The industry leaders participated in a moderated conversation during at the Philadelphia Urban Land Institute's annual “Emerging Trends” briefing November 21 at the Union League Club. (See separate story on the “Emerging Trends” report by ULI and PriceWaterhouseCoopers.)

Panelists agreed that the Philadelphia region, particularly the Center City market, faces real economic, structural, and political challenges that are holding back commercial real estate development.

“Our investor base demands diversification not just by product type, but by geography,” says Daniel DiLella, principal with Equus Capital Partners. “I do like the city, I do like Philadelphia, I wish we could actually invest here, but it's the lack of job growth, it's the education system, it's the tax structure. You have 17 city council people who just don't get it. You can't build today in this city and charge the rents you need to charge.”

Reacting to the changing office economy, Brandywine Realty Trust has repositioned its portfolio to de-emphasize suburban office parks, especially in the Philadelphia market, says Gerard H. Sweeney, president, chief executive officer and trustee.

“We thought that a more reasonable bet for us was to start to liquidate a lot of our suburban office exposure and to move that capital into marketplaces we defined where office buildings were part of a broader based community,” says Sweeney.

“We're better served by being much more focused in what we call town center and urban markets, so with that as an investment predicate, we started to focus on [Washington] DC, Austin, TX; Richmond, VA, and a lot of the inner ring suburban areas.” In Philadelphia, those “crescent markets” include Radnor, Conshohocken, and Plymouth Meeting, Sweeney said.

“No building in this city—except two—sold for more than they cost to build since 1970. That's the Comcast Building and the PNC Building,” says DiLella, noting that Philadelphia was under-demolished 20 years ago. Even though 15-20 million square feet of functionally obsolete space has been demolished since that time, Rubenstein says it's still difficult to build commercial space in Center City unless a developer has a large long-term tenant like Comcast. “You can build apartments, you can get the rents, but you certainly can't build commercial.”

Panel moderator Dr. Peter Linneman, CEO of KL Realty and Linneman Associates asked the panelists to identify the one key issue holding back commercial real estate development in Philadelphia, if they were “king for a day.”

“To me the answer is the public school system,” says Rubenstein. “If you were to significantly change the public school system in Philadelphia, I don't believe we have the infrastructure in place to handle the inflow of people. It would be that significant.”

“I think the problem is that there's not enough jobs,” leading to the highest tax burden on business in the US, says Sweeney. He said he would eliminate the prohibition on uniform taxing of different classes of commercial real estate, and incrementally raise commercial real estate taxes. He says he would use the incremental tax to bring the city wage tax below three percent and cut the net profits tax by half. He says studies suggest those structural changes could generate as many as 50-100,000 new jobs.

“Every incremental decision over the past 40 years has been letting the state of Pennsylvania off the hook about public education in Philadelphia,” says Hankowsky. “So if I could be king for a day, I think the balance about what proportion is funded by the commonwealth vs. what is funded by city taxpayers has to be revisited. We are overburdening business here.”