Philadelphia real estate in University City is a good deal, says expert - Go west, young man, (to University City)

An excellent Op-Ed piece from Glenn D. Blumenfeld of Tactix Real Estate Solutions on the growing West Philadelphia Real Estate market and why employers see value in establishing a foot hold in this area of the city.  

In the mid-19th century, author Horace Greeley exhorted Americans to "Go west young man, go west and grow up with the country." While Mr. Greeley was encouraging people to leave East Coast cities and go west to work the land to create a better future for themselves, those same words could easily apply today for Center City companies deciding where to locate their businesses.

Companies may very well want to go west to University City when deciding where to put down roots. For some, it may very well hold the key to a better or at least a different future. That's exactly what our client FMC Corp. just did at Cira Centre South.

The real estate market in Philadelphia 's central business district, or CBD, has been anything but dynamic in the past 20 years. Only two office buildings have gone up in that period east of the Schuylkill River: Three Franklin Plaza, which was an expansion need for what is now GlaxoSmithKline and Comcast Center. Because demand and, therefore, rents have been flat over that period of time, landlords have not been able to convince tenants to pay higher, replacement cost rents for new buildings. As a result, virtually nothing new has been built. In fact, our existing trophy towers are changing hands for a fraction of their replacement costs ($350-$400/sf vs. $125-175/sf).

That's not the entire story; however. People are in fact paying replacement cost rents in University City and at the Navy Yard. Why? Because these areas provide intangible benefits that a commodity office building in Center City does not. Yes, it's true that these two areas come with significant potential state and local tax benefits being in Keystone Opportunity zones. However, many of the companies who call University City and the Navy Yard home are not taking advantage of these tax benefits. They moved to these locations because they afforded them and their employees something novel, exciting and different.

The trophy towers that redefined the Philadelphia skyline in the late 1980s and early 1990s are now close to 25 years old. As these jewels have aged and some of the older buildings have gotten upgrades, there is less and less distinguishing characteristics among existing building stock in the CBD. As a result, more and more tenants are viewing Center City office buildings as interchangeable commodities; and, therefore, more and more of their location decisions are coming down merely to price.

Enter University City. For years the Schuylkill River defined the western boundary of Center City much like the Mississippi River used to define the border between civilization and the Wild West. Historically, Center City companies never considered locations west of the Schuylkill River as this area was viewed as a crude frontier neighborhood dominated by universities, hospitals and students, with little to offer businesses. That has changed. Those who have spent any real time in University City recently know it's undergoing a remarkable metamorphosis. Construction cranes are a constant presence as the health care systems, universities and the University City Science Center are investing billions of dollars in new buildings and projects including cutting edge technology centers, office buildings with incubators for exciting new companies and even retail and restaurants that rival the CBD amenities. There are also incredible recreational opportunities at your doorstep. Beautiful walking/biking trails and river boardwalks, ball fields, dog parks and elevated green spaces are dotting the landscape.

With the University of Pennsylvania and Drexel University as neighbors, unique partnerships are developing between businesses and educators/students including internships, executive education, faculty/corporate interactions and research collaborations. Plus, the streets are constantly filled with students, health care workers, scientists and business people. All of these components create a unique and dynamic atmosphere and an energy that may be perfect for some businesses. What we are seeing is the development of a city within a city but with a unified plan that is geared towards how people work and live today.

Philadelphia is historically a conservative town. Companies have tended to follow the status quo and make the safe choices when making real estate decisions. When change has come, the catalyst has often been a bold move by one or more business leaders. In the 1970s, for example, most of the region's large law firms were concentrated on South Broad Street. Then firms like Morgan Lewis, Dechert and Ballard Spahr moved northwest to Market Street and the Logan Square area spawning a wave of relocations by other law firms away from Broad Street. Now West Market Street and Logan Circle are the home for most of the major law firms. Similarly, most established corporations in Philadelphia have historically called Market Street, between Independence Hall and the Schuylkill River, home. That may be changing as area stalwarts like FMC, GlaxoSmithKline and rising star, Franklin Square Capital Partners, which is another client, among others, have recently taken paths less traveled, moving their headquarters to University City and the Navy Yard.

As companies change the way they work, they are looking for more than generic places to house their employees. They are looking for a dynamic workplace environment and experience. While virtually no companies have been willing to pay replacement cost rents in our core central business district over the past 20 years, they are clearly willing to pay higher rents if they are getting something unique and different for their money. University City is certainly unique and worth a look. It's probably where you'd find Mr. Greeley if he were alive today and working in Philadelphia.

Glenn D. Blumenfeld is a principal at Tactix Real Estate Solutions, which represents tenants in lease transactions. This article reflects his opinions, not the opinions of the Philadelphia Business Journal.

Source: Philadelphia Business Journal