1701 Market Street: A Case Study on Adaptive Reuse

Mark Cartella:

Pleasure to be here, Ralph.

Ralph Estel:

So Mark, the office market in Philadelphia has been struggling and at the same time the residential market has been kind of on fire. There's a ton of demand. So naturally that leaves that conversation of can we convert some of this office space to residential? And most of the commentators out there have said it's just isn't economically feasible. Which kind of brings us to 1701 North Market Street. So Alterra purchased this property end of last year with the sole purpose of converting it to real estate. So why is it feasible for 1701 North Market?

Mark Cartella:

Yeah, so there's a lot of truth to some of the comments that you've received previously perhaps, where conversions are innately difficult. 1701 Market Street, in our opinion, was one of the last remaining economically viable building that could be converted from an office use to a residential use. And we like to say at Alterra really maintained and possessed a lot of the tangibles and intangibles you look for in a conversion project. Things like zoning. It was a CMX five zoning district, which is obviously the most generous zoning district Philadelphia has. And so the use change wasn't an issue. It had one lease, really one commercial lease, which was Morgan Lewis, of course, that had minimal term left on that lease. And we were actually able to come to an amicable lease termination a little bit earlier than what that lease originally was. Originally it was the end of January, I believe, of this year, of 2024. We were able actually to negotiate that very amicably with Morgan Lewis, who was a great partner in that de-leasing effort to actually the end of 2023, which gave us an opportunity to really hit the ground running. Leo Addimando, a managing partner at Alterra, has been on record saying the only thing worse than an empty office building is a half empty office building, and that's 100% true. It's a great statement. And so that was one thing that was really appealing to us in that potential opportunity. But in addition to that, the tangible aspects of the building really made it appealing. So when you look at the dimensions and the relatively shallow floor plates, there was a lot of efficiencies that we were able to realize within those floor plates. Sometimes you do run into some inefficiencies with really deep floor plates, so think more square than rectangle. Rectangle floor plates are much more preferred. But then you also looked at the location. It's really a special location in many regards. You're essentially located, of course, within walking distance to pretty everything that inner city has to offer. And so that was just an irreplaceable opportunity from a location standpoint. But then even things like setbacks, there's several setbacks that will be in perpetuity from this building relative to some of the taller towers around the area. And so we really liked that, and preserve sight lines from, for instance, City Hall, you can see Billy Penn on the east elevation of the building when you're inside and the list goes on and on. So from a tangible standpoint, an intangible standpoint, it just made so much sense. And for better or for worse, a lot of the other buildings that would be good candidates for a conversion have already been converted. Alterra has done this now for over 10 years, this is I think our 15th conversion. There are others obviously in the market and Philadelphia that have done it as well. Really a lot of credit to, I think the local government here, which you don't hear too often. But they really, I think, have pioneered the idea of a mixed-use live-work-play environment by way of the zoning code, which is not the case for some peer cities. We looked at things in DC and New York and some of the zoning are very restrictive with regards to conversions, which they're working to change, but obviously that's going to take some time and energy. So for all those reasons, we consider this building checking all the boxes, and we fell in love with the building pretty quickly and it was easy to do so for all those reasons I just described.

Ralph Estel:

So you're about a year into the project now.

Mark Cartella:

That's right.

Ralph Estel:

Have you run into any challenges?

Mark Cartella:

Always. Yeah. You always run into challenges in this type of work. But truth be told, this has been probably, I don't want to say easy because there's nothing easy about it, but maybe not as many challenges have been encountered with this one. The largest one, and I'll share very freely, is that we encountered several column enclosures, fire-rated column enclosures, that were compromised, that were buried behind walls. And you always find the proverbial skeletons behind the walls once you start getting into demolition. But that was really by and large, the largest unforeseen condition that we encountered. There was another one, which was kind of interesting. On the 13th floor of the building, there was a vault that was built by previous ownership. It was actually built as part of the building, so it was integral to the superstructure of the building. So it wasn't as if we could just demolish the vault and then not have to worry about some compromised beams and columns. So we were able to get created working with the design team to accommodate that vault and really absorb it within the overall floor plan of that floor. So we had to cut a few holes within the vault to make it work, and made a few minor tweaks and adjustments to I think two or three apartments. But other than that, it's been a pretty smooth process, relatively speaking.

Ralph Estel:

And that vault's going to be visible?

Mark Cartella:

No. No, you won't ever know that it's even was the vault. Basically the walls of the vault now are going to become walls of the units of the apartments. But of course, we had to cut in doorways into the walls of the vault, which is probably 13 inches thick of concrete. But it was interesting. Having been in this industry now for a long time, I never came across a vault that was actually integral to the superstructure of a building. Typically, you can demolish vaults, no problem, not have to worry about reinforcing beams or concrete decks. In this case, it was actually integral to that system, so we had to preserve it, but also make a little bit of Swiss cheese out of it to make the residential program work. Yeah.

Ralph Estel:

Now the train line, I think it's the subway lines go right underneath there, was that any issues in the design or instruction?

Mark Cartella:

So interestingly, this L line does go along Market Street, of course, but it doesn't infringe within our building's footprint. What is really something that we love about the building, adding to that long list of items that I expressed earlier, was that you're actually right over top of the Suburban Station concourse. And so literally you're able to access the Suburban Station concourse from the lower level. So there's two levels beneath the ground level within the building, C1, and C2, so concourse one, concourse two. Concourse one takes you into Suburban Station quite literally. And there's actually a public easement that takes folks that might be getting off from a train ride from the suburbs accessing not only our building, but also Mellon Bank, BNY Mellon Bank Center. So they're able to walk underneath of our building, literally through a public easement and access the BNY Mellon Bank Center building. And so that was another great embedded amenity that we saw where it doesn't get more transit oriented than having Suburban Station underneath literally your apartment.

Ralph Estel:

That's phenomenal. What other type of amenities are you planning for there?

Mark Cartella:

Yeah, so that's something that we're really excited about. We feel that these amenities are going to be really best in class and rival even some of the new buildings that were built ground up along South Broad Street and around Rittenhouse Square. So for instance, the rooftop deck is probably one of the more marquee amenities of the building. It's going to maintain a saltwater pool, which is going to have an infinity edge. And so we're really excited about that. We're actually cutting a hole and reinforcing some of the steel beneath the southwest corner of the building to accommodate that pool. That work's happening real time as we speak. And there's going to be three outdoor living spaces As part of that rooftop terrace, there's going to be a dog park up there, there's a community garden plan, there's a sun deck, an outdoor shower, all on that rooftop deck area. So the nice thing about, again, going about all these existing embedded amenities, it was already a rooftop terrace that Morgan Lewis was using to serve their employees. So we're basically just taking that rooftop terrace and taking it to the next level, almost literally and figuratively. Because in order to accommodate the pool, as you can imagine, the pool has depth to it, in order to preserve the ceiling heights within that top floor, which is the 18th floor of the building, we have to actually build up to a higher elevation. So the sun deck will be roughly five to six feet higher than the current deck to accommodate the depth pool. So that's on the rooftop. We're also really excited about on the C2 level, which is the lowest level in the building, that is going to be a health club as well as a clubhouse amenity. The health club will have an indoor pickleball court. We were able to take advantage of some really tremendous ceiling heights within that space. It's going to have a half court basketball court as well. It's going to have a CrossFit section, so all your explosive movements, your plyometric movements on a turf surface. It'll have a studio. It'll have a sports simulator, and I say sports simulator because it's not going to be just a golf simulator, which is what people typically think of a simulator, it's going to be soccer and other sports to use it for. So that's the health club. And also we'll have a hospitality grade locker room, which will have a cold plunge and saunas. So think of a spa kind of theme. And then in addition to all that, there's going to be a clubhouse, which is going to have a little bit of a speakeasy theme to it. So there'll be a bar. There'll be a prep kitchen for private events if you wanted to host in that space, some billiards, some darts. So it's going to be kind of a loungy speakeasy type of theme to it. So they're kind of the two main amenity levels. There are also a few ancillary amenities peppered throughout the building, most of which will be conferencing rooms, work from home spaces, private rooms for maybe having a podcast or something like that, so studios, things of that nature. So yeah, we feel that with all those amenities under one roof that we'll be able to go head-to-head with pretty much any other class A multifamily building in the city of Philadelphia.

Ralph Estel:

So the apartments, what are you guys looking at? One bedroom? Two bedroom? What's that demographic?

Mark Cartella:

So there's 299 apartments in the building, basically two thirds of which are one bedrooms or one bedrooms plus a den or a work from home space. So think like office, maybe a den or even a nursery. And then the other third is two bedrooms. And the two bedrooms range anywhere from like 1100 to 1200 square feet in size. The one bedroom's range from about 600 to 750 square feet in size.

Ralph Estel:

So they're a little bit larger than what everything's around.

Mark Cartella:

Yeah, that's right. They're actually relatively speaking within Alterra's portfolio on the larger side of apartments that we've done historically. But we live in a new world, this is post-pandemic world that we're all finding ourselves in and the work from home trend doesn't seem to be slowing down much. And we get asked that a lot within our other buildings that we're trying to either stabilize or have turnovers in, where's the space to work in the apartment, from home where I can kind have some privacy and be productive for what your vocation might be. And so we were able to take advantage of some of those larger format apartments and I think come up with something that hopefully will be really received well within the marketplace.

Ralph Estel:

Outside of the building, you doing anything with the facade, any type of change there?

Mark Cartella:

Yes, we are. Quite a bit actually. So when we first acquired the building we really loved the limestone and it's a four-inch thick limestone, which really has a great texture to it. It had a certain richness that it offers and material that you don't really see a whole lot in new construction. That was one thing that we really wanted to take a departure from. So typically when you see a new building being built, it's a lot of glass and steel, which is great and beautiful in its own right. But with this building, we wanted to preserve some of its history, and so we're maintaining the limestone, but reincarnating it in a much slimmer profile, which will effectively be spandrel cladding material. So we're cutting it down to accommodate larger windows. One thing we didn't particularly love about the existing facade was the flat ribbon windows that really didn't create a whole lot of architectural interest. So we're cutting the limestone panels down effectively to deck and then introducing new, larger operable windows in the apartments, which will be a floor-to-ceiling height windows. You can actually see them going in right now, I think we're up to the 10th or 11th floor. So really it's going to have a visual impact to what was there previously and look like a completely different building. There's also some column enclosures that will be vertical elements that will terminate into a sky frame. So that rooftop terrace that I described a few moments ago will be sheltered by this sky frame that will have glass around its entire perimeter, giving you shelter from the elements and the wind and things of that nature. So the building's going to look completely different than it did before we took control of it, which we're really excited about.

Ralph Estel:

You brought up Philadelphia before.

Mark Cartella:

Yeah.

Ralph Estel:

Did they give any incentives, any type of encouragement for this project?

Mark Cartella:

So they did. I mean, particularly going into the mayoral run as we had a new administration coming into power, there was a lot of public statements made about trying to make this work. If you recall, not to go into too much history, we worked for several months, in fact, close to a year with the former owners of the property where we had under contract and lost it and then got it under contract again. So publicly there was a lot of positivity with regards to repositioning the building. However, the only real financial incentive that we were really taking advantage of is the ten-year tax abatement, which is completely preserved for conversions or adaptive reuse. So again, kudos to the city for maintaining that incentive from a tax exposure standpoint, because without that, the project would've potentially not happened at all.

Ralph Estel:

One of the issues that a lot of my clients run into is financing, especially in the past couple of years.

Mark Cartella:

Sure.

Ralph Estel:

How has that going for this project?

Mark Cartella:

So we always felt that it was harder than it should have been because we were so excited about the building. We just thought it was a perfect conversion opportunity. But unfortunately, again, coming out of the pandemic and really unfortunately getting some negative press, I mean the city at large, there was a lot of capital sitting on the sidelines waiting to see what would happen. Whether or not the environment would get better or improve. There was a lot of waiting and seeing to see if this whole work from home trend would subside. I'd like to think that we've turned a corner on that. So it was difficult to get investors by way of the capital markets equity and debt to see the potential. And so that also went into why we had a long protracted requirement of the asset. But fortunately, we remained steadfast and diligent and persevered and a lot of credit to my colleagues at Alterra, Leo Addimando who I mentioned, and Connor Burke and myself, for not letting this one go. So we were able to secure equity through a local family office that we have a great relationship with, their names are Wind River, they're on the advertising banner on the overhead protection on the project. They've been great partners in the project, and we look forward to not only doing this one, but several others, hopefully with them. And then BOCK, the Bank of the Ozarks and Lionheart, they provided the debt. We were able to really rely on some great relationships that were established as part of our 510 North Broad Street project, which that was the same group that provided the debt on that project as well. So between that debt and equity that I just mentioned, we were able to make this thing happen and look forward to serving them and serving future residents as well.

Ralph Estel:

That is great. When do you think it's going to be done?

Mark Cartella:

So we're rocking and rolling. Clemens Construction Company, who is the CM on the project, has been doing a great job for us. Demolition's completely done throughout the building. All that limestone cutting's now done. The exterior windows, like I mentioned, are going in. So we're really working towards water tightness on several of those floors. Drywall's well on their way. We have framing all the way up to, I believe, floor 14 or 15. So we're looking to deliver the first units probably late Q1 of next year with the final completed building by Q2 next year. And we're on track to do that.

Ralph Estel:

Wow.

Mark Cartella:

Yeah, it's a quick, quick construction process, and that was another great attribute that the building had, is that it was maintained really well. So we were able to reuse some of the existing HVAC infrastructure, for instance, chillers and coolers, cooling towers that is, that we're able to salvage basically a repurpose. So we were able to hit the ground running pretty well there.

Ralph Estel:

Mark, this is probably the most interesting project I think going on in the city right now. So thank you for coming down and having a conversation about it. And thank you everyone for joining us, and please look forward to our next segment on Breaking Ground.

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