Turnaround City

Philadelphia was recently ranked sixth in the country among major U.S. metro areas for its degree of high-tech economic activity. The study, conducted by the Hubert Humphrey Institute at the University of Minnesota, adds further fuel to area leaders' assertion that the region has graduated from rust belt to "brain belt."
        Philly has always been a hub that defies state borders, playing just as crucial a role in southern New Jersey's economy as it does in Pennsylvania's. Its statistical area covers nine counties, and it is home to just under 6 million people in an area of 5,936 square miles.
        After all, it's in the gene pool -- in 1946, at the University of Pennsylvania's Moore School of Engineering, the first computer, ENIAC, was invented. Today, such companies as Rhone Poulenc, GlaxoSmithKline, SAP and Boeing not only employ their share of the area's 42,000 engineers, 25,000 scientists and 61,000 computer professionals, but also provide the market momentum to help sustain clusters of smaller, life science companies like PlantGenix, Viasys and CardioNet.
        The biggest deals of 2001 were related to the move by pharmaceutical giant Wyeth-Amherst from its campus in Radnor to the Aventis property in Collegeville. But the financial services and insurance sectors have continued to be prominent on the region's project landscape, with new expansions, locations and leases pursued in the recent past by Citizens Bank, Deutsche Bank, Prudential, Wells Fargo Financial and Aon Insurance Services. In fact, Philadelphia was a key to helping the Mid-Atlantic lead all comers in the fourth quarter of 2001 in $50-million-plus deals.
        Ed O'Brien, senior vice president of the Philadelphia office of The Staubach Company, says that interest is running high with regard to brownfield sites.
        "In Conshohocken, there's probably been 2.5 million sq. ft. [232,250 sq. m.] of new office product built, substantially on brownfield-remediated sites," he says. "It's a hot market, because it sits at the confluence of two major highways, there's commuter rail service into the city, and it is now a fairly attractive suburban enclave."
        Downtown, the latest high-profile building is the Cira Centre, a Brandywine Realty Trust project that will rise 28 stories and feature 735,000 sq. ft. (68,280 sq. m.) of office and mixed-use space on a KOZ site formerly owned by Amtrak. The firm commissioned renowned architect Cesar Pelli to design the building. Expected to deliver in 2005, the project will add to a Brandywine portfolio of nearly 300 office and industrial properties in the region, comprising 20.3 million sq. ft. (1.9 million sq. m.). O'Brien sees the new project as indicative of a downtown resurgence.
        "Candidly, it's the KOZ tax savings generated at that site that will make that building competetive," he says. "Rents will be 20-30 percent higher than comparable center city space, but the tax savings will make them competitive. Firms that want to stay in Philadelphia can save upward of $12-14 per sq.ft. That's pretty attractive number for a brand new downtown building.
        "Having these KOZs, I think we'll see a nice kickback in the downtown market," he continues, a phenomenon driven as much by the recruiting of young urban professionals as by the tax savings. While the commitment required by KOZ terms is substantial, he says, such a program not only suits the mission of creating jobs on a long-term basis, but also ensures that the businesses locating there tend to be more stable and mature. It doesn't hurt the cause that good sites near transportation confluences have been picked for KOZ designation.
        On the power distribution side, throughout this year, PECO Energy, which delivers electricity and natural gas to much of southeastern Pennsylvania, has embarked on $200 million of capital projects to upgrade equipment, expand capacity and improve reliability. But even the utility's old buildings themselves are part of the rejuvenation.
        "In a KOZ along the Delaware River in Chester, two major tenants are renovating an old PECO Energy plant, designed by the same architect who designed the 30th St. station, with large Greek columns," says O'Brien. "It definitely doesn't look like an office building."
        A high-tech corridor has risen up along the much-improved highway corridor of Route 202 in Chester County in such towns as West Chester, Malvern and Berwyn.
        "Chester is very much an economically disadvantaged area," says O'Brien. "The state is putting in new on and off ramps, so access has improved, and a whole series of KOZ sites are popping up in and around this particular site, which is being developed by Preferred Real Estate. The KOZ has attracted two major tenants for a combination of 300,000 sq. ft. [27,800 sq. m.] who just would not have looked there previously."
        The biotech sector has seen new headquarters from 3 Dimensional Pharmaceuticals, Antares Pharma and Viasys Healthcare, a med-tech firm that relocated from Boston last August. This spring, Siemens Medical Solutions announced plans to enlarge its Pennsylvania footprint even further by bringing its U.S. headquarters to Malvern, where its Health Services Corp. was already located. Siemens currently employs about 9,000 workers across Pennsylvania (a number that will rise again with the Pittsburgh fuel cell division). The company expects the relocation of its U.S. headquarters to be completed by the end of 2003.
        The project is just one manifestation of the ample foreign investment that the state has seen in recent years, resulting in a 28-percent increase in American subsidiary employment in the state, to 261,500 workers. About a third of these operations are in and around Philadelphia, fortified in part by the city's full complement of port-related facilities and companies. The Delaware River Port Authority reports an increase in value of shipped exports from $5.9 billion in 1993 to $9.3 billion in 1999. Philadelphia Industrial Development Corp. has begun work on the redevelopment of 60 acres (24 hectares) within a KOZ at the 1,200-acre (486-ha.) Philadelphia Naval Business Center, and Norfolk Southern has begun work on a 136-acre (55-ha.) rail yard there as well, looking to do its part to heighten the level of intermodal cargo activity in the region.
        Another part of the transport infrastructure that pleases foreign and domestic travelers alike is the new $325-million international terminal at Philadelphia International Airport, scheduled to be completed this fall, joining the regional and commuter terminal completed last year.
        "The improvements to the airport have helped the ability to get in and out significantly," says O'Brien, "but the airport needs to create another runway. As a region, it's hard for us to compete with Atlanta and Chicago [as an air traffic hub]. Unfortunately it sits there on the river, so there are geographic limitations. There are plans underway to consider a major land acquisition, but that will take many years."
        Meanwhile, O'Brien is ready for the backlash that drives people back to the city, reporting that the reverse commute to the suburbs is now actually worse than the inbound drive, which is no picnic itself.
        "Five years ago it would take you 30 minutes to go 15-20 miles, and now it's an hour and ten minutes," he says. "When it hits an hour and a half, that's when people will start bailing and asking, 'Why are we doing this?' We're not yet Northern Virginia or Northern Atlanta, but we're not far away.
        "People are more interested in going back downtown, even with the onerous tax structure," he observes, noting that vacancy rates are running 15-16 percent on average across A- and B-class office space. "People are feeling that it's a much easier commute to get onto a suburban rail line and get into downtown. I believe that a lot of companies are going to start moving back into the city."

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