Friday, February 3, 2012

Center City dragged down by vacancies

by Natalie Kostelni

"The Philadelphia office market is beginning to suffer from an emerging real estate trend: tenants who take less space even though the number of employees remains the same or may even grow.

Several companies who signed large leases within the last year, including GlaxoSmithKline, Janney Montgomery Scott, and Reed Smith, shrank the amount of space they leased and others currently in the market are seeking to do the same. Referred to as space utilization, these firms sought to create more open, modern office environments that rely on collaborative space and take into account the actual amount of time an employee spends in the office.

A study by Francis Cauffman, a Philadelphia architectural firm, concluded a majority of offices are occupied just 45 percent of the time and employees conduct 70 percent of their work in group settings. The heyday of the cubicle, where people toil in their own personal space that typically totaled well over 200 square feet, may well be over. How much is now sought? Just over 120 square feet or less. The poster child is when GlaxoSmithKline relocates out of One Franklin Plaza, a 624,000-square-foot building, and moves to the Navy Yard next year.

While this translates into companies needing less office space and savings on their real estate expenses, it also has meant landlords are becoming saddled with unexpected vacancies.

It will catch up with some markets faster than others depending on what sectors are dominante. While accounting, insurance and other firms are ripe for that type of off-site work and office set up, it doesn’t fit for every one.

As a result of the new layout, companies are flipping the traditional ratio between office and open space. Many tenants are coming out of offices they have occupied for the last 15 to 20 years and decided to change their footprint to now have 70 percent open space and 30 percent office space.

“If you had to project into the future, the trend is more and more about reducing the footprint per employee."
Firms are also taking into account improvements in technology and communication that spurs more telecommuting. While space utilization is contributing to the overall vacancy rate of 14.1 percent in Center City, the office buildings with the 10 largest pockets of empty space also show other factors at work. Some of the vacancies, such as what is seen at 10 Penn Center, is a result of tenants moving in to fancier office space on the cheap. There’s also still a hangover from 2008 and 2009 when companies made layoffs during the height of the recession.

“The analogy I use is you’re a size nine in size 12 shoes. Some firms have not right-sized and when they do right-size, you’re going to find every one is taking less space.”

Vacancies in two buildings, 401 Market St. and 801 Market, reflect downsizing that’s happened in banking. At 401 Market, Wells Fargo vacated an 87,000-square-foot gap, and Citizens Bank moved out of 125,000 square feet at 801 Market. The 135,000-square-foot vacancy at 1650 Arch St. is the result of the dissolution of law firm Wolf Block.

Back filling the vacancies will be a challenge and in the meantime it has meant a downward pressure on rents.

“Rents are driven by demand and demand is dropping. The only things that can stabilize Center City rents are two things: job creation, and that hasn’t happened too much, and buildings formerly used as office space coming off line and finding another use.”
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