Market Street office building sells for a third of its highest price

A 15-story Center City office building at 1760 Market St. changed hands last week for $11.5 million, two-thirds less than the $31.5 million at its last sale in 2018.

The 126,689-square-foot building is relatively small, and when it was put on the market earlier this year, there was speculation that it could be converted to residential use. But it is about 70% occupied, and the new owner instead intends to keep it as office space. The price is substantially lower even than when it was sold in 2006 for $19.3 million.

“We’re starting to see the impacts of post-pandemic work patterns and the interest rate environment leading to a reset of valuation in office buildings,” said James L. Paterno, founder of Stockton Real Estate Advisors, which manages 1760 Market St.

While few Philadelphia office buildings have changed hands this year, earlier this month residential developer Ori Feibush bought an office building at 399 Market St. for a sharply discounted price from its assessed value with the goal of dropping rents and attracting new tenants.

The plan appears similar at 1760 Market St.

“There is going to be an opportunity for the new owners to be aggressive and capitalize on providing a quality location and amenities at a different price point than was being offered a couple months ago,” Paterno said.

No one involved in the deal would say who the new buyer is, and online city records have not yet been updated. Paterno would only say it is a local investor who owns other Philadelphia-area properties.

The new owner wasn’t the only bidder for 1760 Market at the bargain prices being offered.

“One of the takeaways from the process is there’s still a lot of capital out there that is interested in investing in Center City,” said Bruer Kershner, senior vice president with CBRE, which represented the previous owner in the sale. “There was a lot of interest in 1760 Market St.”

Stockton Real Estate Advisors and Alterra Property group previously co-owned the building and invested millions in renovations before selling it to Philadelphia-based attorney and property investor Victor F. Keen in 2018.

Stockton continued managing the building under Keen and will do so under the new owner as well. Current tenants include Meridian Bank, the Philadelphia Trust Co., and OJB Landscape Architecture.

“It’s an amazing representation of the peaks and valleys of real estate cycles,” Paterno said about the discounted sale price.

1760 Market St. is a modestly sized outlier amid Philadelphia’s core office tower district. It was built in 1981 to appeal to smaller users who still wanted to be in the heart of Center City.

It was built “so that you could be a big fish in a small pond,” said Bill Luff, head of the commercial property consultancy CRE Visions. “So rather than be a 3,000-square-foot user on a 30,000-foot floor, you would share the floor maybe with only one other tenant.”

In some ways, that makes 1760 Market ideally suited for today’s office market.

In the post-COVID world, many businesses have switched to a hybrid schedule in which workers are not expected in-person five days a week. As a result, they have been using less space and moving to smaller offices in newer and higher-amenity buildings.

In Philadelphia, that’s meant more office users are leaving larger spaces elsewhere in Center City for smaller quarters in the higher-end office district between Market Street and John F. Kennedy and west of City Hall.

“As occupancy and tenancy skews smaller, and people experiment with hybrid work, the need for larger offices is being rethought, particularly in the tech sector and finance sectors,” said Paterno.

Unlike behemoth office buildings that are struggling with low occupancy — like Centre Square or Wanamaker’s — 1760 Market’s smaller floor plates also makes it more feasible for conversion to a residential apartment building.

But the current high costs of borrowing, the large supply of new apartment units opening in Philadelphia, and the fact that 1760 Market is largely occupied all combined to make such a transformation impractical.

“The building works pretty well for residential, but residential conversion is a real timing challenge,” Paterno said. “Conversion in the future is not out of the question, I guess. But … it’s a lot less expensive to keep as an office building than to undertake a residential conversion.”