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Six Blocks

Tactix

Philadelphia is the fifth largest city in the country behind only New York City, Los Angeles, Chicago and Houston.   As one of the country’s leading metropolises, you would think that Philadelphia’s central business district would be expansive, providing a wide array of options for tenants.  You would be wrong.  Of the 34,190,000sf of Class A office space in the central business district (defined as the area bounded to the east by the Delaware River, the west by the Schuylkill River, the north by Vine Street and the south by Walnut Street), just slightly less than one-half, or  15,445,265sf, is concentrated along the six block stretch on West Market Street between 15th and 21st Streets.

Over the past 15 years, a large percentage of our Center City clients have focused their space search almost exclusively along the West Market Street corridor. It’s where most of the major law firms and corporations call home because it’s close to the courts and public transportation.  While the center of the universe used to be South Broad Street until the mid 1970s or early 1980s, things started to change with the development of our trophy towers along West Market Street: Liberty Place, Mellon Bank Center, Two Liberty, and Commerce Square. These shiny new towers of the late 1980s and early 1990s signaled the changing of the guard for Center City as the center of the business world moved to these six blocks.  This concentration movement intensified further over the past seven or eight years as Class B and C office buildings on Chestnut, Walnut, Arch and Vine Streets have been repositioned into condos, apartments and charter schools thereby driving incumbent office tenants into the remaining office stock along West Market Street.   However, things may be changing once again.  Why is that?

Perhaps it is because our once gleaming trophy towers on Market Street are now 30 years old and don’t seem quite as exciting as they once did. Perhaps today’s businesses are looking for cooler environments with a true “sense of place” that cannot be found in a generic glass box.  Perhaps it’s because clients rarely visit their vendors’ or service providers’ offices any more so prime location and status are not quite as important as they used to be.  Or perhaps it’s because people are starting to realize there is a startling lack of amenities along West Market Street unless of course you need to make a deposit at a bank branch.  Lacking amenities like restaurants, bars and shops, West Market Street is a virtual dead zone after 6 p.m.

The desire to consider alternative real estate locations could be due to something else as well; economics. As office inventory in the City has dramatically shrunk due to conversions and repositioning, demand along West Market Street has increased thereby driving rents up to unacceptable levels for many users.  An example demonstrates the premium being paid for West Market Street’s premier towers.

Assume you lease space in a trophy tower on West Market Street for 10 years with a starting rent of $34/sf with 3% annual increases. After 10 years, you will be paying 30.4% more than you did the first year or $44.36/sf.  Now assume instead that you can also lease space in a funky warehouse type environment in Olde City at $22/sf with $.50/sf annual increases.  In this scenario, you will be paying just $26.50/sf after 10 years. Assuming you leased 15,000sf that translates to an annual premium of $267,900 (or 67%) to be in a trophy tower as opposed to the funkier space.  Not all companies think a 30 year old office building is deserving of such a large premium.

Today’s younger work force is influenced by the culture of Google, Yelp and the Silicon Valley. They are less concerned with pretty views and fancy lobbies than they are with “in office” amenities such as natural light, open plans, coffee bars, pool tables and yoga rooms.  These collaborative and youthful work environments can be created in less expensive locations.  Many people feel that generic office towers have become very isolating. More and more we’re hearing from clients that their employees are cocooned in their office suite and they complain that they have almost no interaction with other building tenants throughout the day.  The only social interaction comes at lunch time when employees leave the building.   In effect, their office has become nothing more than a place for their employees to put their heads down and do work.  Even a 200,000sf client of ours recently told us they felt anonymous in their 1,000,000 square foot office buildng. Why pay a major premium for that type of experience?

The Navy Yard, University City and even Olde City with its edgy Tech Alley are offering something newer, cooler and on a more personal scale.  And the real estate in these parts of town is often a lot cheaper than being in a trophy tower on West Market Street with hip amenities right next door.  At the Navy Yard you have access to water, a cool park and other open spaces, a more human scale with less imposing buildings and a real sense that you are working in a cutting edge community.  People throw frisbees around as they walk their dogs.  In University City, companies interact with students, academicians and cutting edge scientists. There’s a buzz there that now carries over into the cool new eateries, cafes and outdoor spaces.  You can ride your bike along the river at lunch time, take a walk on the new boardwalk in the Schuylkill River or hang out on Cira Green once it’s completed.  And in Olde City, you can have an identity and collaborate with other entrepreneurs in a local cafe instead of being a small, invisible business in a 1,000,000sf building in the CBD.

You see, the work place of today and certainly tomorrow are much different than it was in 1988 when Liberty Place first cracked the brim of William Penn’s hat.  Today’s pricing model is reflective of an old paradigm where larger and taller necessarily meant better and people paid extra to be a block away from a train line.  However, as the rent premium for trophy space on West Market Street continues to rise, some younger companies are starting to reassess what is important and how much they really want to pay for certain features.

As a result of these changing business practices, our six block “center of the business universe” is expanding south to the Navy Yard, West to University City, East to Olde City/Society Hill and a bit north to Arch Street and the Comcast urban campus. These emerging business neighborhoods offer tenants something new and different which, more and more, is accommodating what today’s young companies are looking for.  As more and more young companies flock to these alternative neighborhoods, the West Market Street buildings may soon find demand slipping.  If they want to keep attracting tomorrow’s companies and commanding high rents, they are going to have to provide more than marble lobbies, pretty views and fast elevators.  They are going to have to create business communities where companies can have an identity and employees can interact, collaborate and thrive beyond their front doors.

For more information contact Glenn Blumenfeld

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