The boom in the construction of office buildings in center-city Philadelphia and low-rise office buildings in industrial parks in the suburbs has caused some concern among real estate observers. In this second article in a series on commercial and industrial real estate activity in Greater Philadelphia, the impact of a possible surplus of office space is discussed.

By Raymond A. Berens
Bulletin Real Estate Editor

Center-city Philadelphia is beginning to look like the glass canyon of Manhattan in New York City.

Despite the impact of the recession – the cutback in capital production, massive layoffs, cuts in average hours worked, the drop in new factory orders and shipments of goods and inventory trimming – in Greater Philadelphia, real estate developers have been pushing hard to start construction of new office towers and to complete those already started.

Will all this construction yield too much office space in center city and the suburbs?

Until a few years ago, Philadelphia had a major surplus of center city office space that cost developers thousands of dollars in interest owed and rent lost.

The surplus was generated by a surge of construction before the 1973-74-75 recession. It occurred because developers misgauged the demand for office space.

Now, some real estate observers have started to worry about a repetition of that surplus and its impact on the market.

But others have discounted the seriousness of the situation.

Charles F. Seymour Sr., president and chief executive of Jackson-Cross Co., acknowledged that there would be “an overhang” of downtown office space when developers complete the buildings now being constructed and those planned but not yet started.

But Seymour, an office-space authority whose firm has been keeping tabs on office leasing for the past six years, claimed that the surplus of office space would not be “serious” and would not cause any “serious dislocation” of the market.

Will construction of buildings planned but not yet started cause any serious problems?

“There’s room for another one or two (Buildings),” Seymour replied.

Construction of these “one or two” buildings could begin as soon as the end of this year.

For example, the Oliver Tyrone Corp., an offshoot of the Pitts burgh-based firm that developed the 1234 Market (st.) building, plans to build 1600 Market, a twin-tower complex – in two stages – on the site of the old Fox Theater. Construction on the first tower probably will begin this fall.

One Logan Square Associates, a joint venture of a subsidiary of the INA Corp. in Philadelphia and Urban Investment and Development Co., a Chicago-based real estate development subsidiary of Aetna Life and Casualty Co., plans to build One Logan Square, an $80 million eight-story three-sided hotel and a 28-story wedge-shaped office tower with some 600,000 square feet of office space, on the southwest corner of the Benjamin Franklin Parkway and 18th st, Ground-breaking is scheduled for mid-November.

Two other planned projects might not get started until next year.

Developer Jack W. Blumenfeld plans to build a 16-story office building with 230,000 square feet at the foot of Market st., overlooking the Delaware River, in the Penns Landing development. Pre-leasing is going well, but the project has not yet cleared the City Planning Commission.

And Cadillac Fairview/Barge Philadelphia Joint Venture, a partnership of Cadillac Fairview (Pennsylvania) Inc., a subsidiary of Cadillac Fairview Corp. Ltd. Of Toronto and Barge Development Co. of Dallas, plans to build a $70 million twin tower office complex – two identical 22-story hexagonal structures – atop the commuter tunnel and the four-level Gallery II shopping mall now under construction on the north side of Market St., between 10th and 11th sts., in the Market Street East Development. Construction cannot start until next year.

These buildings will be added to the seven major office towers – the SmithKline Building at 16th and Race sts.; the rehabilitated North American Building at 121 S. Broad st., the 1760 Market (st.) building on the southeast corner of 18th and Market sts., the 10 Penn Center building on the northwest corner of 18th and Market sts.,; the 613 Chestnut Street building over-looking Independence Square; the 8 Penn Center building on the southeast corner of 17th St. and John F. Kennedy blvd., atop the closed ice skating rink, and the Atrium (the Stock Exchange Building) on the southwest corner of 19th and Market sts. – now being built downtown.

John B. McGowan, vice president of Cushman & Wakefield of Pennsylvania Inc., viewed all this activity as a clear sign of increased competition.

“The is good action now in the market – a competitive situation – but the stage is set for another supply in 1982 and ’83,” McGowan said.

McGowan, C&W’s 36-year-old office-leasing specialist who just completed a survey of current conditions and a forecast of future ones, conceded that “there might be an appearance of an oversupply.”

“But that is misleading… because of the leasing activity we are seeing now in the new buildings that are becoming available this year and early next year. “ he said.

He estimated that there would be 1.45 million square feet of office space available in buildings – those being built now and the 1818 Market building, which still has 200,000 square feet of unrented space – by the end of the first quarter of next year.

“With only average absorption, conservative absorption (600,000 to 650,000 square feet a year), we will see that this space will be rented by the first quarter of ’82,” he said.

“There will be only bits and pieces left in the first quarter of ’82, but the major portion of the 1.45 million (square feet) supply that’s coming on stream between today and the first quarter of ’81 will be absorbed by the first quarter of ’82,” he said.

“We’ll go back into another tight supply situation by the end of ’82,” he said.

He claimed that the present office market is different from the one that existed during the last recession.

“In 1974-75, we had a lot of purely speculative – no tenants – office buildings come onto the market, “ he said.
“These buildings were created, I believe, not because of a correct assessment of demand, but because of the availability of (construction) funds. Aggressive lenders allowed this to happen.”

“It was a disaster here in the city,” he said.

“This time, the new buildings all have sponsorship,“ he said.

“And there was pre-leasing,” he said. “The lenders would not go ahead without pre-leasing,”

“We do have some purely spec buildings, but they are on small lots, such as 1760 Market,” he said.

“We’re also seeing some rehabilitation – up to class A, not to junk – of some old buildings, such as 121 S. Broad (the North American buildings) and 211 S. Broad (the Pennsylvania Lumberman’s building),” he said.

McGowan concluded that “for the first time in Philadelphia’s modern history, supply and demand between now and the middle of 1981 will be in fair balance due to the fact that we are not experiencing a speculative binge in office supply.”

He said that “this situation came about due to the reluctance of lenders who are still hungover from the 1974-75 experience here in Philadelphia and nationally.”

Stephen M. Hughes, vice president and resident manager of the Philadelphia office of Coldwell Banker Commercial Brokerage Co., a division of the national firm, was optimistic about the market.

“We feel confident that the office market is in a very strong condition for those buildings that are coming on stream for the next two years,” he said.

“There will be (enough) demand to fill them,” he said.

He called Philadelphia “one of the healthiest markets” in the nation “in terms of the excess of supply and demand.”

“The market is a little tight right now, but during the next two years, it is going to be very, very healthy,” he said.