Building market on fire
$596M in 2004 sales nears 2002 record

Natalie Kostelni
Staff Writer

The Center City office investment market has been one for the books this year, with 13 buildings coming on the market, tallying up to an estimated total of $840 million in closed and potential sales.

So far, 10 buildings have traded hands for an estimated $596 million, while three recently were put up for sale by their owners: Four Penn Center, United Plaza and 833 Chestnut East. Those properties are expected to have no problem finding a buyer, according to real estate observers.

"It's an exceptional year under anyone's definition," said Robert Fahey, an investment broker with CB Richard Ellis.

The last time the investment market experienced such heated activity was in 2002, which logged a record year. Two Liberty Place and Centre Square were among eight major towers that sold that year, totaling more than $920 million in value, according to CB Richard Ellis data. Before then, 1998 was a banner year when $666 million worth of office buildings changed hands.

This year stands out in terms of the number of buildings sold and dollars laid out. The mix of properties also is notable. From high-end offices of One and Two Logan Square to more modest buildings off the Central Business District, such as 833 Chestnut East and 436 Walnut.

The Center City market is attractive to investors for one main reason, said Walt D'Alessio, vice chairman of NorthMarq Capital, a national real estate banking company, and chairman of Brandywine Realty Trust, which bought One and Two Logan Square this year.

"It's a pretty solid investment market," he said. "What it does have is solid, predictable, steady returns, which is the result of the fact that there's no big building going on. It's not grossly over-built. Our real estate overhangs are nothing like what other cities experience. We get a little tipsy and they get staggering drunk."

Two main factors are driving investors to real estate: they have lots of cash seeking out properties to buy, while low interest rates enhance leveraging opportunities.

"There is more investment capital seeking real estate investments today," Fahey said, noting that pension funds are taking major positions in real estate. Two years ago, U.S. pension funds allocated $24 billion in real estate. By 2003, that figure jumped to $32 billion. This year, pension funds want to invest $44 billion in real estate.

It underscores that "real estate has been embraced more firmly by the institutional investment world," Fahey said.

Real estate has become increasingly attractive as alternative investment vehicles, such as the stock, bond, hedge and commodity markets have been showing modest or flat returns, said Jim Vesey, an investment broker with Cushman & Wakefield.

Continued historically low interest rates is the other cause for a robust investment market in Center City, as well as throughout the region, Vesey said.

"Those two factors have led to an unprecedented amount of capital pouring into real estate," he said, noting private opportunity funds as well as entrepreneurs, who can compete in a climate of low interest rates, have taken increasingly bigger stakes in real estate.

The heightened desire to own commercial real estate has had other effects. The number of potential buyers bidding on a property has dramatically increased. Vesey often sees 20 offers made on a single site. Fahey generally sees 20 to 30 offers made, when two years ago that number would typically be between 10 to 12.

"As a proxy for the market, it speaks to, and proves, the amount of capital in the market," Fahey said.

Of the downtown properties that have sold, only three attracted outside investors. Chicago-based Transwestern Real Estate acquired 1601 Market St. and 1700 Market. Triple Net Properties of Santa Anna, Calif., bought the Public Ledger Building.

D'Alessio said that foreign capital, which isn't always apparent, is also playing a big role. A steady stream of money is flowing into real estate in Philadelphia and other cities from Germany, Kuwait, Singapore and other countries, he said.

The investment trend is expected to continue into next year, barring any dramatically negative change in the economy, or another terrorist incident.

nkostelni@bizjournals.com | 215-238-5139