Wednesday, July 31, 2019

Co-Working Sector Fueling Growth in Philadelphia Office Market

by John Jordan
Source: CBRE Research
Thanks to continued strong leasing activity by co-working operators, this business segment now represents more than 1 million square feet of office space here.

In the second quarter 2019 office market report for Philadelphia, reported that the co-working segment eclipsed the 1-million-square-foot mark in the second quarter. The brokerage firm also reports that another lease deal with a co-working firm involving multiple floors of a City Center office building is currently pending.
“The co-working phenomenon continues its positive momentum both in Philadelphia and markets across the United States. This disruptive industry has firmly established itself as an office solution for many corporations and we anticipate its growth trajectory to continue.”

Downtown Philadelphia was home to the most significant leasing activity of the second quarter in the Greater Philadelphia/Southern New Jersey region.
The EPA signed a 173,000-square-foot lease at Four Penn Center, a move from its current location at 1650 Arch St. in the second quarter. In addition to WeWork and Industrious’ new co-working deals at 1100 Ludlow St and Two Liberty Place, respectively, Children’s Hospital of Philadelphia signed on to take more than 50,000 square feet at the historic Wanamaker Building. Notable leases outside the CBD included Kreischer Miller’s renewal at 100 Witmer Rd. in Horsham and FXI’s new lease at 5 Radnor Corporate Center.

The vacancy rate for the Philadelphia CBD stood at 14.9% at the end of the second quarter. The region’s overall asking rent stood at $26.96-per-square-foot at the mid-point of 2019. Net absorption in the market was  a negative 232,222 square feet.

During the second quarter, market fundamentals across the metropolitan area improved slightly.  Occupancy gains in the CBD and Camden, NJ helped dampen the effects of Bank of America’s l exit from the Bracebridge buildings in Wilmington, which left more than 500,000 square feet of Class A space available.
Strong rent growth persisted in the CBD, where landlords asked 5.3% more for Class A space than they did this time last year. The premium for Class A space in Market West approached $7-per-square-foot per year compared to Class B space.

Reports also show that rents grew slightly in the suburbs and the outer submarkets, except for the Wilmington CBD where rates dipped in response to occupancy losses there. The overall vacancy rate in the CBD tightened by 30 basis points, reverting nearly back to where it stood at the end of 2018.

Vacancy across the suburban Pennsylvania markets generally grew, except for in the Main Line, where a flurry of leasing in Radnor caused vacancy to tighten by 410 basis points to 4.5%. The most noteworthy jump in vacancy occurred in Wilmington, where the previously mentioned Bank of America departure moved the rate to 26.6% at the end of the second quarter.

In the Philadelphia CBD there is currently approximately 1.3 million square feet of new office product under construction. With the recent delivery of the nearly 400,000-square-foot Triad 1828 Centre in Camden, NJ, the next major office product to open its doors will be Five City Center in Allentown, PA. The 300,000-square-foot mixed-use building is nearly 85% pre-leased to payroll services firm ADP.

Two major developments in the Philadelphia suburbs are currently under construction—AmeriHealth’s Caritas’ build-to-suit in Newtown Square and Amerisource Bergen’s build-to-suit in Conshohocken.

In terms of the region’s capital markets, Philadelphia rounded out the first half of 2019 with a relatively quiet quarter in the office investment sales sector. There were a few notable trades, including Buccini/Pollin Group’s purchase of Glenhardie Corporate Center in Wayne for roughly $120-per-square-foot and Apex Financial Advisors’ purchase of Lippincott Centre in Marlton.

Liberty Property Trust continued to divest from the office market, selling four more properties in Malvern. Despite these deals, sales volume for the second quarter in Philadelphia was the lowest since 2012. The report notes, however, that the four-quarter aggregate figure for the area indicates that office spaces, in recent quarters, remained above the 10-year average.

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