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The people who are typically behind the scenes buying, selling, leasing and developing Philly’s Center City skyline and beyond questioned what’s next for commercial office space in 2024.
Especially up in the air is the future for any building that’s not considered prime real estate — or Class A — office buildings. It’s those Class B, Class C and below commercial properties that have languished, despite sporadic renovations whether in any city center or in surrounding suburban communities.
Most of the office building stock, “at this point have become functionally obsolete,” said Anne Cummins, chief operating officer at Gattuso Development Partners at the Urban Land Institute’s annual economic forecast and real estate trends event in mid-November.
Hundreds attended the emerging trends in real estate event at The Bellevue in Philadelphia in November 2023. (Courtesy of the Urban Land Institute Philadelphia)
Gattuso is a Philadelphia-based company that has worked on high profile projects such as the Comcast Center, the Navy Yard, and the Camden Waterfront.
The economic forecast did not offer a virtual option to attendees — and hundreds gathered inside The Bellevue Grand Ballroom on South Broad Street in Center City.
One key question discussed is what happens when there’s erosion to the property tax base in communities when an office building defaults on its existing debt.
Whether that debt is taken on for renovations or is a previous mortgage — lenders such as banks — are typically not interested in becoming property owners and managers. Especially when there’s less demand than ever for office leases, that means the building owners aren’t generating the same amount of money with tenants inside the property.
In the suburbs, there’s likely more restrictive zoning than within city limits which could be, “a difficult process for a lot of developers thinking about what to do with some of these buildings that should be something other than what it’s currently,” Cummins said, which is why conversations between municipal leaders and developers need to happen sooner rather than later, she argued.
“You may ask why is the township [or city] going to be interested in having this conversation [about office space] with a bunch of developers,” Cummins queried.
Worker Recovery Rate in the Center City Commercial Districts tracked by the Center City District using Placer.ai data for November 2023. (Courtesy of the Center City District)
The woes of the office building market might seem like only a problem for commercial real estate professionals, but Cummins said it should be an economic development issue for everyone.
“If all of these [Class B and below] buildings are sitting around and they’re vacant and they’re not being looked at and adapted, that tax base is going to suffer,” she said. “And those communities are going to suffer.”
For a city like Philadelphia, which relies on a combination of city wage taxes, business taxes and property taxes for its budget — some worry about the city’s shrinking revenue as there are fewer high wage earners working within city limits because they’ve opted to keep working remotely and the business they work for are no longer leasing office space in Center City.