by Jake Blumgart, For The Inquirer
Published Jan 3, 2022
Center City is not back to its pre-pandemic self, and it may never be. With vacancy rates likely to rise as remote work trends last beyond the pandemic, what are we going to do with all these hulking office towers?
Some dream of a future for Philadelphia’s business district as a new neighborhood in the sky, with bedrooms where cubicles used to be. The reality could be darker, literally: a lot of the remaining towers are not ideally suited for housing, with vast amounts of space that have no access to natural light.
Philadelphia has been down this road before. The city boasts a large downtown residential population in part because many historic office buildings have already been converted to housing. That set the city up to fare better than most urban cores during the pandemic.
But in the heart of the office district north of Market Street and west of City Hall, downtown still feels ghostly. In a new world of remote and hybrid work, that haunting feeling could last.
“Landlords in their private moments will acknowledge that most companies will consume less space post-pandemic,” said Glenn Blumenfeld, principal with the tenant brokerage firm Tactix Real Estate Advisors. “I’m worried about the vibrancy of the core business district. What happens if the average employee only comes into the city 25 hours a week, not 40?”
Return to work has been slow
Center City boasts almost 63 million square feet of office space, according to the commercial property analytics firm CoStar Group. Pre-vaccine rollout, many of these glittering towers, dowdy mid-century midrises, and historic icons sat empty. Since then, the return to work has been a stuttering affair.
After Labor Day, when things were supposed to be returning to normal, over 15% of downtown office space was vacant and available for lease. Even that is a falsely rosy number. Commercial leases are multiple years long and many companies are locked into pre-pandemic contracts, regardless of their remote work plans.
“If the sublease rates are an indicator of who wants to be in their space today, it’s quite possible that we will see a surge of vacancy–especially in Center City,” said Lauren Gilchrist, managing director of research for Longfellow Real Estate Partners.
Blumenfeld said that almost every client his firm represents has plans to take less office space unless they are actively adding headcount. Tactix clients who have been in their offices for over ten years are “almost universally” seeking 20%-to-30% less space.
The economy of post-industrial American cities depends on a crown of centrally located high-rise towers filled with highly paid professional workers. Their consumer spending washes down to lower-income service workers, the transportation sector, and small businesses selling food and clothing. In Philadelphia, suburban commuters even make substantial contributions to the revenue base through wage taxes.
COVID imperils all of that. It isn’t that office work will vanish, and the Comcast towers will be transformed into vacant monoliths. But even what seems like manageable reductions in office space and in-person work hours can send disruptive ripples across the economy that could submerge services like commuter rail or business models like lunch counters.
Apartments or labs are the future
Assuming we don’t ever fully return to pre-COVID normalcy, what will we do with all this office space in Center City? Blumenfeld and other real estate experts in Philadelphia say there are two viable alternative uses: conversion to residential multifamily buildings or life science industry laboratories.
Philadelphia is a leader in renovating historic warehouses and offices into apartments, topping a recent RentCafe list of American cities with the most adaptive reuse of older structures.
Pre-World War Two buildings are relatively easy to convert for residential purposes. They are usually smaller, with floor plates of a manageable size that allow every living space to have a window. The buildings sport brick and stone materials that new construction could never afford, with soaring ceilings to top it all off.
But much of that low-hanging fruit was plucked in the 2000s. Back then, a wave of office vacancies in the most valued properties provoked a cascade of tenants from slightly down market buildings into the most expensive towers. Their vacated offices were taken by those in even older buildings, which left many historic offices empty. In turn, these were made into housing.
Seven million square feet of office space across the city was converted into apartments and condos in this period, according to Blumenfeld. Following the Great Recession, even more historic inventory got turned into housing. Today, far fewer pre-war office buildings are left.
“A lot of Philadelphia’s pre-World War Two office properties that are most suitable for conversion were already converted during the last building cycle,” said Adrian Ponsen, director of industrial analytics with the CoStar Group. “Now even the more modern buildings are still seeing significant vacancy, but they’re not as well-suited for conversion.”
Why new buildings are hard to convert
Newer office buildings, from the mid-century modern obelisks at Penn Center to the cyclopean Comcast towers, are a different story altogether. Ideally, residential units would have a depth of 34-to-35 feet at the most. Postwar office buildings are often well over twice as deep, presenting an enormous challenge for architects trying to design saleable units.
“If a building is 75-to-80 feet in depth you end up with a weird no man’s land,” said Michael McCloskey, principal at the architecture firm Bernardon. “If it’s five or 10 feet [of extra space], you can fill it with residence storage or something. But if it’s 120 feet deep, what do we do with all this windowless internal space?”
Consider the high-end condo towers currently coming on the market, like the Arthaus on South Broad Street or The Laurel in Rittenhouse Square. A theoretical 3,000 square foot unit can be expected to have daylight reaching almost every room. Converting a contemporary office building could result in 1,000 square feet of sunbathed space and 2,000 square feet of dark area.
McCloskey argues that these kinds of worst-case scenarios will be most prevalent in the suburbs, where sprawling office complexes and towers in locations unappealing for residential uses will pose the most serious problems.
“In urban environments, you can convert a lot better than in suburban environments,” said McCloskey. “In suburban markets, land costs are lower and you have the ability to spread out and get bigger floor plates than in most urban environments. They go wider than taller.”
His firm has evaluated potential conversions in Philadelphia, Wilmington, and the collar counties. In one suburban complex (which he cannot name because it isn’t public yet), the office building was 82-to-85 feet deep. McCloskey came up with creative solutions, such as communal lounges or resident storage in the darkened interior.
Reaching toward sunlight
Other architects say there are ample uses that up-market buyers might have for sunless internal spaces.
“Our lives have changed and there is so much that now does not require natural light,” said Cecil Baker, one of the top architects in the city, who designed many of the highest-end towers of recent years, like 500 Walnut and One Riverside.
For the clientele that Baker usually serves, he can reel off a range of options for all that dark interior space. At-home theaters, libraries full of light-sensitive tomes, gallery space with artworks that cannot be exposed to sun, a wine cellar in the sky.
“As we’ve changed the accouterments of our life, it has changed the perception of the inside of the home,” said Baker. “We were asked to do plans for an office building in the middle of town on Market Street. It was easy because all of that backspace which traditionally would not be used was now tremendously marketable.”
Others are less bullish on the residential possibilities of modern office buildings. Blumenfeld said that theoretical conversions of postwar office buildings would have a tough time competing with products like The Laurel or Arthaus, which could have space for wine storage as well as a lot of natural light. Such office-to-housing projects couldn’t compete well on costs either, because conversion would be too expensive to allow for substantial price reductions.
Labs could sell
If housing proves too difficult for many modern office towers, laboratory space for expanding biotech, pharmaceuticals, and other life sciences could also offer a viable alternative.
“I’m not hearing the residential side of the equation much yet, but I’m hearing lots about labs,” said Gilchrist, whose company is the largest privately held life sciences developer in America. “The vast majority of the dialogue is around the office to lab conversion space, because people see the fundamentals of the life sciences market in Philadelphia remaining strong and growing.”
Gilchrist said that the city of Philadelphia can compete with the suburbs in this sector because most National Institutes of Health funding is bending towards urban institutions like the University of Pennsylvania, Children’s Hospital of Philadelphia, Temple University, and Thomas Jefferson. Many new biotech and life science startups are spinning off from the city’s educational and medical institutions too, and more than $800 million in venture capital has flooded into the regional sector this year.
There isn’t enough laboratory space to meet that demand. In the Philadelphia region, there is currently four and a half million square feet, with plenty of room to grow. (Nationally there is only 150 million square feet of lab space, in comparison to 4.3 billion square feet of office space.) University City alone is set to double its inventory with projects under construction.
Some of the challenges office-to-housing conversions face would be an advantage for constructing laboratory space. Interior space without natural light is adaptable for sun sensitive experiments. Most office buildings have un-openable windows and clustered bathrooms, which would have to be tweaked for residential use but could remain for a lab conversion.
Converting existing buildings to laboratory space comes with its own challenges. Strong floors that can handle vibrations and heavy equipment are necessary, as are backup electric facilities. Vertical shafting is needed to connect laboratories to the roof to expel exhaust.
“In Philadelphia, a saving grace is really the life sciences,” said Blumenfeld. “It’s not death and doom all over. You look at University City, it’s booming. If you want space there, you have to wait a year to 18 months to even get space because it’s being built now.”
Offices will endure but may shrink
Blumenfeld said he thinks the rise of hybrid work will have a similar effect to the vacancy trend in the 2000s. There will be a flight to quality as those who still need offices move towards the top of the market. Older and less desirable offices will suffer, but the market won’t evaporate.
McCloskey agrees. While he cannot violate his clients’ privacy with specifics, his architecture firm is evaluating three 1970s or 1980s-era buildings in Center City for transition from office uses to multi-unit housing or hotels.
“Not every office building is going to close, that’s not a thing,” said McCloskey. “Newer buildings still offer a quality product. Then the lower product is pushed down, which is good for affordability. But when there’s no market for offices at the lower level, we look at conversion.”
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