Saturday, August 4, 2012

Bright spots in Center City space

by Natalie KostelniThough the overall Center City office market has lost some of the momentum it had when it closed out 2011, trophy and Class B office space have emerged at midyear as two sweet spots that may help define the future direction of the market.

Three significant Class B buildings have been targeted for apartment conversions, pulling more than 715,000 square feet of office space off of the market. Those buildings are: 1616 Walnut St., a 25-story, 279,770-square-foot property; 260 S. Broad St., which stands 21-stories and totals 330,000 square feet; and the Arch, formerly known as the Robert Morris Building, which totals 106,000 square feet.

The removal of that much space in that office category has helped push down the vacancy rate for Class B space to 10.5 percent at the end of the second quarter from 13.1 percent at the end of last year.

As the new owners of those buildings roll out their conversion plans, tenants have been forced to look elsewhere for new digs. That has meant, in most cases, seeking out other Class B and Class C space.
“There’s not a lot of places for all of those tenants in the B and C market. Tenants are finding space and it’s out there but it’s not plentiful. Unless you’re flexible, there’s not a lot of options.”
The dynamics playing out in the Class B market — shrinking inventory, limited space and demand — has meant pressure on rents.

“We have seen Class B rents tick up in certain submarkets. Brokers also expects as rents go up, concessions will continue to go down.
At the end of the year, Class B rents stood at $24.59 a square foot and are now at $25.51 a square foot.Tenants that are expanding also put some pressure on the Class B market. One company, whose firm owns five Class B office buildings in Center City, has seen a series of tenants add space as they grow.
“They aren’t noticeable, but we felt that taking them in the aggregate, it was meaningful."
At the opposite end, the trophy market has been affected by a string of large lease transactions during the first half of the year.

For example: Marsh & McLennan Cos. took 102,608 square feet at Three Logan Square; Cozen O’Connor took 200,000 square feet at One Liberty Place; Ballard Spahr stayed put in 190,000 square feet at Mellon Bank Center; and Reed Smith grabbed 115,000 square feet at Three Logan.

While those tenants and others have wrapped up their deals, other companies are looking for large blocks of trophy space, which is in short supply. Just 9 percent of the trophy market, which totals 6.35 million square feet, is available. Some of the tenants scouring the market include: Drinker Biddle & Reath seeking 175,000 square feet, FMC Corp. is scouting out 150,000 square feet, Pepper Hamilton is on the hunt for 150,000 square feet; Glenmede Trust wants 100,000 square feet; and Beneficial Bank is looking for 100,000 square feet.
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