Philadelphia Office Vacancy Drops 180 BP to 13.9%

by Steve Lubetkin, Globest.com

Renovation of older office space in the Philadelphia suburbs is driving leasing demand and vacancy has declined dramatically in submarkets like Plymouth Meeting, northwest of the city.

In the Blue Bell/Plymouth Meeting area, class A vacancy has dropped from 26.7 percent at the end of 2010 to “a staggering” 3.0 percent in the first quarter of 2015.

“My general sense is there’s a lack of quality product in these suburban markets. Developers are starting to realize that by starting to make an investment in these lower quality buildings and turning them into A and A-plus buildings, they’re able to achieve higher rents on those buildings.”

As examples of the renovation activity, Kairos Real Estate Partners, which, as previously reported by GlobeSt.com, is renovating 600, 601, and 602 Office Center Drive, a 393,561 square-foot campus in Fort Washington, recently purchased for $77 per square foot. Earlier, Kairos successfully renovated 2200 Renaissance Blvd., a trophy property in the King of Prussia submarket, attracting one company to relocate its world headquarters there.

After ending the year with two trophy sales, suburban sales activity remained strong from late December through the end of the first quarter. There were five sales totaling $77 million, but assets in core submarkets like King of Prussia/Wayne received a premium on a per square foot basis compared to secondary, non-core suburban markets. In King of Prussia, the Merion Building sold for $254 per square foot, while buildings in non-core suburban markets have sold at a fraction of the cost of core markets.

In Center City Philadelphia, the University City market west of the Schuylkill River has been strong because of expansion by the University of Pennsylvania and Penn Medicine, its healthcare arm, and Drexel University. “The institutions are increasing their footprints there, and we’ve seen declining vacancy in a lot of the buildings. Especially as companies seek to be close to the universities, we’re seeing increasing rents.”

The nearly complete second Cira Centre tower, which will be mostly occupied by FMC Corporation, a chemical company, is almost completely pre-leased. “The vast majority of the building is already spoken for, and given the lack of quality large blocks of space that we have in the central business district, the timing for a new trophy tower in the office market is right. We’ll see an expanding demand base, driven largely from companies interested in the city coming in from out of market and from the suburbs.”

Comcast Corporation, which already occupies a signature tower in the Center City district, is constructing a second tower, and its plans for space have expanded. Originally intending to lease out some of the new tower, Comcast recently said it would occupy the entire building, and has also pushed out some smaller tenants in its existing headquarters to take over the space.

“Just given where they are with growth, especially with the pending Time-Warner merger, they are on an expanding trajectory."

One surprising sector of the Philadelphia office economy is the growth of coworking space providers. We identified 17 coworking providers in Center City. “Where coworking used to be small scale, we’ve increasingly seen more interest from national groups, more corporate groups." Since 2014, the number of sole proprietor-owned businesses in Philadelphia has leaped 149 percent, making shared office space an increasingly attractive play.

Other highlights:

Philadelphia’s office market recorded +641,881 square feet of net absorption in the first quarter, compared to net absorption of -171,699 square feet during Q1 of 2014.  
Class A CBD average asking rents grew 2.9 percent year-over-year to $29.41, driven by limited quality blocks of space and expanding tenant demand.
Since Q1 2014, total vacancy in the regional office market has declined 180 basis points to 13.9 percent.
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