Philadelphia Office Sales Double As Investors Seek Yields

Photographer: Bradley C. Bower/Bloomberg

The City of Brotherly Love is finally getting some affection from commercial real estate investors.

Philadelphia, where office properties last year attracted about half the investment of Washington and less than a 10th of Manhattans total, is seeing a boom in demand that has sent the average price per square foot to a record. Office sales in the first half of this year more than doubled to $1.4 billion, the highest since close to the markets peak in 2006, according to New York-based research firm Real Capital Analytics Inc.

Real estate values approaching or surpassing peak levels in New York, Boston and Washington have buyers turning to Philadelphia for its higher yields, rising rents and falling vacancies. Thats bolstering office deals in the fifth-largest U.S. city at a time when Manhattan-like towers have opened with luxury condominiums and cable operator Comcast Corp. is developing a skyscraper that will be the areas tallest.

We view Philadelphia as really on the upswing, said Gerard Sweeney, chief executive officer of Brandywine Realty Trust (BDN), which owns 13 properties in the citys main business district, including one under development. Theres certainly an expectation that rents will continue to move up.

The average capitalization rate -- a measure of yield that moves inversely to price -- for a Philadelphia office building was 7.5 percent in the second quarter, according to data compiled by Real Capital. While thats down from a high of 8.9 percent two years earlier, its more than the averages of 4.6 percent in Manhattan, 6.1 percent in Washington and 6.5 percent in Boston, the data show.

The average price per square foot of a Philadelphia office building reached $283 in the first quarter, the highest in Real Capital records dating to 2001.

Philadelphia has long been overshadowed by its big-city East Coast neighbors to the north and south. Institutional investors such as sovereign-wealth funds gravitate to the perceived safety of New York or Washington, where rents frequently climb faster and values rebounded first in the recovery.

Unlike New York, with its heavy concentration of financial, media and technology tenants, and Washington, with its work force tied to the federal government, Philadelphia doesnt have a single large office-tenant base. Government, universities and hospitals are among the biggest employers in Philadelphia County, according to the Pennsylvania Department of Labor & Industry.

The largest public companies by market value with headquarters in the city are Comcast; oil pipeline operator Sunoco Logistics Partners LP; and FMC Corp., a research company in the chemical industry, according to data compiled by Bloomberg.

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Philadelphia Office Sales Double As Investors Seek Yields