Philly area developer Bill Glazer warns a commercial real estate slowdown is coming

Bill Glazer, owner of Keystone Development + Investment, is one of the Philadelphia area’s busiest redevelopers. Since 1991, his Bala Cynwyd-based firm has updated or repurposed 10 million square feet of office space and other commercial property along the East Coast, including the old Scott Paper and Curtis Publishing headquarters in Philadelphia, the new AmerisourceBergen headquarters complex in Conshohocken, and dozens of suburban office buildings, sometimes replacing offices with apartments or biotech labs.

He took questions from The Inquirer on how builders are dealing with higher interest rates and bank troubles. Answers edited for clarity and brevity.

Commercial real estate today is facing a triple threat: interest rate increases, which for us are unprecedented — over 5 [percentage points] within one year; lending and capital availability, which is down; recession and revenue pressures [which discourage tenants, making projects unattractive].

This is the real estate circle of life. We are in a cyclical business. We are now in this part of the cycle. The same stresses we’ve seen in the banking industry are playing out in real estate.

Every asset class is facing pressures. We are seeing universally that capital availability is being pulled back for every class. Not the least in retail — Bed Bath & Beyond just said they will not be reopening any of their stores in their bankruptcy. Warehouses, too.

Every time this happens, there is a flight to quality, to the projects most likely to succeed. Lenders face stresses from regulators, from markets, from their funding sources, and that will flow through to commercial real estate loan availability. They are looking for the best [developers, clients and] properties.

You know that Toll Bros. was unable to pull off their condominium project. They demolished [part of Jewelers Row in Philadelphia], but they did not build. They sold the ground to Pearl Properties. You read that the big Durst project on the waterfront stalled.

Most new, ground-up projects are being shelved or paused or sidelined. The contractors are still finishing up jobs in their pipeline. But it’s coming. The Fed, in tamping down inflation, is adding so much pressure to the [borrowing] costs of new construction, there will be far fewer new construction starts. That will translate to fewer cranes.

There are more from-the-ground-up projects that will not more forward, until either interest rate costs come way down, or construction costs come way down. Either of which are going to come with some form of recession.

There’s a burning need for their science in the marketplace. But the life science community and venture capital are going under a lot of capital stress right now. Anyone who needs to raise money for those projects is going to feel that pressure.

We’re having an investor day for BioLabs, our tenants at the Curtis Center. There’s about 300,000 square feet there of life science space and another 150,000 square feet left to lease. I wish I had more space in that building to convert into life science space.

We are fully capitalized and made at least $40 million in investment in mission-critical infrastructure such as backup power generation, exhaust, redundant power — the baseline requirements for Biosafety Level 2 labs and [FDA-rated] Good Manufacturing Practice labs. Ceiling heights at least 12 feet, we have 14. Floor load capacity, 200 pounds per square foot. Vibration tolerance. Engineering tolerance. Curtis was built for heavy printing presses.

The Public Ledger was broken up into condominium ownership units. So they can’t do this.

Philadelphia became a leader in converting buildings from offices to other uses. One thing it has going for it is a lot of historic buildings, which [qualify for] tax credits — that’s really helpful. Costs are one of the big challenges in converting offices to apartments. Tax credits are really helpful.

It is extremely tricky. Each building is unique. In Philadelphia, a lot of the large buildings were factories. They have great bones that would lend themselves to conversion to life science or residential. You need the right floor plate, the right window line, a lot of things have to work just right.

Philadelphia hasn’t had such extraordinary high [prices as New York and other big cities], and it doesn’t fall to great lows. We haven’t had a lot of speculative projects that would add too much supply to the market. And we have some developers who have arranged some sensational projects as we come into this part of the cycle — Ron Kaplan [PMC] with his high-rise towers on the Schuylkill, Robert Zuritsky [Parkway Corp.] finishing the Morgan Lewis headquarters [2222 Market St.] and now onto the Chubb project [2000 Arch St.]. They really upgrade our skyline immensely.

The next one is David Adelman’s project with the Sixers, which can make a generational change for Philadelphia. These are the real heroes and winners that will keep Philadelphia as a first-class, first-tier city.

I haven’t seen that.

The 10-year tax abatement was the best thing we did to promote building. That’s being pared back. The mayor and City Council need to reinstate it if they want more building.

The State of Pennsylvania has been very helpful with RACP [Redevelopment Assistance Capital Program] matching grants. It was helpful to us with the AmerisourceBergen tower.