Thursday, February 2, 2017

Strong Sales, Lease Signings, Low Vacancy Mark 2016 Philadelphia Office Market

by Steve Lubetkin,

Investment sales activity was robust in both the CBD and suburban office markets while vacancy rates in the suburbs hit historic lows in 2016, the fourth-quarter 2016 Office Market report.

“The overall vacancy rate increased 120 basis points to 10.6% year-over-year, largely due to the delivery of the 622,000-square-foot FMC Tower at Cira Centre in the second quarter. This is the first new construction in the Philadelphia CBD since 2007, and the building’s completion added nearly 230,000 square feet of vacant space to the market.”

The overall vacancy rate is expected to continue to rise in early 2017, with two sizable renovation projects scheduled to deliver in the second quarter. One Franklin Tower, GlaxoSmithKline’s former headquarters, and the former Family Court building at 34 South 11th Street will add a combined nearly 300,000 square feet of redeveloped office space to the market.

Average asking rental rates increased by 7.2% over the past year to $30.08 per square foot, the highest in the Philadelphia CBD’s history. There was also an increase in investment sales activity, which rose 7.9% in 2016. Two Liberty Place, acquired by Coretrust Capital for $207.9 million, was the biggest office-building sale in 2016.

Leasing activity totaled 2.2 million square feet in 2016, a drop of 4.8% from 2015. Aramark inked the largest lease of the year for 297,800 square feet at 2400 Market Street. Other notable leases in the CBD submarket included Five Below taking 180,000 square feet at 701 Market Street, and GSA leasing 94,704 square feet at 801 Market Street. In addition, Nasdaq leased 75,000 square feet at the FMC Tower at Cira Centre South, and Montgomery, McCracken, Walker and Rhoads took 67,000 square feet at 1735 Market Street.

In the Philadelphia suburbs, space reached its tightest levels in more than 15 years.

“In 2016 we saw the lowest overall vacancy in the Philadelphia suburbs since 2001. The overall vacancy rate declined to 11.8% by year-end, down 290 basis points from 2015.”

Class A direct asking rental rates increased 0.5% from a year ago to $25.63 per square foot. Overall net absorption was positive for the year, rising to 1.9 million square feet compared to 558,526 square feet in 2015.

The King of Prussia submarket accounted for nearly 40.0% of the 3.2 million square feet of new leasing activity in 2016. Significant leases included Vertex, which leased 168,000 square feet at 2301 Renaissance Boulevard in King of Prussia; The Hartford Mutual Funds, which took occupancy of 73,189 square feet at 690 Lee Road in Wayne; and Teva Pharmaceuticals, which leased 60,307 square feet at Two Quarry Ridge in Malvern.

Other notable 2016 lease signings in the submarket included:

  • Voya Insurance and Annuity Company renewing for 100,000 square feet at 1475 Dunwoody Drive in Exton.
  • Franklin Mint Federal Credit Union taking 52,000 square feet at 5 Hillman Drive in Chadds Ford.
  • Ashfield Healthcare leasing 82,000 square feet at 1100 Virginia Drive in Fort Washington.
  • Linde Engineering North America renewing for 60,103 square feet at 325 Sentry Parkway East in Blue Bell.
  • inVentiv Health renewing for 51,320 square feet at 100 Brandywine Boulevard in Newtown.

Investment sales activity, which rose 3.1% year-over-year, has increased significantly over the past two years and is expected to remain robust into 2017.  A total of 9.7 million square feet has been sold since 2015, which is 49.4% higher than the total volume from 2010 to 2014.

With the steep decline in vacancy and rising tenant demand experienced over the past year, new construction activity is expected to increase in 2017. The overall vacancy rate is projected to drop further next year, with rental rates for all classes rising by 5.8% by year-end 2017.

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