Philly undoes deal with developer Peebles to revamp historic Family Court building into luxury hotel

The move underscores the feeling of uncertainty surrounding the hotel industry and other categories of commercial real estate as the long-term impacts of the pandemic take hold.

The old Family Court building at 1801 Vine St. in Center City. Philadelphia officials have terminated developer Peebles Corp.’s deal to revamp the historic Family Court building.Read moreALEJANDRO A. ALVAREZ / Staff Photographer

by Jacob Adelman

Published Nov. 24, 2020, 4:37 a.m. ET

Philadelphia officials have broken off an agreement to sell the historic Family Court building on the Benjamin Franklin Parkway to Peebles Corp. for the developer to revamp into a 203-room luxury hotel, as the coronavirus pandemic clouds the demand outlook for visitor accommodations in the city.

The Philadelphia Industrial Development Corp. said that it had “coordinated with the city and concluded that we will formally terminate the agreement” to purchase and redevelop building at 1801 Vine St., across from Logan Square, according to an email the agency sent last week to Christopher Leng Smith, Peebles’ managing director for the northeast U.S.

The decision was made “in consideration of the impact of COVID on the hospitality market,” Sam Rhoads, a PIDC executive vice president, wrote to Smith in the email, which was provided to The Inquirer.

The move underscores the uncertainty surrounding the hotel industry and other categories of commercial real estate, with the long-term impact of the pandemic on everything from office use to convention businesses yet to play out.

“Nobody really knows what the landscape is going to look like post-pandemic,” said Christophe Terlizzi, who heads KeyBank’s commercial real estate practice in the region. “It’s unknown and it’s unknowable.”

Although hotel performance has ticked up since the early days of the pandemic, when business travel and tourism came to a virtual halt, the sector continues to struggle.

Occupancy at hotels in Philadelphia and the surrounding Pennsylvania and South Jersey counties remained depressed at 46% during the week ended Nov. 14, down from 74% during the same week a year ago, according to the hospitality-industry tracker STR Inc.

Revenue per available room, a standard metric used in the hospitality industry to gauge hotel performance, fell 61%, from $110.53 to $42.75, during that time.

With vaccinations against the coronavirus expected to reach the market in the months to come, some see a resumption of more commercial activity on the city’s horizon. Yet, it’s uncertain how long some sectors, such as hospitality, will take to return to pre-pandemic levels, if they ever do.

Workers who have gotten used to discussing business with associates around the world using teleconferencing software such as Zoom may be less likely than before to take expensive and time-consuming business trips or attend costly conventions, some have speculated.

And Center City may become less of a destination for whatever business travel remains if companies continue allowing employees to work from home, or if a new demand for less densely filled offices prompts a move to the suburbs where space is cheaper, others fear.

“In 2020, the immense adverse impact to the hospitality industry caused by the COVID-19 novel coronavirus created significant changes in market dynamics that impacted viability of hospitality development across the nation,” PIDC president Anne Bovaird Nevins said in an email Monday.

Peebles chief executive R. Donahue Peebles said in a statement that the company was “surprised and disappointed by the action taken by PIDC and the City of Philadelphia today to terminate our efforts to build Philadelphia’s first Black-owned hotel.”

“We are puzzled by the motives underlining the rush to terminate now when there are no viable, alternative uses for the structure,” Peebles said. “We are not aware of any major city of Philadelphia contract that has been terminated during this health crisis, begging the question: Why us?”

PIDC’s decision appears to cap Peebles’ troubled years-long effort to redevelop the 79-year-old Beaux-Arts Family Court building, which stands across the street from the Free Library of Philadelphia’s Parkway Central Library, into upscale accommodations with a roof deck and a lavish ballroom for meetings and parties.

City officials awarded the project to Coral Gables, Fla.-based Peebles, one of the largest black-owned real estate development firms in the country, after a competitive bidding process in 2014.

PIDC, a nonprofit partnership between the city government and the Chamber of Commerce of Greater Philadelphia, was tasked with overseeing the redevelopment, which was described at the time as a vital step toward further enlivening the Parkway area.

Peebles faced its first major hurdle about two years later, when National Park Service officials ruled that building alterations the company was proposing would disqualify it from a historic-preservation tax credit that it planned to use to help finance the project.

A revised version of the plan was eventually accepted by the Park Service, but it involved structural adjustments that made the project more expensive and a reduction in the number of revenue-generating guest rooms that the project could accommodate.

The proposal sustained another financial hit from federal tax law changes in 2017 that diminished the value of the preservation credit by an estimated 20%.

By then, the cost to build the project had also ballooned from an anticipated $85 million in 2014 to about $105 million, R. Donahue Peebles has said.

Nevins, in her email, identified the setbacks as additional reasons why “sale of 1801 Vine Street will not move forward at this time.”

She said Peebles’ most recent agreement to buy and redevelop the building had expired in early spring, around the time that the city’s first business restrictions aimed at stemming the spread of the coronavirus went into effect. PIDC had been “in a ‘pause’” concerning decisions on the project since then, she said.

Peebles, however, said his company does not believe the city had the right to terminate the agreement and was “evaluating our options.” He also hoped Mayor Jim Kenney would intervene, he said.

“We have stuck by the city and this project despite its challenges because of the potential for social and economic transformation,” Peebles said. “This project is regarded as a symbol to the Black community, at a time when our country has been divided, often along racial lines.”

Nevins said PIDC and the city will now devise a process to solicit and vet a new round of proposals, with a focus on plans that involve minority and female ownership and workforce participation and ones “that provide benefit to the existing residents and include amenities available to the public.”

“While this is not the outcome all parties had hoped for, we have learned a lot in this process and remain confident that the building is a valuable asset for the city,” she said. “We look forward to re-evaluating the highest and best use for the property and adopting a new plan for future redevelopment.”