-towners in 17 years, according to the analysis, which does not include foreclosures or partial acquisitions of under 50 percent.

"You have tenants moving back downtown, you have a residential market doing very well," said Caitlin Simon, a vice president at San Francisco-based Shorenstein Properties, which returned to Philadelphia this year after a 10-year hiatus by dropping $184.2 million on Market Street's 1818 Beneficial Bank Place. "It's a market that we think is very dynamic and has a lot to offer."

So far in 2015, 74 percent of the office square footage to change hands between the Delaware River and the Schuylkill has been purchased by investors based outside the Philadelphia region, such as Shorenstein and Los Angeles-based CBRE Global Investors, the data show.

That's almost as much as in 2007, when 75 percent of the city's office property transfers went to out-of-towners.

Philadelphia's homegrown commercial-property buyers don't seem to mind the increased competition - attention from outsiders increases the value of their investments and makes it easier to find backers for new development.

"It's a real validation of the fundamentals of Philadelphia," said Jerry Sweeney, chief executive of Brandywine Realty Trust, the city's biggest office landlord.

There's still time this year for out-of-town buyers to snap up even more office real estate here. Five major commercial properties are listed for sale, including 1700 Market Street and the Bourse at Independence Mall.

If outside investors snap those up before New Year's, 80 percent of all 2015 transactions will have involved buyers from beyond this region's borders, the most since 1998.

"There still remains a plethora of capital to invest in commercial real estate," said Bill Luff, executive managing director for Colliers in Philadelphia. "They see us as being an undervalued market."

Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School, said Philadelphia is getting attention from out-of-town investors because it's seen as a relative bargain compared with the cities that have traditionally attracted the most institutional money.

In the three months that ended in June, Philadelphia office properties sold at $187 a square foot, according to Colliers' most recent national roundup. Prices in midtown New York City, by comparison, were close to $1,600 a square foot, while Washington's offices were selling at $625 a square foot and San Francisco's sold at $465.

"There is a perception that prices have gone very far relative to the fundamentals," Wachter said. "There's a closer look at stable, growing markets that are not in the first tier of global tech cities, and we qualify."

Buyers are emboldened by growing demand for office space in Center City. Vacancy rates are at 8.2 percent, their lowest since 2000, according to Colliers, as companies open offices downtown to tap a labor pool drawn by the city's cultural and educational offerings.

"You have all these amazing educational institutions, all the medical institutions, the historical sites, and the tourism," said Abdi Mahamedi, chief executive of the Purchase, N.Y.-based Carlyle Development Group, which this year bought the Public Ledger building at Sixth and Chestnut Streets. "All of that together has the potential to compete with Boston and Washington and New York."

Shorenstein's Simon, meanwhile, said her company continues to monitor the Philadelphia market for additional investments as it revamps part of 1818 Beneficial Bank Place into open spaces with exposed concrete ceilings, to appeal to Center City's increasingly youthful workforce.

"It's a market we really like, and we're always interested in finding the right opportunity," she said.

jadelman@phillynews.com

215-854-2615@jacobadelman

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Center City office acquisitions, by square footage

Year       Out-of-town      Total office space       Percentage       investors                 of total

2015*    3,391,574             4,609,134              74

2014       3,235,126             5,454,585              59

2013      1,746,199             6,515,981              27

2012       738,796             1,525,718              48

2011       841,172             2,235,597              38

2010       161,000             1,190,413              14

*Year to date

SOURCES: Colliers International; Inquirer analysisEndText