Friday, May 27, 2011

Vacancies rise as Bala Cynwyd office market falls behind

by Natalie Kostelni

"The office market here, attractive for its proximity to Philadelphia but without the tax burden, has seen better days.

After once enjoying a tight, enviable 3.9 percent vacancy in 2000, the amount of empty space lingering on the market has been on a steady climb since. Office tenants have been migrating to shinier, newer office buildings just down the road in Conshohocken, Radnor and other nearby markets or closing up altogether.

Tenants are also shrinking. For example, Pearson VUE, which administers professional tests, this month renewed its lease at Three Bala Plaza for 42,000 square feet, down from 68,000 square feet. In addition, many existing tenants simply hopscotch around the office submarket, leaving it with half a dozen buildings with pockets of empty space and a 20.7 percent vacancy rate as of the first quarter. Data puts the vacancy rate at the end of the first quarter at about 17 percent.

Tenants who have moved or closed vary in size and type. Janney Montgomery Scott, Hartford Insurance and Verizon shuttered offices in the market. St. Joseph’s University, which had been in 17,000 square feet at Three Bala, relocated back to renovated space at the former Episcopal Academy campus, which it owns. AT&T trekked out to King of Prussia; Judge Group, Smith Barney and ECBM Insurance moved to Conshohocken; Teva Pharmaceuticals went to Horsham; and GfK U.S. Healthcare headed to Blue Bell.

The market totals 2.9 million square feet so small fluctuations can feel bigger but, still, activity hasn’t been as robust as in Radnor or Conshohocken.

“When you lose a 35,000-square-foot tenant in Bala, it’s significant,” Dugan said. “There’s some small deal activity, but you’re not seeing the 15,000- to 30,000-square-foot deals.”

The pool of office tenants who consider Bala also look in Conshohocken and Radnor, both of which have newer buildings or offices that have undergone major overhauls, putting Bala at a disadvantage.

“It’s a market that was used to having 5 to 6 percent vacancy, but it has spiked. Bala is a simple market. It has a phenomenal location but what has been built in the last 20 years? Nothing.”

Landlords have spent money, sometimes millions of dollars, to make interior renovations. Tishman Speyer, the market’s largest landlord with just over 1 million square feet, has made some interior upgrades to its One, Two and Three Bala buildings, but not to the extent of some of the buildings in Radnor and Conshohocken. Maguire Partners sank $6 million into renovating One Belmont. Keystone Property Group totally re-did One Presidential Blvd. and 225 City Ave. — but that only accounts for 208,000 square feet of space. All of those makeovers still can’t keep up with Conshohocken or Radnor.

“What draws people to Bala a lot of executives on the Main Line can live close to the office and don’t pay city taxes, but you still have easy access to the city. What has happened over the years is the asset quality has really fallen behind buildings in Conshohocken and Radnor.”

Bala also doesn’t attract a lot of large space users, which has also been a challenge. Bala is predominantly tenanted by companies leasing 2,500 to 6,000 square feet.

“It’s very hard to make up for 40,000 square feet of vacancy. In other markets, there are a lot of 20,000-square-foot tenants that can come in and fill in that.”

Nearby suburban businesses also hesitate to move to Bala because rents are relatively high and asset quality isn’t as good as where they are, he said.

Rents average about $31 a square foot.

“For Bala to be competitive for the next 20 years, we need new development,” said Gary Brandeis, managing director of Fb Capital Partners, which invests in real estate and owns the Crown Plaza on City Avenue. Brandeis also sits on the City Avenue Special Services District. “Bala can’t compete against Radnor, Conshohocken and new development. I think for an office submarket, this is a critical part of keeping Bala Cynwyd competitive over the long run.”

Lower Merion is trying to establish an overlay district along the City Avenue corridor that could have the potential to spur new development. The new zoning would promote taller buildings and denser, mixed-use development that would be more pedestrian friendly in a designated area.

The proposal, for example, would allow the height of existing and new buildings to reach up to 300 feet tall, or roughly 30 stories high. The zoning would flank both sides of City Avenue and Philadelphia City Council passed the zoning district in 2009. Lower Merion Commissioners have yet to sign off on it and hearings this summer are expected to refine the ordinance.

The overlay district has been controversial. Opponents worry that taller buildings will mean more traffic congestion and be a detriment to the residential communities. If the zoning eventually passes, development activity would be years away but once in place, could potentially pull more tenants out of Center City who are seeking breaks on Philadelphia taxes and proximity to the city and brand-new buildings.

“The location of Bala will never change but the rezoning is going to be a factor to make it more competitive. It needs the rezoning, otherwise more tenants will leave.”

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