With more working from home, busy Pa. warehouses worth more than empty offices

"The land under industrial buildings is now worth two to three times what it's worth for an office building."

The owners of Oldies.com, from left to right, Jerry Greene, Nina Greene, Peter Anderson, Michael Greene, and holding her dog, Beanie, Melissa Greene-Anderson, gather with some of their Beatles merchandise in 2014. The building is now for sale as offices, stores and "flex spaces" about their size are torn down for delivery stations and warehouses. ( DAVID MAIALETTI / Staff Photographer )Read more

Published April 15, 2022, 9:55 a.m. ET

The old Charming Shoppes headquarters in Bensalem is now an Amazon warehouse. A former Bank of New York Mellon back office in King of Prussia is making a similar transition. And the building housing Oldies.com, a pop-music shrine viewable from the Blue Route in West Conshohocken, is also being marketed as a warehouse site.

Even as the pandemic eases, Americans’ mass movement toward working and consuming from home has upended demand for business properties, making warehouses more valuable than suburban offices.

“Land for offices used to be worth two to three times properties you could use to support a warehouse. Now it’s flipped, and the land under industrial buildings is worth two to three times what it’s worth for an office building,” said Robert Fahey, head of the Philadelphia group that sells commercial real estate to investors in the mid-Atlantic states for CBRE, the largest U.S. business property broker.

Before 2020, warehouse space in the Philadelphia area was a few dollars a square foot, compared to over $30 for the top office properties and $10 to $20 for older office buildings. Offices typically cost more to build and renovate, and landlords expected higher rents.

But now, as office demand sags, warehouses in many cases have topped $10 a square foot and are considered a surer bet for future income by a growing number of landlords.

Gambone Group, which owned 43 office buildings in the Route 422 office corridor from King of Prussia to Pottstown, was charging “$5 to $7 a square foot” before selling the portfolio last year to a unit of Washington-based MRP Realty; after improvements, the new owner has “almost doubled the rents, to $9 to $14 a square foot,” notes Justin Bell, managing director at the Newmark commercial-property brokerage office in Philadelphia.

Even the nonprofit Philadelphia food charity Caring for Friends now finds itself paying $10 a square foot for small warehouse space near Philadelphia International Airport -- less than offices in the neighborhood list for, noted executive director Vincent Schiavone.

This rent reversal has driven up speculative prices paid to purchase warehouse sites even faster. Small and midsize buildings have been especially in demand by neighborhood “last-mile” delivery centers from home-delivery companies like Amazon and Philadelphia-based Gopuff.

Some landlords are even knocking down offices to build warehouses. That’s what happened in late 2020 to the former Charming Shoppes headquarters on State Road in Bensalem Township. The property “is now a 235,000-square-foot Amazon warehouse,” Bell noted. “Five years ago nobody would have been crazy enough to make that conversion.”

Fahey cited similar office-to-warehouse teardowns in the Mount Laurel area, where national landlord Prologis has continued expanding after its 2020 purchase of Philadelphia’s former Liberty Property Trust, once the region’s top office developer, and private developers are mulling similar plans.

It’s not just shippers like Amazon searching for delivery space; even traditional retailers such as Target are looking for regional and neighborhood warehouses.

Investors paid a reported $350 a square foot last winter -- “a record price” for warehouses in the region -- to purchase a new 300,000-square-foot warehouse that Target leased on the site of a demolished drug-manufacturing facility on River Road in Upper Merion Township, near the former Inquirer printing plant, Fahey noted.

That price is triple what suburban office buildings have sold for lately, said Bell. Investors paid extra because Target, a large, profitable company, had locked in its lease for 10 years.

But smaller buildings with no long-term tenants in suburban industrial areas of Exton and Horsham are still commanding prices of $140 to $175 a square foot, also more than nearby offices.

Bell said there are few small warehouse properties still available locally after the deals of the past couple of years. One he recently listed is the 34-year-old building at 60 Portland Rd., off Balligomingo Road near the West Conshohocken-Upper Merion border.

That’s the current home of vintage-music wholesaler Oldies.com, whose sign is visible from the Blue Route (I-476). The building is only partially heated and air-conditioned. It includes about 36,000 square feet of warehouse space and 16,000 square feet of offices that could be converted to warehousing. (Oldies.com is moving to a smaller space, according to the Philadelphia Business Journal. The company’s owners didn’t return calls. )

Similar “flex space” office/warehouse buildings “were considered damaged goods for a good part of the last 10 years; nobody wanted to buy them,” Fahey added. But the building next door at 70 Portland recently sold for a sturdy $148 a square foot. “They are betting they will be able to rent it at a premium,” said Bell. “Based on the lack of supply, that’s probably a good bet.”

Fahey said the warehouse users compete for space with developers seeking to open more biotech labs. “These properties have high ceilings and loading docks. Even buildings that have been vacant for years out in Horsham or Exton are now hot properties for life-science conversions.”

Larger lab-conversion plans are underway at several long-vacant industrial sites around the region. Developer Brian O’Neill has signed tenants at the former GlaxoSmithKline complex, which he calls the Center for Breakthrough Medicines, in Upper Merion, and hopes to put more in the former Inquirer printing plant across River Road.

Other labs are rising in University City and the Navy Yard. City officials are trying to attract biotech users to a string of vacant Schuylkill properties near the former Sunoco refinery. Plymouth Group and Centerbridge Partners LP are planning what they call “Budd Bioworks” at the sprawling former train-car factory on Hunting Park Avenue in North Philadelphia. Suburban biotech parks have sprouted at the former Rohm and Haas plant in eastern Montgomery County, along with a Bucks County-based biotech park in Doylestown.