Monday, June 25, 2018

Center City Philadelphia’s Tightest Office Micromarkets

Rittenhouse Square, Logan Square Have the Lowest Availability Rates in Philadelphia’s CBD
Most Philadelphia office brokers and investors consider Market Street West (the portion of Market Street running from City Hall to 21st Street) as Center City Philadelphia’s premiere office district and with good reason.

Public transit access is exceptional along that corridor, which is home to more than 12 million square feet of office space, more than double the amount of office space located on other major Center City thoroughfares such as JFK Boulevard, South Broad Street, or Market Street East.

However, Market Street West’s concentration of modern office skyscrapers has made it a favorite among large, publicly traded companies based in Philadelphia, a feature which is both a blessing and a curse for local office landlords.

Clearly, Market Street’s popularity among large tenants is a plus for landlords that can retain them. Giant long term leases by companies such as Independence Blue Cross or Beneficial Bancorp help some office owners keep large portions of their properties filled for years or even decades on end.

The problem is that thanks to high business costs, Center City Philadelphia does not have a strong track record when it comes to attracting and retaining large corporate headquarters. Many of Philadelphia’s largest white collar employers such as Sunoco, Dow Chemical and PNC have all either vacated or downsized their Market Street office space in recent years as part of cost-cutting efforts.

The end result: in terms of the percentage of office availability rates, Market Street West does not stand out as a particularly tight office market today.

The tightest office micromarkets (in terms of both physical vacancy rates and percentage of space listed as available for lease) are currently Rittenhouse Square and Logan Square. Both are located a few blocks off of Market Street and are home to some of Center City’s most coveted public greenspaces.

In contrast to Market Street West, the bulk of office stock in the Rittenhouse Square is comprised of office properties located along Walnut Street, smaller than 350,000 square feet and built before 1970.

These properties cater almost exclusively to tenants looking for spaces less than 15,000 square feet, often in industries like legal services, healthcare and accounting. These mostly privately-held firms do not face the same scrutiny from public shareholders and as a result, are less likely to relocate out of Center City in order to cut costs.

From an owner’s perspective, one downside associated with owning these older, smaller office properties is the constant time and money spent shuffling tenants in and out, as having smaller tenants means more lease expirations.

However, these properties have maintained higher average occupancy rates in recent years than most of the newer skyscrapers along Market Street. As a result, available office space is also harder to find in and around Rittenhouse Square and Logan Square than it is in any other major office district of Center City.

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