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One landlord 'monopolized' Philly's best markets. That a problem?

If Brandywine's so powerful, why are Philly office rents so low?

Brandywine Realty Trust has "monopolized" the Center City office market, with "similar dynamics" in Radnor, Philadelphia Business Journal's Natalie Kostelni reports in this story today.  I posted a similar story here in January.

"78% of the available space in the city's trophy buildings is currently under Brandywine's control," according to the Savills Studley Report (corrected) on the local office market for year-end 2013 here.

Does this mean Brandywine, which has been selling properties outside Philadelphia while consolidating its hold on Center City, University City and the Main Line's high-rent district, can force higher rents on Philly-area employers?

Well, the same Savills Studley brokerage report also noted that office vacancies across the area were up, and office rents were down. Center City office rents, in the $20s-low $30s range, are still in the range they've been stuck for 20+ years, and a lot lower than in New York, Boston or Washington.

And with Brandywine's FMC Tower and Liberty Property Trust's Comcast tower 2 going up, which will remove those two companies from of hundreds of thousands of sq. ft. of Center City office space,"the question on everbody's mind is whether there will be demand to fill" existing properties, Savills Studley noted last quarter.

Some real estate brokers, like Robert Fahey at CBRE, have welcomed Brandywine's investments along Market St. because they expect this will firm up flagging rents -- projecting that higher rents will attract new construction for high-end tenants, and keep Philly from descending to the level of one of those inland cities with aging offices no one wants.

But "lauding the benefits of high prices gets it exactly backwards from an antitrust perspective," Prof. Michael Carrier, intellectual-property expert at Rutgers Camden law school, told me when I raised the question last winter. The Supreme Court has ruled it is "automatically illegal" for firms to combine assets "for the purpose and with the effect of raising, depressing, fixing, pegging or stabilizing" prices. The court has also rejected the defense that the resulting prices are "reasonable."

In fact, it's not an antitrust violation if it's a single company like Brandywine doing all the combining. But it's still "right to question the wholly-rosy story about the benefits of higher prices," Carrier concluded.

In doubling its bets on Philadelphia, Brandywine moved against conventional real estate wisdom. Big national and super-regional landlords like Malvern-based Liberty Property Trust and NJ-focused Mack-Cali have lately sold Philadelphia-area office properties in favor of more lucrative markets, leaving local outfits like Brandywine and the private Keystone Property (Bill Glazer) and Hayden groups to buy up aging and second-tier offices at discounts to 2000s prices. Active, locally-based developers like Dan DiLella (Equus, the former Berwind Property) say Philly offices cost too much to build, and yield too little to own. 

So what's the harm, and what does Brandywine stand to gain, in dominating slow-grow Philadelphia? Brandywine is patient, says analyst John Guinee to clients of Stifel & Co., here. Ownership will pay off someday. Maybe Comcast will actually lure in the long-hoped-for telecom tenants. Or Drexel President John Fry and U.C. Science Center chief Steve Tang will succeed in luring more employers here for the convenience of recent-tech-grad and co-op student labor. Or some of the bright small software firms scattered across Center City, U City, the Navy Yard and the avenues will grow up and hire lots of people and need places to put them (that don't involve working at home). And maybe these things will happen before today's buildings wear out and are turned into apartments/condos/subsidized hotels.

But, Guinee added, Brandywine's openly Philly-or-bust strategy also leaves the company open to investor "criticism at the slightest miss."