Brandywine Snaps Up 1MSF Philly Office in $129M Deal

By Barbra Murray, Contributing Editor

Three years ago, the entire industry would have scoffed at the idea of acquiring the leasehold interest in a premier 1 million-square-foot Philadelphia office building for a measly $129 million, but Brandywine Realty Trust has succeeded in doing just that. The Radnor, Pa.-based REIT just wrapped up the purchase of the 53-story high-rise formerly known as Bell Atlantic Tower from an affiliate of The Blackstone Group, which came out of the deal with a stake in Brandywine.

Carrying the address of 1717 Arch St., the 19-year-old office property sits in the coveted Logan Square submarket of Philadelphia’s central business district. The building, which also features a 309-space parking facility, occupies land under a long-term ground lease with Verizon. The ground lease is scheduled to expire at the end of August 2022, but renewal options could extend the lease through 2092.

Brandywine financed the acquisition of 1717 Arch by handing Blackstone $51.2 million in cash and 7,111,112 class F units, valued at $77.8 million, of a newly established class of limited partnership interest in the REIT’s operating partnership. One year after the closing of the office building transaction, the units will qualify for a payment equal to the same dividend paid on common shares, and the unitholder will also have the option of exchanging them for an equal number of common shares or a cash payment.

“We are excited to become significant shareholders of Brandywine in connection with this transaction,” Frank Cohen, senior managing director of Blackstone, noted in a prepared statement. “We see this as a great opportunity to participate in the U.S. office market recovery in a high-quality portfolio with a terrific management team. Brandywine also has the right team to re-lease and reposition 1717 Arch St.”

Brandywine, which increased the size of its portfolio in the City of Brotherly Love to 3.9 million square feet with the acquisition , has a successful history of leasing up and repositioning assets in the city. The REIT’s One and Two Logan Square buildings are 98 percent leased and Cira Centre and the IRS Philadelphia campus are both 97 percent leased. However, challenges abound. The total average vacancy rate for Class A office properties in the CBD was 12.7 percent in the second quarter, according to a report by real estate services firm Jones Lang LaSalle Inc. However, occupancy levels may be on the verge of rebounding, at least in the submarket’s Class A segment, where the second quarter vacancy rate marked a decline from 14.2 percent in the first quarter of 2010 and fourth quarter of 2009.

“Brandywine has every reason to be confident in the state of Philadelphia’s Class A office market, as evidenced by our 98 percent occupancy rate,” Gerard Sweeney, president & CEO of Brandywine, told CPE.  “We think the leasing success of our other properties in the Philadelphia CBD reflects the strength of that market. We believe that an active marketing campaign will enable us to attract new tenants to 1717 Arch, making it as successful as our Cira Centre and our One and Two Logan properties.”