Sunday, May 9, 2010

South Broad vacancies rise high

"For years, South Broad Street has been a highly desirable office submarket in Center City and consistently experienced some of the lowest vacancy rates in town as tenants clamored to set up shop along the Avenue of Arts.

But no more.

The submarket has one of the highest vacancy rates —16.2 percent at the end of first quarter — in Philadelphia and is higher than the 13.7 percent overall vacancy rate of the Central Business District. At the end of last year, the vacancy was 14.3 percent. The empty space is in stark contrast to its past, when the 2.5-million-square-foot submarket had vacancies below 5 percent.

“Everything was so tight there. There wasn’t a lot of flexibility,”

Companies wanted to be close to the hubbub of the theaters, restaurants and shops. “Traditionally it has been a tight market and hard to find space,”

The return of the high vacancy rate harks back to a time 20 years ago when tenants used to veer from South Broad. Then, the submarket was all but dead as tenants abandoned older buildings for fancy new ones along West Market Street.

That’s a dynamic at work again today.

“It’s a flight to quality,” Smith said. “People who are in A-minus, B-plus buildings move up to an A building and pay the same rent. Typically, this happens to South Broad and Walnut in every recession.”

Much of the vacancy dragging down South Broad can be attributed to a single building ­— the Atlantic Building at 260 S. Broad St. The other buildings that make up the market, including the Bellevue, 230 S. Broad, 1 South Broad, and Land Title, are nearly fully occupied.

“There’s always one or two buildings that are down on their luck in the city,” said SSH Real Estate, which owns 123 S. Broad St., one of the seven main buildings that comprise the market. “Last quarter it was 1650 Arch St.”

Historically, the 21-story, 325,000-square-foot structure has been fully occupied for as long as it has been around.

The Atlantic was constructed in 1923.

“We’re competing with Market Street whereas we didn’t have to before."

Three big tenants defected from the Atlantic Building, leaving it 48 percent unoccupied over 10 floors. Klehr Harrison moved to 1835 Market St. DMJM Aviation and Family Planning Council relocated to 1700 Market.

“It will come back,” he said, noting that rents will need to be adjusted downward to entice tenants coming out of B and C class buildings. “It’s a very natural progression. Then the C buildings either adjust their rents again or change as a conversion.”

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