Friday, July 2, 2010

Phila. office vacancy rate nearing 15%

"The vacancy rate of Philadelphia’s downtown office market nudged up during the second quarter, hitting 14.8 percent. The total amount of vacant space on the market at midyear is 3.68 million square feet, or the equivalent of three Liberty Place skyscrapers.

The data spotlight a trend in which tenants continue to have the upper hand when it comes to making office lease deals in the Central Business District. That trend is expected to continue for the foreseeable future.

“We’re stabilizing but we haven’t hit bottom,” the biggest “fear” is that a company could “cut-and-run” and really drag the market down further.

In other market indicators, the absorption rate also stayed in negative territory and rose year-to-date to 291,776 square feet. Projections peg the absorption rate hitting negative 500,000 square feet by year end, which at this point, is on track — barring any unforeseen tenant defections that could give it an even bigger boost.

One issue yet to get resolved, but which could potentially have a significant effect on the market, is what Verizon will do with roughly 400,000 square feet it currently leases at Bell Atlantic Tower but is scheduled to expire August 2012.

One tenant that affected the market during the second quarter and caught real estate observers off guard is Arkema Inc., which has decided to sublet roughly 131,000 square feet of its space at 2000 Market St. The company will relocate to space it owns in King of Prussia. “Down cycles are fraught with anomalies and this was the anomaly in the second quarter.”

By putting the Arkema space up for sublease, the total amount of sublease space available for rent swelled to 1.15 million square feet compared with an annual historical average of 860,000 square feet. Three tenants — Arkema, Sunoco Inc. with 220,000 square feet at Mellon Bank Center, and Unisys with 90,000 square feet at One Liberty Place — account for the bulk of the sublease space. The remainder is fractured in smaller pockets throughout the central business district. Tenant activity is strengthening though deals are taking longer to consummate."

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