Philadelphia Commercial Real Estate Review - Year End 2011

by Eric Stretch
Executive Summary
The commercial real estate market in greater Philadelphia continues to face challenges from a stalled employment market but has enjoyed activity from the manufacturing uptick posted during the end of last year and beginning of this year. As such, the industrial market is well into the recovery phase while the office market waits for the financial activities and professional and business services, the classic demand drivers for office space, to gain an uptick in employment. Rents across the board remain depressed and tenants in the market can still achieve discounted pricing below the market highs posted in 2007. Concession packages have shown signs of shrinking of late, but on a geographic basis where stronger markets have seen free rent written into deals dwindle as of late. Overall, the remainder of 2011 is expected to witness positive demand for all product types, albeit modest in some areas and for some products, and landlords should expect to begin filling vacancies, but at a much slower pace than any recent post-recessionary period given the depth and breadth of the greater economic downturn.s

Greater Philadelphia Regional Office Market
The greater Philadelphia office market may have bottomed out late last year given three consecutive quarters of occupancy gains. Driven by employment, office activity has been slow over the past three quarters while near-term future demand is expected to remain muted over the next year or so. Not surprisingly, the main culprits for the recent downturn in the market have been financial activities and professional services firms which posted nearly 1 million square feet of tenancy losses since the beginning of the recession. Offsetting this to some extent has been the nearly 800,000 square feet of space absorbed from the education and healthcare sector. In fact, this business sector accounts for nearly all the net occupancy gains posted in the greater Philadelphia Region since early 2008.

While the overall market appears to be in a state of flux, performance varies significantly from a geographic perspective. The downtown Philadelphia market certainly follows the greater trend having only just begun to shed some of the vacancy added to the market during the recent past. But a look toward the western suburban submarkets reveals quite a different story. Aggressive pricing by some area REITs drove demand during 2009 and 2010, positioning this area well where vacancy is near pre-recessionary levels. Activity in the northern suburbs is strikingly different where vacancy still hovers well over the 20 percent mark. Large retractions early on in the downturn from the likes of Unisys and GMAC pushed vacancy higher while the general market demand deterioration that followed the greater economic downturn added more and more supply to an already saturated market. In the southern New Jersey market, exposure to the greater financial meltdown was evident as large wholes appeared in the inventory from shuttered IndyMac operations and downsizing from Cendant Mortgage. This market continues to suffer from retracted demand and is not expected to fall into a recovery mode until at least next year, if not later.

Greater Philadelphia Region Industrial Market
Recovery persisted in Philadelphia’s regional industrial market, evidenced by the seventh straight quarter of occupancy gains. The vacancy rate fell to 9.3 percent, while the availability rate trended similarly, falling to 13.5 percent and down 90 basis points since its most recent peak in the first quarter of 2010. On a product-type basis, market measures do not translate universally. Claiming most of the occupancy gains during the past nine quarters is warehouse/distribution space where occupancy grew by over 12 million square feet. Furthermore, almost all of this sector’s gains occurred along the I-81/78 Corridor, outside of Philadelphia’s adjacent counties, proving recovery to be clustered by geography as well. Manufacturing space enjoyed a spike in activity from the middle of 2010 to the first quarter of 2011, but mirrored the sentiment contained in the Philadelphia Federal Reserve Banks Business Outlook Survey from July as manufacturing space posted near-zero occupancy growth in the second quarter. Manufacturing firms are somewhat optimistic about hiring plans over the next six months, but the effects this may have on real estate will be muted with little loss or gain in vacancy expected for the remainder of the year.

Average asking rental rates remain flat. During the recession and the months following, landlords opted to keep asking rents near peak levels in order to maintain leverage during lease renewal negotiations. While this strategy worked, new deals were often signed at 25 to 50 percent below asking rents and included significant amounts of free rent. Currently, asking rents remain artificially high, but to a much lesser extent. Free rent still is written into new leases, but amounts decreased toward the ½ month to 1 month per year of term with longer deals tending toward 1 month per year of term. Until the recovery is broad based across geographies and product types, tenants looking in less active submarkets can still demand lower rents with significant concessions."
http://www.omegare.com/