The 305,170-square-foot office building at 1701 Market St. in Philadelphia was built in 1955.
Alterra Property Group is once again moving forward with plans to buy 1701 Market St. and convert the Center City office building into 325 residential units, reviving a transaction that previously fell through due to rising costs.
The 305,170-square-foot, 18-story building is owned by New York-based LXP Industrial Trust (NYSE: LXP) and currently houses the headquarters of Philadelphia law firm Morgan Lewis and Bockius. Permits issued by the Philadelphia Department of Licenses and Inspections on July 19 for the residential conversion at 1701 Market include plans identifying Philadelphia-based Alterra as the project's developer, signaling a sale agreement with LXP is back on.
Alterra’s residential conversion plans filed with the city also include an expansion of the rooftop terrace, amenity space, and retail and commercial space on the ground floor. An existing parking garage on the second through fifth floors would remain. Residential units would be on the sixth through 18th floors.
City approval for Alterra's change of use plan comes less than six months after the previous sale agreement fell apart in early February, with Alterra Managing Partner Leo Addimando saying at the time that the price of the property, cost of construction and projected apartment rents no longer added up to a financially viable project. He declined to say how much Alterra would have paid for the building.
Addimando cited construction costs rising between 10% and 20% annually over the past five years and financing costs increasing from 3% to 8%.
“When those three variables exist in an equilibrium, then the math problem you’re trying to solve works,” Addimando said in February. “You can attract debt financing, you can attract equity capital, because you can generate a certain rate of return. Well, that model is basically broken right now. It’s not broken in Philadelphia for 1701 Market, per se. It’s broken across the country."
Despite abandoning the sale, both Addimando and LXP CEO Will Eglin expressed interest in reviving the deal.
During LXP’s quarterly call with analysts in May, Eglin revealed that the building was again under contract “but with a lot of contingencies.” He did not identify the buyer or sale price, but said LXP’s portfolio of four office buildings had an estimated total value of $75 million, including 1701 Market St.
Both an LXP spokesperson and Addimando declined to comment Tuesday on the pending sale of 1701 Market.
The property is at a critical juncture. Morgan Lewis is moving five blocks west to Parkway Corp.’s new 19-story building at 2222 Market St. when its current lease expires on Jan. 31, 2024, leaving 1701 Market empty.
The value of office buildings has dropped precipitously as remote and hybrid work trends remain strong. Office buildings across the country have lost a combined $500 billion in value, according to research from academics at Columbia University and New York University that was updated in May. The city assessed the value of 1701 Market at $69.8 million this year, up from $66.7 million in 2022.
The prospect of converting office buildings to residential has gained traction as businesses downsize their office space, vacancies increase and office buildings become distressed. Between Center City, University City and the Navy Yard, a record-high 22.9% of office space is available, according to real estate brokerage Savills.
Known as Six Penn Center, 1701 Market St. was built in 1955 and bought by LXP in 1997, according to property records. Morgan Lewis moved there in 1998. It sits between Comcast Corp.’s headquarters and City Hall, in the heart of the central business district.
Real estate experts have viewed the building as a prime candidate for a residential conversion given the challenge of filling the space once Morgan Lewis vacates the building.
The building’s rectangular shape makes it easier for residential units to have window access, making it a more likely candidate for a conversion than other large Center City office buildings.
From 1998 to 2021, 180 buildings or 9 million square feet of office and industrial space was converted into residential in Philadelphia, according to the Center City District. That means many of the buildings that would be the best candidates to be converted already have been, and the remaining office buildings would likely be more challenging.
Alterra has a history of converting buildings into residential. The company bought the 220,000-square-foot One City office building at 1401 Arch St. in 2017 and converted it into 323 apartments that opened in 2020. The company also converted a 100,000-square-foot office building at 1701 Arch St. into 111 apartments and recently put it up for sale.
Addimando said in February he hopes to have Alterra work on three conversion projects in the next five years.