The Monopoly board that makes up Philadelphia’s trophy office inventory has witnessed a dramatic shift in market fundamentals over the last ten years.
This small but commanding submarket of what is now 11 office buildings totaling 10.7 million square feet was once owned by a diverse group of real estate firms. It is now dominated by one owner, Brandywine Realty Trust, and the impact on the Center City office market is significant.
Here’s how Brandywine got there.
In 2004, Brandywine made its first move by purchasing One and Two Logan Square, two office buildings at 100 and 130 N. 18th Street totaling 1.3-million-square-feet. A year later, Brandywine took a second lap around the board and developed Cira Centre, a 730,000-squarefoot trophy tower on the western most edge of Philadelphia’s Central Business District, giving it a 19.1 percent share of the trophy market.
In 2010, Brandywine acquired 1717 Arch Street, formerly known as the Bell Atlantic Tower, and rebranded the building as Three Logan Square due to its proximity to One and Two Logan Square and thus creating a dominate position in that corner of the Monopoly board. This added another 1.2 million square feet to its downtown portfolio, bringing it up to a total of 3.2 million square feet, or a 35 percent share of the trophy market.
Figure 1: Brandywine CBD Profile
This key strategic purchase of 1717 Arch Street had other implications. It helped to minimize potential competition for three anchor tenants with expiring leases in One and Two Logan Square. Brandywine was successful in retaining these three anchor tenants: Marsh McLennan at 120,000 square feet; Drinker Biddle at 155,000 square feet; and Pepper Hamilton with 275,000 square feet.
Rolling doubles and taking a second consecutive turn in 2010, Brandywine provided financing for One and Two Commerce Square. It followed this up by purchasing these two trophy assets in 2013. This acquisition added 1.9 million square feet to the company’s CBD trophy portfolio and gave Brandywine control of 5.1 million square feet, or a 48 percent of the trophy market.
Brandywine’s share of the total trophy market will eventually increase to 51 percent when it completes Cira Centre South at 30th and Walnut Streets in 2016. Perhaps more significantly, looking at what is currently available for lease, Brandywine now controls over 82 percent of the current direct available trophy space. Its share of the total trophy market square footage will shrink to 46 percent after Liberty Property Trust completes the Comcast Innovation and Technology Center in 2017, when the CBD will have a total of 13 trophy buildings and Brandywine will own seven of them.
Figure 2: CBD Trophy Buildings in Brandywine's Share of the Trophy Market
Beyond buying trophy properties, Brandywine made other key acquisitions to solidify its share of the game board. In 2011, it bought 1919 Market Street, one of the CBD’s most desirable development sites. The real estate company intends to construct a mixed-use apartment building with first floor retail and multiple levels of parking. This purchase allows Brandywine to control another key place on the board and eliminates the opposition from seeking to develop competing office space along this key office corridor. This should add value and vitality to its buildings across the street at 1900 Market and Commerce Square, the first of which will soon be redeveloped to Class A office standards. Lastly, acquisitions of 3020 Market Street and the former post office at 30th and Walnut, along with the development of Cira North and South will give Brandywine a third area of dominance in the Philadelphia real estate Monopoly board.
Brandywine has quickly secured its position as Center City’s largest office landlord controlling nearly 7.3 million square feet, or more than 30 percent of the combined trophy and Class A space in the West Market Street submarket. As Brandywine acquires a greater market share, tenants seeking superior space are noticing rising asking rents in the highest quality buildings despite a relatively stable availability rate since the end of the recession.
Figure 3: CBD Rental Rates: Trophy vs. Class A
In a third quarter 2012 investor earnings call, Gerard Sweeney, President and CEO of Brandywine said that because “…there still remains a fairly significant gap that needs to be closed in order to substantiate some new development. Hence that’s one of the reasons why I think we’re so optimistic on our ability to continue to move rents up in our inventory class in the city as there continues to be a dearth of available space and very high quality office product and we can be pretty well positioned within that market.” Brandywine appears to be making good on this statement and asking rents for trophy space has accelerated. From the fourth quarter of 2004 when Brandywine made its first trophy building acquisitions of One and Two Logan Square for a 15.1% total market share, until mid-2010, modest asking rent increases of about 0.5% per quarter can be seen in the trophy market. It was not until the third and fourth quarters of 2010 when Brandywine purchased Three Logan Square and a partial share of Commerce Square for a 48.2% total market share did trophy asking rental rates begin to climb at a rate just over 1.2% per quarter. Furthermore, this increase of nearly 16% over 13 quarters ($28.57 in 2Q10 to $33.23 in 2Q13) is dramatically larger to the entire remaining Class A market that saw no increase in rents at all.
“Hence that’s one of the reasons why I think we’re so optimistic on our ability to continue to move rents up in our inventory class...”
- Jerry Sweeney
All of this leaves many unanswered questions. How will Brandywine continue to advance and solidify its market dominance and objective of continued rental growth with significant market changes occurring? How will competitors develop new strategies to compete on a board increasingly dominated by one player? Will Brandywine be able maintain its existing asking rents and retain its tenant base at the higher rents or will they be forced to compete with the lower cost buildings?
Figure 4: Brandywine Current and Potential Availabilities