One of Center City’s most iconic distressed office buildings could undergo a residential conversion following foreclosure proceedings expected to wrap up early next year.

TF Cornerstone plans to convert Center City’s historic Wanamaker Building into apartments following bankruptcy proceedings.

New York-based development company TF Cornerstone plans to transform the 1.4M SF structure at 1300 Market St. into apartments once the foreclosure process is complete, according to the Philadelphia Business Journal, which cited an unnamed source.

The vintage skyscraper’s current owner, Rubenstein Partners, is in the midst of bankruptcy proceedings in the Philadelphia Court of Common Pleas. TF Cornerstone acquired the majority of the building’s office debt in July and is pushing to advance the foreclosure case.

The two parties will have an opportunity to hash it out during a settlement conference scheduled for Jan. 6. If they don’t come to an agreement, a trial will begin on March 3.

The Wanamaker Building’s floor plate is roughly 100K SF, about five times larger than the ideal size for an office-to-residential conversion, the PBJ reported. One feasible but pricey solution would entail hollowing out the historically protected structure for an interior courtyard.

TF Cornerstone, which also bought the 435K SF Macy’s space on the first three floors of the building for $40M in 2019, has extensive experience with office conversions in New York City.

Its projects include 95 Horatio Street, a former refrigeration facility in the Meatpacking District that was converted to 318 residential units, and The Fairfax, a former FBI headquarters building that became 313 residences.

Last week, the company and partner Dune Real Estate announced plans for a new $1B office conversion venture called Alta Residential.

“Dune and TF Cornerstone have identified the conversion of office buildings to residential as a generational opportunity given the scale of the distress in office real estate together with the unmet demand for housing in the U.S.,” the companies said in a Tuesday press release.

In addition to TF Cornerstone’s hometown, Alta Residential will target the office markets in Washington, D.C., Boston, Atlanta, Dallas, San Francisco, Los Angeles, Charlotte and Raleigh, North Carolina.

Rubenstein paid $200M for a majority stake in the Wanamaker Building in 2017. It was 96% occupied at the time. That rate dropped to 36% when advertising firm Digitas vacated its space last year.

Rubenstein listed the building for sale in 2021 after several high-profile tenants, including the General Services Administration, the Department of Housing and Urban Development and the Children’s Hospital of Philadelphia, moved out in the wake of the pandemic.

The building went into receivership in September 2023. Details about TF Cornerstone’s plans to buy it first emerged in July.

As rent growth declines and new construction progresses, oversupply is a hot topic in the multifamily industry. Now, fresh data shows the impact of elevated supply could fall heaviest on the high-end properties that make up the bulk of scheduled new deliveries.

There were just fewer than a million units under construction at the end of the third quarter, and 70% of those were considered high-end, according to a CoStar report that found the gap between mid-range and high-end rents is widening.

The rent difference between properties considered four- or five-star and those considered three-star is about $550 per month, or $6,600 a year, much higher than the marginal difference in years past, CoStar found. That could be an issue since developers often deal with oversupply by offering concessions to lure tenants from other complexes, making larger differences more impactful.

High-class building rents nationally average $2,074 per month, so a developer would have to offer at least three free months to attract a tenant from a lower-class building, CoStar reported.

Landlords are already offering concessions on 30% of rental listings, the highest rate in two years, according to a Zillow report from last week. 

The trend is being felt in submarkets like Downtown Miami, which saw luxury rents drop 1.1% at the end of the third quarter, while lower-tier rents grew by 1.1%, according to CoStar. Downtown Miami has about 16,708 units under construction, or about 57.8% of its inventory. With an average price differential of $540 a month, Miami’s nonluxury product is somewhat insulated from the large supply of four- and five-star units coming online, CoStar reported.

Charlotte’s South End had 6,592 units, or 59.3% of its inventory, under construction and saw a rent growth decline of 3.1% in the third quarter. 

Other submarkets likely to feel a pinch include St. Augustine, Florida, Downtown Austin and Downtown Atlanta, which all have a construction pipeline representing more than 40% of their inventory. All three markets saw rent growth declines in the third quarter.

The Sun Belt has the largest concentration of units under construction. The markets with the most units being built include Downtown Miami, Downtown Nashville, Frisco/Prosper in Dallas-Fort Worth, Downtown Denver and Charlotte’s South End. 

Multifamily REITs are seeing the impact of oversupply and concessions in these areas, according to third-quarter earnings calls. UDR reported its San Francisco and Sun Belt markets being impacted by new supply, with average concessions hovering at about three weeks and ranging up to six weeks free. 

UDR expects the concession-heavy dynamic to continue throughout the fourth quarter and into 2024, said Michael Lacy, the company’s senior vice president of property operations.

The same submarkets seeing many product deliveries this year will probably see more still in 2024, Camden Property Trust President Keith Oden said.