Philadelphia Eyes Expansion

City planners and government officials are looking to put the City of Brotherly Love on the map with robust investments in infrastructure and the city’s business district. Recent …

City planners and government officials are looking to put the City of Brotherly Love on the map with robust investments in infrastructure and the city’s business district. Recent foreign investment from large business and industrial firms have brought attention to the fact that Philadelphia is ideally situated with relation to New York and Washington, D.C., but suffers from image problems held by domestic investors. City officials are hoping to change this by addressing unfavorable tax issues, rooting out government corruption and improving construction costs that critics claim are artificially inflated by union organizers. For more on this continue reading the following article from National Real Estate Investor.

Lost in the glare of New York and Washington, D.C, Philadelphia often escapes the notice of outside investors. For Alan Greenberger, however, the city’s location is his major selling point in pitching the market to major employers.

“The financial linkage to New York and the political one to Washington make great sense,” says Greenberger, Philly’s deputy mayor for economic development and director of commerce.

Compared to those other East Coast cities, Philly’s lower cost of doing business appeals greatly to foreign-based companies and investors, he says. Last year, Brazilian chemical manufacturer Braskem bought Sunoco Chemicals for $350 million and took over its headquarters in the city’s central business district. Northern Ireland’s Almac Group opened its $120 million North American headquarters in Montgomery County in July. AgustaWestland, which is a division of Italian aerospace specialist Finmeccanica, builds helicopters at a plant in northeast Philadelphia.   

The U.S. investor is a harder sell, says Greenberger, acknowledging that the city’s tax structure is a big deterrent. The business privilege tax rate is $1.42 on every $1,000 of gross receipts and 6.45% on taxable net income. The wage tax is 3.9% for residents and 3.5% for non-residents.

“There is very little to attract outside investors” to Philadelphia, says Joseph Zuritsky, chairman of Parkway Corp. The tax structure is one of the market’s challenges, according to Zuritsky, who is also chief executive officer at the 70-year-old family business headquartered in Philadelphia. “It is one of the few cities that levy a business tax and a significant wage tax, forcing many businesses to leave the city.”

Construction barriers

High construction costs also deter commercial and residential development, say Zuritsky and others. Only New York, San Francisco and Chicago have higher expenses on that front, but sale prices in those cities offer a positive return. Builders blame union labor for Philadelphia’s lofty construction expenses, but developer Carl Dranoff believes the prolonged recession in the building industry may invite compromise that helps lower those costs.

Another problem for potential investors is the perception of city government and its reputation for being tough on business. “We are striving to make government more responsive and transparent,” says Mayor Michael J. Nutter. “We’re not perfect, but we are rooting out the people responsible for past problems.”

The city has reformed its permitting process, and focuses on having infrastructure in place before reaching out to investors and developers. The new master plan for the Delaware River waterfront, for example, shifts gears from gambling and industry to encourage low- and mid-rise neighborhoods, which are dotted with 10 parks that are never more than a short walk away.

When dealing with investors, Greenberger says he “shows them the city we have become.” Today’s Philadelphia, adds Dranoff, is on the “solid B list of cities, with a better-than-average chance of joining the A list.”

Leading the way

Center City, the 24/7 central business district and focal point of business, arts and culture, is enjoying a renaissance. Since 1990, the number of residents in the core area has more than doubled to 93,000, says Paul Levy, president and executive director of the Center City District.

That gives Philadelphia the third-largest downtown by population after New York and Chicago. In the 2010 census, Philadelphia’s population rose for the first time in 60 years, making it the fifth-largest U.S. city.

Some 264,827 people work in Center City, or 39.4% of the Philly workforce. Development in Center City and in University City, across the Schuylkill River in West Philadelphia, has totaled $12.3 billion since 2007. That includes housing, office and academic buildings, medical facilities, arts and cultural projects and hotels.

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Center expansion

A big chunk of that money — some $786 million — boosted the size of the Philadelphia Convention Center by 62%, making it the 14th-largest building of its kind in the nation. The biggest publicly funded project in Pennsylvania history, its expansion increased exhibit space to 679,000 sq. ft., up from 440,000 sq. ft. before renovations began.

In turn, this convention center expansion created a need for more hotel rooms. There are 11,000 guest rooms in Center City, twice the number in 1990.

Richard Oller, president of Multifamily Management Service of Philadelphia, points out that it’s difficult to build much-needed large hotels in the city because the room rates are “lower than they should be,” and too low to offset high construction costs and provide an attractive return.

Revenue per available room averaged $104 in 2010, according to Smith Travel Research, the same as in 2004 and well below 2007’s $122.46. As of May 30, Center City’s average daily rate was $158.21, compared with Boston’s $179.71 and Washington’s $215.59.

Focus on Navy Yard

Despite the Center City focus, growth and investment are not limited to a couple of neighborhoods, and Nutter is pinning his hopes for growth on the green economy. He and Greenberger point to the 1,200-acre Philadelphia Navy Yard in South Philadelphia, which is being turned into a laboratory for green research and development.

“Energy efficiency is not a fad,” says Nutter. “It is not an economy that can be outsourced.”

In 2010, the U.S. Department of Energy announced it would invest $129 million at the Navy Yard to create the first national research hub for energy efficiency, calling the project The Greater Philadelphia Innovation Cluster.

Dangling tax incentives of $3.3 million, the city lured British energy-efficiency firm the Mark Group to establish its U.S. headquarters at the Navy Yard in early 2011.

Among the other 115 companies and 8,000 employees already at the Yard are Urban Outfitters and Tasty Baking. Both moved from elsewhere in the city, lured by tax breaks and infrastructure already in place. A pending move by GlaxoSmithKline from Center City to an $80 million complex in the Navy Yard will keep the pharmaceutical giant and 1,300 jobs in Philadelphia. There also are dozens of small start-ups at the Yard.

Universities expand

The Philadelphia region is home to more than 100 institutions of higher learning. The universities and medical centers — “eds and meds,” as Dranoff calls them — have contributed the lion’s share of money and effort to revitalize the city, especially its core.

If the focus of development is on “closing gaps [infill] and creating paths,” as Greenberger sees it, the University of Pennsylvania and Drexel and Temple universities are doing just that.

Drexel’s president John Fry has launched an effort to link the school’s University City campus on its north side to Amtrak’s 30th Street Station, and eastward to the Schuylkill River that separates Center City from the neighborhood it shares with the University of Pennsylvania.

In June, Drexel spent $21.8 million for 3.6 acres of parking lots on the western doorstep of the station for future university housing, academic buildings, or commercial space.

Amtrak is preparing a master plan for 30th Street Station, its third busiest after New York and Washington with 7 million passengers annually. The station is isolated by the Schuylkill, two expressways and a swath of parking lots.

Land transformed

The University of Pennsylvania, the region’s largest private employer with 31,645 jobs, spends $200 million a year on capital projects. In 2006, it began Penn Connects, a 20-year master plan designed to “embrace the Schuylkill riverfront,” in the words of the university’s president, Amy Gutmann. The school will accomplish that goal by transforming 24 acres of former U.S. Postal Service land between Market and South streets.

The university acquired the land and the 30th Street Post Office building in 2004. The Postal Service moved its regional sorting and distribution center and 3,700 employees to a $300 million facility in southwest Philadelphia in 2006.

The university flipped the post office building to Brandywine Realty Trust, which had developed the Cira Centre, a 29-story, 731,000 sq. ft. skyscraper linked to 30th Street Station by a pedestrian bridge, in 2005. The result: A $252 million IRS regional headquarters and parking garage for 5,000 employees.

The university is completing the $40 million conversion of 14 acres of parking lots between Walnut and South streets to Penn Park as a green space with athletic fields and tennis courts.

Temple University plans to spend $1.2 billion over 10 years to expand its North Philadelphia campus and develop properties along the North Broad Street corridor to Center City.

Along with projects by private developers, North Broad Street eventually will connect to South Broad Street at city hall, a stretch that is known as the Avenue of the Arts and long a development focus.

North and South Broad meet Market Street at city hall’s Dilworth Plaza, which will undergo a $50 million facelift to be completed in 2013. The Southeastern Pennsylvania Transportation Authority (SEPTA) is planning a $200 million revamp of subway and trolley lines that intersect under city hall.

Eds and meds notwithstanding, the 43.7 million sq. ft. office market in Center City struggles with a vacancy rate of 14%, and total year-to-date net absorption of just 87,225 sq. ft., according to CB Richard Ellis.

Nothing is under construction, and GlaxoSmithKline’s move to the Navy Yard will add 800,000 sq. ft. to the submarket’s vacant inventory.

Rates remain low

Asking rates have changed little in the past 25 years, says Steven H. Gartner, president of Metro Commercial of Conshohocken, which handles office and retail leasing activity in the city and region. One office building, 1500 Walnut Street, leased for $20 per sq. ft., plus electric, 20 years ago, says Gartner. “Today, it leases for $20 a foot, plus electric.”

Only two Class-A office towers have joined the Philadelphia skyline since the completion of Willard Rouse’s Liberty Place in the late 1980s. The Cira Centre, completed in 2005, cost $180 million. In 2008, Liberty Property Trust completed construction of The Comcast Center, a 58-story, 1.78 million sq. ft. tower at 17th Street and John F. Kennedy Boulevard in Center City, at a cost of $540 million.

Some Center City properties are LEED-certified by the U.S. Green Building Council. The Comcast Center, headquarters of the cable giant that leases 1.04 million sq. ft. at the 58-story tower, is the second tallest LEED-certified building in the United States. (LEED stands for Leadership in Energy and Environmental Design.)

Experts warn against downplaying the contribution of the Center City office market to the city’s growth and well-being.

“Even in the depths of the market, our insurance and financial services sectors have done well,” says Oller. “While it hasn’t been a source of growth, it has been a source of stability. An investor would do well on selective office opportunities with attractive yields.”

This article was republished with permission from National Real Estate Investor.

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