This summer Philadelphia’s Center City office market saw a surge of activity. Huge sums of money were lost.

After years of uncertainty and stasis in the wake of the COVID-19 pandemic and the rise of remote work, Center City’s office market began thawing this summer.

Five big office buildings changed hands between June and August, and for vastly less than their last sale prices as commercial real estate values have plummeted in the era of hybrid work.

Two of the buildings will be kept as office spaces — 399 and 1760 Market Street — but at much reduced rents. 400 Market will be converted into apartments, while Three Parkway will be half residential and half office. Parts of the stately Bourse building on Independence Mall will become hotel space and part kept as office.

The loan on the Wanamaker building, one of the white elephants of Center City real estate, was sold in June at a $45 million loss to New York City’s TF Cornerstone Inc. The company already owns the Macy’s space on the bottom three floors, and is in talks to buy the whole thing outright.

This summer’s commercial real estate moves are not anything as simple as good news.

Huge sums of money have been lost by building owners and investors, including public pension funds. The Pennsylvania school (PSERS), Pennsylvania state workers (SERS), and New Jersey state pension funds lost a total of $1.3 billion from real estate investments in their most recent annual fiscal reports, even as they paid Wall Street real estate firms a total of more than $180 million in fees. For all three funds, real estate was their worst-performing asset class.

Commercial real estate owners are challenging property tax assessments on their buildings that are inarguably worth less than they used to be, threatening municipal finances. Office vacancy as of the second quarter of this year stood at over 19%, according to Jones Lang LaSalle (JLL), and 2025 is slated to be the peak year for lease expirations with 1.4 million square feet of space up for renewal. Center City District reports retail occupancy is still well below 2019 levels.

But the vibes, as unscientific a measure as that may be, seem to be shifting with the help of an expected interest rate cut that could ease pressure on new projects and building owners with floating rate loans.

“I don’t know if cautious optimism is the right word, but there is a feeling that there is a way to work our way through this,” said Tom Weitzel, JLL’s managing director in Philadelphia. “This is not good, this is not easy, but there’s a light at the end of the tunnel.”

The early pandemic enthusiasm for the idea of converting vacant office space into housing cooled as the realities of the concept became clear. Many office towers have too much dark interior space to allow for easy conversion. And a half-empty office building is still half-full, making it difficult to undertake large-scale renovation.

In Philadelphia there was an added challenge. The city never lured large suburban employers back downtown, so many of the historic Center City office buildings that are easiest to convert had already been transformed into apartments.

Still there has been a trickle of such projects and this summer saw two additional conversions added to their ranks as the acquisition price barrier to conversion fell due to desperate owners offloading weak properties.

In mid-July, Lubert-Adler Real Estate Funds and Keystone Real Estate Group purchased the Bourse building — which the Philadelphia Business Journal reports will be partly turned into hotel and event space — and 400 Market St., which zoning permits show will become 176 apartment units.

Lubert-Adler referred questions about the project to Keystone, which declined to comment because a spokesperson said their planning and design is not yet advanced enough.

For local business leaders, however, the mere fact that the purchasers are well-regarded corporate actors was cause for optimism.

“We are very excited to see such reputable, long-standing Philadelphia firms take an interest in jewels like the Bourse,” said Job Itzkowitz, executive director of Old City District. “It’s energy, excitement, and a path forward when we were unsure what that was going to be during the sale process.”

A couple days after the Bourse purchase, PMC Property Group acquired Three Parkway at a quarter of its assessed value, according to the Business Journal. The former headquarters of the Pennwalt Corp. will remain half office space, while the other half of the 20-story building will be converted into 175 apartments.

With these two projects added to the list, there are now seven conversions announced in Center City totaling 1.5 million square feet of space — or over 4% of the downtown office market — and adding over 1,350 apartment units to the area. (Assuming all the projects are completed.) And still more large office owners are considering conversions of some of their holdings.

“It’s way more [conversions] than we predicted,” said Clint Randall, vice president of economic development with Center City District. “It doesn’t take the office market from too much vacancy to healthy vacancy … It’s not a silver bullet, but thanks to conversions we help the supply side of the equation moderate.”

Residential conversion isn’t the only fate of office buildings purchased post-COVID. The east and west sides of Market Street saw sales of midsize buildings in June that would preserve office uses while reducing rents to allow access to start-ups, nonprofits, and small businesses that have historically often been excluded from Center City.

First, at 399 Market St., residential developer Ori Feibush purchased the old Colonial Penn Life Insurance Co. building for $14 million, a markdown of one-third from its previous valuation. It was also just one-third occupied.

“This is the greatest value opportunity in our professional lives with the distress that we’re seeing in office buildings,” Feibush told The Inquirer at the time.

Feibush cut the office suites into smaller chunks between 3,000 and 6,000 square feet to appeal to smaller users, and lowered the rents to $23-$25 a square foot.

The average lease in Center City this year is 13,200 square feet and the average cost of office space across the Philadelphia region is $29.95 a square foot, according to JLL.

Feibush says his strategy has been a success so far, with two leases signed and negotiations underway for three more that if concluded will double the amount of occupied space in the building.

At 1760 Market, which changed hands at the end of June for two-thirds less than its previous sale price in 2018, a similar plan is underway.

“Leasing activity is robust,” said James L. Paterno, founder of Stockton Real Estate Advisors, which manages 1760 Market St. “Two leases signed with two more in the works.”

Rents at the building have dropped from $33 a square foot to mid-$20s, Paterno says. Within the next months, leases signed and anticipated would move 1760 Market up to 86.5% occupied.

A dominant narrative in recent years has been the “flight to quality” where, as office users have moved to hybrid work models, they need less space so are splashing out for nicer offices.

Randall of the Center City District argues that 399 and 1760 Market are examples of this trend for smaller users, who can now afford centrally located offices. He says that Philadelphia’s office market is driven by smaller tenants that only need 2,000 to 10,000 square feet and that buildings of this scale have the smaller floor plates to accommodate them.

“Those are both perfect buildings for that segment of the office market,” said Randall. “Small tenants are looking for opportunities to pursue a flight to quality, too, and those buildings are well-positioned to capture some of that momentum.”

Market observers agree that this summer’s sales are a good sign in that they show that some building owners and investors have come to the painful realization that they will have to sell their buildings at a substantial loss if they expect to get anything back.

Still, something is better than nothing.

“The uptick in transaction volume doesn’t speak to a healthier market necessarily, so much as it does just more desire to unload properties or to shift burdens elsewhere,” said Ashley DeLuca, who co-leads the distressed property team at Ballard Spahr. “But it’s good for the city to have transactions in general, rather than everyone just sitting and waiting.”

Many of the transactions so far have been for smaller, even boutique buildings like 1760 Market (126,689 square feet). On the other end of the spectrum are the huge office complexes that have been suffering most acutely during the pandemic, like Wanamaker (1,401,000 square feet) and Centre Square (1,760,091 total square feet) where occupancy has been dwindling for years.

The sale of the Wanamaker loan does not bring clarity to what the future of this iconic building will be. But the fact that a credible real estate company that already owns a chunk of the building bought the loan and is negotiating for ownership of the whole building clears the way for a radical reimagining of the space.

The outcomes for the owners of such very distressed buildings can be ugly, but that doesn’t mean there won’t be winners. Like, of course, the eventual new owners.

“This happens every 20 years or so — the Savings and Loan crisis of the 1980s, the 2008 financial crisis —where people are selling for pennies on the dollar,” said Glenn Blumenfeld, principal with tenant brokerage firm Tactix Real Estate Advisors. “This is when people get rich in real estate. It’s hard to get rich at the height of a market. It’s easier when you have big distressed situations.”

Staff writer Joseph N. DiStefano contributed to this article.