PHILADELPHIA — About 100 tenants at 1616 Walnut St. have been put on notice that they need to vacate the property and find new space.

A partnership that bought the 25-story, 279,770-square-foot Center City office building last month for $28.3 million is seeking to convert it into residential use to seize on a hot multifamily market and have started to negotiate with current tenants in the building. The new ownership consists of Federal Capital Partners of Chevy Chase, Md., as well as Cross Properties and 806 Capital, both of Philadelphia.

The process of relocating companies and converting the building can take some time. No time frame has been set for when it will begin to convert the building to residential use, said Leo Addimando, a partner at 806 Capital.

“We aren’t going to be forcing tenants out,” Addimando said.

Most tenants have leases expiring next year though some run into 2016 and 2017. Many occupy 5,000 square feet or less with the average firm totaling 1,500 square feet.

One of those tenants is the Greater Philadelphia Cultural Alliance. It had negotiated a few weeks ago with the older landlord, Isard-Greenberg Co., to renew its space at 1616 Walnut for another five years but the lease hadn’t been finalized.

“We were taken by surprise,” said Stuart Adair, vice president of finance and administration, about having to move out. “We’re probably in better shape than some of the other tenants since we had been in the process of looking at some other buildings as we were considering whether to stay here or go someplace else.”

Cathy Coate, an office broker with Colliers International, is helping the Cultural Alliance and a handful of other tenants search for new offices.

“A lot of tenants that I’m working with want to be in the same area and there aren’t many options,” she said. “Some of the tenants are going to be happy with their relocations and some of them are not. Some tenants thought they were going to be at 1616 Walnut until 2016 and for them, this will be really disruptive.”

While the sale of 1616 Walnut is affecting its office tenants, it is expected to have a positive impact on the overall office market. It will help shore up some vacancy that has been dragging the market down. The overall Center City office vacancy rate is 14 percent, and Class B space, which accounts for roughly 19 million square feet, had a vacancy rate of 13.1 percent at year-end.

With its tenants told to look elsewhere, other buildings, especially those that are Class B, stand to benefit. Of the building’s total square footage, 188,560 square feet was dedicated to office use. Already some landlords have begun to notice the effect of 1616 Walnut’s sale and eventual conversion.

“A lot of the tenants are out in the market right now and we’ve seen an uptick in activity and inspections at our buildings,” said Jeff Seligsohn of SSH Real Estate. “Class B buildings are getting a boost, and the B market could use a little jolt. I don’t think we will raise our rents, but it will fill existing vacancies.”

SSH Real Estate owns 123 and 230 S. Broad St. and 42 S. 15th St., among other buildings.

The sale also underscores the increasing desirability of living downtown. For the first time in 60 years, Philadelphia’s population grew, according to the 2010 Census. Between 2000 and 2010, 8,819 new residents were added, and Center City District expects that trend to continue.

Since it’s easier and less expensive to convert an existing building into residential use, investors are scouring the market to identify other buildings that might work for apartments. A number of office landlords aren’t allowing tenants to sign long-term leases as they gauge whether their property might be ripe for residential conversion. It wouldn’t be surprising to see more office buildings that fit the profile — short-term leases, good location, and architecturally suitable — get snapped up and converted, said Ken Mallin of Mallin Panchelli Nadel.

“What it’s demonstrating is the demand in Center City,” Mallin said. “The population is increasing every year in Center City and I would suspect the increase in the number of units is not keeping pace with the population.”

Natalie Kostelni, Reporter
Philadelphia Business Journal

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