Philadelphia's dominant office landlord is speeding plans to put apartments on its vacant land.
"Residential, retail and hotel land values have been accelerating faster than what we have seen for office development," Brandywine Realty Trust chief executive Jerry Sweeney told me Wednesday, explaining the shift.
Brandywine controls five of the 10 biggest office towers in Center City, and suburban office centers around Philadelphia, Washington, Richmond, Va., and Austin, Texas.
In meetings with investors this week, Sweeney has given what Janney Capital Markets analyst Daniel P. Donlan called "surprisingly positive" development plans: • "Two-hundred-ninety-two market-rate apartments and 55,000 square feet of retail" will rise in the grassy field amid Philadelphia's high-rise office canyon at 1919 Market St., in a joint venture with Independence Blue Cross, according to Donlan, who expects the project finished in 2014.
Sweeney said Brandywine is "finalizing" designs but has set no dates. The move expands residential growth west of City Hall, where weak office demand since the mid-2000s has opened space for the Liberty 2 office-to-condo and Robert Morris office-to-apartment conversions, the Murano condo tower and developer Ron Caplan's apartments at the AAA insurance site. • At Cira Centre South, near the Penn and Drexel campuses, Brandywine "intends to take advantage of the high demand for both market-rate and student housing by building a mixed-use residential development through a [joint venture] with another public company," Donlan wrote in a report to clients.
Brandywine's plan for a Cira 2 office tower (in a state and city tax break zone south of Brandywine's successful Cira Centre, Post Office complex, and parking garage) stalled in the 2008 financial collapse. Brandywine still plans new offices near the apartments, when the market is right, Sweeney said. • On Plymouth Road in Plymouth Meeting, Brandywine plans to build 400 "garden apartments" with partners who will manage the development, Sweeney said. Suburban apartments help "optimize land value" in a slow office market by taking advantage of "the strong demand for residential for-rent projects."
Brandywine is approaching suburban governments seeking planning and zoning approvals for homes, hotels and retail at other office sites. Tredyffrin Township (where Brandywine is a landlord) is among the towns mulling more flexible height limits and uses for aging office properties, in hopes that new tenants' property taxes will help pay rising public school expenses without boosting tax rates.
Office rents in the region are still so weak (stuck in the $20s a square foot range for high-end space, half or less of New York and Boston rents, and flat for two decades) that there's little economic justification for new office towers, which can cost $40s a square foot and up.
Demand for rental apartments in Center City and neighborhoods to its north and south is stronger, thanks to service workers and recent graduates who don't own cars; sales, tech and creative professionals who don't need old-fashioned offices, and empty-nesters moving down from the suburbs. Developers are pushing proposals for new apartments from the Delaware riverfront to the swamps near the airport. New city residences can qualify for substantial property tax breaks, even as the city's taxes on older homes rise.
More flats among the office blocks "is good for Center City," said Paul Levy, who runs the Center City District, which levies fees on downtown property owners for supplemental services like sidewalk cleaning. Nearly half of Center City residents also work downtown, according to the district; others commute to outlying neighborhoods, the suburbs, or metro New York.
New residents spend at Center City stores, restaurants, bars and shows, propping up property values in defiance of the national real estate recession. Walgreens and Marshalls, among other mass-market retailers, have announced new Center City stores this year.
"Diversification pays dividends," Levy told me. "Now if the city would also start reducing the wage and businesses taxes, there would also be demand for more downtown office space."