In 2007, a 975-ft. tall office tower will take center stage as Philadelphia's tallest skyscraper. Malvern, Pa.-based Liberty Property Trust is developing the $465 million Comcast Center in the heart of Philadelphia. The largest cable provider in the nation, Comcast will lease the upper 44% of the tower — or 534,000 sq. ft. — through 2022.
The embattled project was cleared to begin in January after months of resistance from rival office landlords who claimed that a subsidized office tower is the last thing their weak office market needs.
Although the downtown office vacancy rate has declined from 20% in December 2003, it still remains an unhealthly 17%, according to Grubb & Ellis. The vacancy situation is expected to worsen over the next 18 months.
“This market just hasn't hit bottom yet, and several major leases will roll this year and next,” says Craig Scheuerle, senior vice president at Grubb & Ellis. The Philadelphia market posted 635,000 sq. ft. of negative net absorption during the third quarter of 2004.
“At the very top of the market in 2000, the best office space in Philadelphia was fetching $38 per sq. ft. triple-net. But now, that space is going for $25 per sq. ft., and that's the high end,” he says. According to Scheuerle, Liberty hopes to get nearly $40 per sq. ft. for the remaining space in the tower — but he doubts future tenants will pony up that amount.
Liberty Property Trust senior vice president John Gattuso believes the tower will “perform very well” in the marketplace. In fact, he's more concerned about the fate of other landlords. “Many of these owners bought these properties for rich prices, thinking there wouldn't be any new supply coming on line in Philadelphia,” he says.
More than 1.9 million sq. ft. of office space was under construction in Philadelphia at the end of 2004. Still, that's only 1% of the market's existing inventory of 191.5 million sq. ft., reports Newmark.
On Jan. 3, Wachovia analyst Christopher Haley said the Comcast Center development should bode well for Liberty shareholders. He estimates that the transaction will boost value by $1.24 per share. The market's reaction was different, and shares of Liberty fell 11 cents to $43.09 on Jan. 3.
Dave Campoli, mid-Atlantic manager at rival landlord HRPT Properties Trust, rallied other local landlords against Comcast's original demand for a tax-free zone, which was ultimately denied by state authorities.
Campoli sees that as a partial victory since Gov. Edward Rendell ultimately came back with $43 million in other aid for the Comcast project. Campoli is still concerned about the health of the Philadelphia market. HRPT owns 4.7 million sq. ft. of Class-A office space in downtown Philadelphia.
Comcast expects its Philadelphia staff to grow from 1,300 to 1,900 between 2004 and 2007. The company's revenue history suggests that 50% growth in its headquarters staff is attainable. Comcast posted $39 million in revenues in 1981 compared to $20 billion in 2003. Comcast CEO Brian Roberts says that the firm's Philadelphia headquarters could employ as many as 4,000 people within the next five years.
That may explain why Comcast has options for additional space that includes a 16-story second building on the site. As of mid-January, Comcast was the only signed tenant in the building.
It's understandable why Campoli is alarmed. Comcast currently occupies 330,000 sq. ft. at HRPT's 1500 Market Street office building, but the cable firm will be vacating that space within two years. Aside from losing a major tenant, Campoli wonders how 500,000 sq. ft. of vacant space in the 1.24 million sq. ft. Comcast Tower will affect the market.
“There are a lot of reasons why this project is wrong,” says Campoli. “It will take a very long time for Liberty to fill up this space.”