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Silverstein taps CMBS to break into Philadelphia's office market

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Silverstein Properties is tapping commercial mortgage bonds to break into Philadelphia’s office market.

A joint venture between the New York firm, Migdal Insurance and the Arden Group is purchasing a 54-story building at 1735 Market Street, in the City of Brotherly Love’s central business district for $451.6 million. To fund the purchase, the sponsors have obtained a $311.4 million mortgage from two banks, Deutsche Bank and Goldman Sachs; this loan, which pays a fixed rate of interest, and no principal, for its entire 10-year term, is being securitized in a transaction called DBGS 2019-1725, according to rating agency presale reports.

S&P Global Ratings describes 1735 Market Street as a “trophy quality building.” The presale report notes the “prominent location” on 18th Street between Market and JFK Boulevard, a few blocks from city hall. Built in 1990, the property includes 1.17 million square feet of office space 44,474 square feet of retail space, a 176-space parking garage, and has direct concourse access to the SEPTA suburban station.

The property has benefited from $20.4 million (or $15.85 per square foot) in improvements since 1998. The seller (not named by S&P, but reportedly Equity Commonwealth) has only owned the property since 2015, but has spent $7.7 million, including converting the fifth floor to an amenity floor in 2018 at a cost of $4.5 million, says S&P.

The office space is 93.9% occupied by a diverse group of tenants, including financial, law and consulting firms such as Bank of New York Mellon, Towers Watson, UBS Financial Services, Raymond James, Goldman Sachs, JPMorgan Chase, Boston Consulting Group and Fidelity BrokerageDSS.

S&P considers the mortgage to have “moderately high leveraged,” with a loan-to-value ratio, as calculated by the rating agency, of 89.4%. However, the LTV ratio based on the appraiser's "as is" valuation of $440.3 million is only 70.7%. S&P’s estimate of long-term sustainable value is 20.9% lower than the appraiser's "as is" valuation.

Among the risks to the deal, a major tenant, Aberdeen Investment Management, which leases over 57,632 square feet on the 31st, 32nd and 33rd floors (4.5% by net rentable area), will be leaving in September. “We understand that Aberdeen had wanted to remain in the building, on a lower floor, but the targeted spaces were ultimately taken by Towers Watson Delaware,” the presale report states. “Although we believe that the soon-to-be vacant Aberdeen spaces should prove attractive to prospective tenants, we increased our economic vacancy to 11% in our analysis to account for the potential risk of additional vacancy.”

S&P expects to assign an AAA to the senior tranche of notes to be issued in the transaction.

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