PhillyDeals: Sale of former Bell headquarters doesn't inspire confidence in Philly's commercial real estate market

The former Medical College of Pennsylvania is being renovated."Why build for $1 what you can only sell for 50 cents?" one investor said.
The former Medical College of Pennsylvania is being renovated."Why build for $1 what you can only sell for 50 cents?" one investor said.
Posted: August 11, 2010

What will it take to get big private construction projects started again around Philadelphia?

Last week's sale of the 53-story former Bell Atlantic headquarters tower at 1717 Arch St., to Brandywine Realty Trust, for just $129 million, or $125 per square foot, could prove a good deal for Brandywine when the office market revives years from now.

But it wasn't priced to inspire confidence for anyone hoping to build soon.

The last high steel hung in that neighborhood, Liberty Property Trust's Comcast Center, cost $500 million, or $400 a square foot, in the mid-2000s. The tower was assessed this year by the city at just $181.5 million.

"Why build for $1 what you can only sell for 50 cents?" asks Jason Friedland, a director at real estate investor Iron Stone Strategic Capital Partners in Philadelphia. "That's why we buy old buildings" like the former Medical College of Pennsylvania in East Falls, which Friedland's firm is renovating and leasing to tenants as it finds them.

In the suburbs, it's a little different, maybe.

Drug-data manager IMS Health Inc. is consolidating 1,000 workers, from aging buildings it owns at 660 Germantown Pike, Plymouth Meeting, to the 150,000-square-foot Highview complex at Providence Corporate Center, Collegeville, abandoned by Wyeth Pharmaceutical Co. when it was bought by Pfizer Inc. last year. IMS is paying modest initial rents in the mid-$20s per-square-foot per-year.

"The market has been thin," said Stephen Spaeder, senior vice president at landlord and builder BPG Properties Ltd., which built and owns Highview. Yet the IMS deal "came together quickly, because there's so few large blocks" of empty suburban office space.

Spaeder said a few other suburban tenants - the federal Nuclear Regulatory Commission, Broadview Networks, Quest Diagnostics, and drugmaker GlaxoSmithKline - are also negotiating new leases of 100,000 square feet or more in the King of Prussia area in the mid-$20s to low-$30s.

That's approaching where rents will have to go for builders to make a profit from new offices out there. If tenants that size keep signing, Spaeder concluded, "in early 2011 a couple of us are going to be able to start new buildings."

Back to normal?

SunGard "is back to peak employment, around 21,000 (worldwide)," after being "down to 19,000" earlier in the recession, chief executive Cristobal Conde said.

The Wayne-based business and backup software maker posted a modest 4 percent sales growth for last quarter. Conde says that masks conflicting trends: downward price pressure (in the face of weak sales to cash-strapped governments and other clients), and rising orders from private colleges and recovering banks, for example.

Five years after taking the company private, are SunGard's private-equity owners ready to sell? "It comes up at every board meeting and we are constantly huddling and brainstorming," said Conde. "[But] as we continue to grow, it puts us more out of reach of everyone but the biggest" potential buyers.

Third time

E-Mon L.L.C., the Langhorne-based maker of electrical submeters, has been bought by Honeywell Inc., the Morris Township, N.J.-based industrial giant that has been expanding its "smart grid" electrical-products line.

It's the third time E-Mon has been sold in a decade. In 2001, chief executive Donald Millstein sold E-Mon to Hunt Power L.P., of Dallas. In 2007, Millstein bought it back with backing from private-equity firm Branford Castle, of New York.

Neither side will say what Honeywell paid, but "it was more than last time," Millstein told me. "We've had double-digit growth [each of] these last few years." Millstein will stay in charge, Honeywell spokesman Mark Hamel said.

Honeywell will also keep E-Mon's 50 employees, including headquarters staff and finishing workers in Langhorne. "Business as usual," Hamel said. "Our plans are to grow."


Contact Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.

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