123 S. Broad is finding a niche in Philadelphia’s uncertain office market

In late June, Peter Soens found himself celebrating the latest lease-signing for his office building, the Beaux-Arts style 123 S. Broad St., as a summer storm laced across the sky just outside the 29th-story windows.

When most people sign a new office lease, everything usually just takes place online, with scanned copies of the contract flying back and forth over email. But in this case, the heads of the architectural firm Wallace Roberts & Todd — which just leased 17,000 square feet of space at 123 S. Broad — brought over some fancy scotch and signed in person.

Heavy rain and wind kept them off the building’s roof deck, which offers gorgeous views of Center City and South Philadelphia, but they didn’t let the weather dull the mood.

“They were all so excited,” said Soens, founding partner of SSH Real Estate. “It was just like the old days. It was fun.”

This latest lease-signing is part of a larger narrative that Soens has been pitching all over town.

At the beginning of the pandemic, 123 S. Broad — a 30-story building with 750,000 square feet of office space — seemed to be in trouble.

In late 2018, one of the two biggest tenants, the law firm Montgomery McCracken Walker & Rhoads LLP, moved out of 120,000 square feet of office space at the top of the building. Then in early 2020 the other major tenant, Wells Fargo, announced that it would be giving up its 200,000 square feet of space — leaving roughly 40% of the building vacant.

Then COVID hit.

That scenario sounds dire. But at 123 S. Broad, SSH was actually in a decent position to weather the storm.

The architecturally gorgeous building is a testament to South Broad’s history as a financial hub, its glory recaptured as the headquarters of the fictional brokerage firm Duke & Duke in the 1983 Eddie Murphy movie Trading Places. Although it doesn’t contain parking, 123 S. Broad is easily accessible from multiple forms of rail transit. Last year it won an award from the Building Operators and Managers Association for best amenities.

The location away from the newer office district on West Market is also a distinction.

“This area of Broad Street has everything: You have the arts, tourists, residents, restaurants,” said Soens. “Market Street was always quieter at night, and now it’s even more quiet because less office workers are in.”

Most important, SSH bought the building during the last major downturn in 2008. As a result, it hasn’t been encumbered with the debt load and high interest rates of buildings that changed hands or were built in the years immediately leading up to the pandemic.

That meant SSH could afford to invest in the building — adding amenities like a gym with personal trainers, a refurbished grand ballroom, and the roof deck — while offering lower rents than higher-end buildings.

“They are well positioned in comparison to buildings that were sold in the five years preceding the pandemic,” said Bill Luff, head of the commercial property consultancy CRE Visions. “The market was frothy, rates were high, they bought high, they financed high. [SSH] is not in that position. That means they can undercut where the demand in the marketplace is.”

Now, office market observers across the country have noted that remote work is putting pressure on older, amenity-light, or otherwise out-of-date buildings. But the top end of the market is still going strong. So-called trophy buildings, or class A offerings — centrally located, with parking, and all the latest amenities — can hold up in the post-COVID world.

But Luff says not everyone can afford those top-of-the-line buildings, or perhaps they just don’t like the vibe. So instead of finding new major tenants, 123 S. Broad has been filled with small law firms, start-ups, or creative businesses like architecture firms. These are the kinds of clients who may be seeking smaller offices to accommodate hybrid work, as opposed to larger firms like Comcast that are requiring more days in person.

As a result, the number of tenants in the building has doubled since 2019, while the average footprint has shrunk radically. The 120,000-square-foot space formerly leased to Montgomery McCracken now hosts 23 tenants. The rent per square foot is $33.50 for the higher floors of 123 S. Broad — a little less than the Center City average — and $29.50 for the lower floors. The new leases range from five to 16 years.

“The building is really diversified now,” Soens said. “The nice thing is that the largest tenant is now less than 5% of the total space, so it operates more like an apartment building where every year there’s going to be a lot of [churn] with small tenants.”

With the signing of Wallace Roberts & Todd at the end of last month, 123 S. Broad is at 80% occupancy with several more new leases under active negotiation. That’s still below its peak in 2018, before the two big firms left, when the building was at 90% — the threshold most top-of-the-line offices buildings set for themselves.

But the building’s performance has been strong enough in this tough market that Soens has been on a small victory tour, giving talks about the building’s success at the Union League and the Center City District’s most recent membership meeting.

Soens also acknowledges that part of what makes 123 S. Broad ideal for small offices — the reasonably sized floor plate and abundant windows — would make it ideal for conversion into apartments, too. Unlike most modern buildings, which have too much dark interior space for easy residential conversion, this almost century-old structure looks like the many historic, former office buildings in Center City that have already been transformed into apartments.

But that’s not part of SSH’s vision for any part of the building in the foreseeable future. For Soens, as office building prices fall, he sees opportunity throughout Center City for scooping up office buildings as they did in 2008 with 123 Broad — perhaps for residential conversion but perhaps, with some tweaks, for office again.

“We think there’s going be some opportunities for us,” said Soens. “We’ve had tremendous leasing success here. If we had some more buildings, if we had the right capital on the right plan, and you can create something nice, it’ll do well as office.”