Higher Yields Draw Philly Office Investors

by Steve Lubetkin, Globest.com
Expanding construction by one of the market’s largest employers, Comcast Corporation, seems to be serving as a stimulant for the Philadelphia office market. A steady pace of hiring in the Philadelphia metro is increasing demand for office space as companies look for larger locations to house their growing work forces.

Firms are scouring the market for available space both in the CBD and in suburban areas, the report says. Many smaller businesses are expanding, adding fewer than 100 jobs and backfilling dark space in adjacent suites or looking for new locations.

“A lot of people out there, both tenants and investors, are interested in Philadelphia office. I think there are a lot of drivers for that. The growing start up tech industry, the healthcare industry here is one of the strongest per-capita in the country. It’s become an area where a lot of investors are starting to look because there’s a little bit more of a yield in the opportunity here.”

Overall, Philadelphia office development is on the rise, although it is expected that deliveries this year will fall significantly below the 10-year average.

“They are looking for larger spaces.There is a very limited amount of larger space for tenants to occupy in class A properties.”

Most projects are pre-leased, build-to-suit projects or mixed-use buildings with large office components. Many of those projects won’t be completed for the next few years. The balance of new construction and demand has kept vacancy stable for the past several years. Rents, on the other hand, have been able to post modest gains, benefiting property owners, the report says.

Philadelphia’s stable economic growth is fostering tighter office operations with higher first-year yields, attracting investors from neighboring metros and intensifying competition among buyers.

Average rents increased 2.1 percent to $23.05 per square foot, up nearly 1 percent above the pre-recession high set in mid-2008. In the same span last year rents rose 1.7 percent. Class A asking rents averaged $26.44 per square foot, climbing 1.2 percent during the past year. At Class B and C properties asking rents advanced three percent vs. last year, to $20.52 per square foot.

The Main Line submarket recorded the highest rents at $30.88 per square foot, followed by the Bala Cynwyd-Narberth and Conshohocken submarkets at $30.21 and $30.15 per square foot, respectively. One of the strongest rent growth was in the Market Street East submarket, which rose 10.9 percent to $24.21 per square foot. Marcus & Millichap sees average asking rents rising 1.7 percent this year to $23.25 per square foot. In 2014, rents for marketed space rose 1.5 percent on average.

Some key highlights of the report:

Employment: This year employers are on track to boost total employment 1.2 percent, adding 35,000 positions. In 2014, a total of 45,400 jobs were created in the Philadelphia metro, while the unemployment rate plunged 130 basis points to 5.5 percent.

Construction: The construction pipeline will shrink this year with only 200,000 square feet of office space scheduled for delivery. Last year 690,000 square feet was placed into service. More than 2 million square feet is expected through 2018.

Vacancy: A slow construction pipeline will enable vacancy to fall 40 basis points this year to 15.7 percent on net absorption of 1.3 million square feet. In 2014, average vacancy recorded a 20-basis-point increase.

Rents: Average asking rents will rise 1.7 percent this year to $23.25 per square foot, up 1.6 percent above the pre-recession high. In 2014, rents for marketed space rose 1.5 percent on average.

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