Thursday, January 19, 2017

Philadelphia’s Office Vacancy Decreases to 8.9%

by Costar Research Department

The Philadelphia Office market ended the fourth quarter 2016 with a vacancy rate of 8.9%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 998,728 square feet in the fourth quarter. Vacant sublease space decreased in the quarter, ending the quarter at 864,423 square feet. Rental rates ended the fourth quarter at $22.33, an increase over the previous quarter. A total of seven buildings delivered to the market in the quarter totaling 469,277 square feet, with 4,491,509 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall Philadelphia office market was positive 998,728 square feet in the fourth quarter 2016. That compares to positive 1,449,583 square feet in the third quarter 2016, positive 1,883,898 square feet in the second quarter 2016, and negative (164,999) square feet in the first quarter 2016.

Tenants moving out of large blocks of space in 2016 include: DuPont moving out of 379,228 square feet at The DuPont Bldg; Merck & Co, Inc. moving out of 344,280 square feet at The Pinnacle; and FMC Corporation moving out of 200,501 square feet at 1735 Market St. Tenants moving into large blocks of space in 2016 include: Guardian Life Insurance moving into 274,152 square feet at Guardian Life Insurance; St. Luke’s Health System moving into 247,008 square feet at Founders Building; and Nationwide Mutual Insurance Company moving into 220,230 square feet at 355 Maple Ave. The Class-A office market recorded net absorption of positive 192,578 square feet in the fourth quarter 2016, compared to positive 815,760 square feet in the third quarter 2016, positive 794,844 in the second quarter 2016, and positive 279,383 in the first quarter 2016. The Class-B office market recorded net absorption of positive 602,497 square feet in the fourth quarter 2016, compared to positive 281,859 square feet in the third quarter 2016, positive 834,863 in the second quarter 2016, and negative (360,072) in the first quarter 2016. The Class-C office market recorded net absorption of positive 203,653 square feet in the fourth quarter 2016 compared to positive 351,964 square feet in the third quarter 2016, positive 254,191 in the second quarter 2016, and negative (84,310) in the first quarter 2016. Net absorption for Philadelphia’s central business district was positive 336,935 square feet in the fourth quarter 2016. That compares to positive 242,382 square feet in the third quarter 2016, positive 60,917 in the second quarter 2016, and negative (189,885) in the first quarter 2016. Net absorption for the suburban markets was positive 661,793 square feet in the fourth quarter 2016. That compares to positive 1,207,201 square feet in third quarter 2016, positive 1,822,981 in the second quarter 2016, and positive 24,886 in the first quarter 2016.

Vacancy
The office vacancy rate in the Philadelphia market area decreased to 8.9% at the end of the fourth quarter 2016. The vacancy rate was 9.0% at the end of the third quarter 2016, 9.2% at the end of the second quarter 2016, and 9.5% at the end of the first quarter 2016. Class-A projects reported a vacancy rate of 10.4% at the end of the fourth quarter 2016, 10.4% at the end of the third quarter 2016, 10.5% at the end of the second quarter 2016, and 10.8% at the end of the first quarter 2016. Class-B projects reported a vacancy rate of 9.2% at the end of the fourth quarter 2016, 9.5% at the end of the third quarter 2016, 9.6% at the end of the second quarter 2016, and 10.0% at the end of the first quarter 2016. Class-C projects reported a vacancy rate of 6.4% at the end of the fourth quarter 2016, 6.6% at the end of third quarter 2016, 6.9% at the end of the second quarter 2016, and 7.1% at the end of the first quarter 2016. The overall vacancy rate in Philadelphia’s central business district at the end of the fourth quarter 2016 decreased to 9.3%. The vacancy rate was 9.8% at the end of the third quarter 2016, 9.3% at the end of the second quarter 2016, and 9.4% at the end of the first quarter 2016. The vacancy rate in the suburban markets decreased to 8.8% in the fourth quarter 2016. The vacancy rate was 8.9% at the end of the third quarter 2016, 9.1% at the end of the second quarter 2016, and 9.5% at the end of the first quarter 2016.

Largest Lease Signings 
The largest lease signings occurring in 2016 included: the 320,367-square-foot lease signed by CIGNA Health Management, Inc. at Two Liberty Place in the Philadelphia CBD market; the 168,000-square-foot deal signed by Vertex Inc. at 2301 Renaissance Blvd in the Suburban Philadelphia market; and the 153,600-square-foot lease signed by Five Below at The Lits Building in the Philadelphia CBD market.

Sublease Vacancy
 The amount of vacant sublease space in the Philadelphia market decreased to 864,423 square feet by the end of the fourth quarter 2016, from 913,077 square feet at the end of the third quarter 2016. There was 901,415 square feet vacant at the end of the second quarter 2016 and 833,972 square feet at the end of the first quarter 2016. Philadelphia’s Class-A projects reported vacant sublease space of 560,541 square feet at the end of fourth quarter 2016, down from the 584,485 square feet reported at the end of the third quarter 2016. There were 560,109 square feet of sublease space vacant at the end of the second quarter 2016, and 533,650 square feet at the end of the first quarter 2016. Class-B projects reported vacant sublease space of 280,114 square feet at the end of the fourth quarter 2016, down from the 286,701 square feet reported at the end of the third quarter 2016. At the end of the second quarter 2016 there were 309,139 square feet, and at the end of the first quarter 2016 there were 249,561 square feet vacant. Class-C projects reported decreased vacant sublease space from the third quarter 2016 to the fourth quarter 2016. Sublease vacancy went from 41,891 square feet to 23,768 square feet during that time. There was 32,167 square feet at the end of the second quarter 2016, and 50,761 square feet at the end of the first quarter 2016. Sublease vacancy in Philadelphia’s central business district stood at 172,838 square feet at the end of the fourth quarter 2016. It was 248,847 square feet at the end of the third quarter 2016, 197,890 square feet at the end of the second quarter 2016, and 182,859 square feet at the end of the first quarter 2016. Sublease vacancy in the suburban markets ended the fourth quarter 2016 at 691,585 square feet. At the end of the third quarter 2016 sublease vacancy was 664,230 square feet, was 703,525 square feet at the end of the second quarter 2016, and was 651,113 square feet at the end of the first quarter 2016.

Rental Rates 
The average quoted asking rental rate for available office space, all classes, was $22.33 per square foot per year at the end of the fourth quarter 2016 in the Philadelphia market area. This represented basically no increase in quoted rental rates from the end of the third quarter 2016, when rents were reported at $22.32 per square foot. The average quoted rate within the Class-A sector was $26.92 at the end of the fourth quarter 2016, while Class-B rates stood at $20.27, and Class-C rates at $17.85. At the end of the third quarter 2016, Class-A rates were $27.08 per square foot, Class-B rates were $20.20, and Class-C rates were $17.76. The average quoted asking rental rate in Philadelphia’s CBD was $28.13 at the end of the fourth quarter 2016, and $21.40 in the suburban markets. In the third quarter 2016, quoted rates were $28.52 in the CBD and $21.36 in the suburbs.

Deliveries and Construction 
During the fourth quarter 2016, seven buildings totaling 469,277 square feet were completed in the Philadelphia market area. This compares to six buildings totaling 878,890 square feet that were completed in the third quarter 2016, nine buildings totaling 601,047 square feet completed in the second quarter 2016, and 61,949 square feet in seven buildings completed in the first quarter 2016. There were 4,491,509 square feet of office space under construction at the end of the fourth quarter 2016. Some of the notable 2016 deliveries include: FMC Tower at Cira Centre South, a 622,000-square-foot facility that delivered in third quarter 2016 and is now 80% occupied, and Guardian Life Insurance, a 290,265-square-foot building that delivered in second quarter 2016 and is now 100% occupied. The largest projects underway at the end of fourth quarter 2016 were Comcast Technology Center, a 1,336,682- square-foot building with 100% of its space pre-leased, and CHOP Research Tower, a 466,000-square-foot facility that is 100% pre-leased.

Inventory 
Total office inventory in the Philadelphia market area amounted to 418,139,590 square feet in 23,286 buildings as of the end of the fourth quarter 2016. The Class-A office sector consisted of 131,604,997 square feet in 973 projects. There were 8,163 Class-B buildings totaling 177,738,357 square feet, and the Class-C sector consisted of 108,796,236 square feet in 14,150 buildings. Within the Office market there were 1,013 owner-occupied buildings accounting for 37,766,365 square feet of office space.

Sales Activity
Tallying office building sales of 15,000 square feet or larger, Philadelphia office sales figures rose during the third quarter 2016 in terms of dollar volume compared to the second quarter of 2016. In the third quarter, 45 office transactions closed with a total volume of $525,485,732. The 45 buildings totaled 3,364,794 square feet and the average price per square foot equated to $156.17 per square foot. That compares to 43 transactions totaling $487,549,856 in the second quarter 2016. The total square footage in the second quarter was 4,407,921 square feet for an average price per square foot of $110.61. Total office building sales activity in 2016 was up compared to 2015. In the first nine months of 2016, the market saw 120 office sales transactions with a total volume of $1,941,701,521. The price per square foot averaged $166.53. In the same first nine months of 2015, the market posted 123 transactions with a total volume of $1,612,759,798. The price per square foot averaged $132.37. Cap rates have been lower in 2016, averaging 7.55% compared to the same period in 2015 when they averaged 8.13%. One of the largest transactions that has occurred within the last four quarters in the Philadelphia market is the sale of Cira Square in Philadelphia. This 870,262-square-foot office building sold for $354,000,000, or $406.77 per square foot. The property sold on 2/8/2016, at a 5.80% cap rate.”

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