Thursday, March 28, 2024

Philadelphia’s Suburban Office Struggles Pre-Date the Pandemic

By Brenda Nguyen Costar Research
Philadelphia's office market has in some ways become a tale of two cities, highlighting challenges that preceded the pandemic and those that followed.

The Philadelphia suburbs have grappled with high office availability rates for over a decade, well above the historical regional average. For them, a large amount of available office space is standard operating procedure.

However, the large amount of available office space comes as a shock to Philadelphia’s central business district. Center City, which had previously maintained the region's lowest availability rate, now leads the Philadelphia region in office availability with an 18.1% availability rate, translating to 12.1 million square feet of office space for lease. Meanwhile, the suburbs, which encompass a significantly larger geography—recorded a 16.6% availability rate, which translates to 23.2 million square feet on the market.

Signs of softening demand in the office market first surfaced over a decade ago. Philadelphia’s lowest recorded availability rate of 10.8% occurred in 2007, the year before the Great Financial Crisis. Since then, Philadelphia’s office availability has never dropped below that marker.

The office surplus has been evident in Philadelphia's historically high office availability rates. Over the past two decades, the availability rate for office space has consistently exceeded those of multifamily, industrial, and even retail properties.

Philadelphia’s structural office issue is rooted in the 1980s, a record year of office development locally and nationally. As of 2024, 1980s buildings comprise 22% of existing office space, while offices built between 1960 and 2009 comprise 65%.

The area's aging office inventory presents a challenge. Without modernization efforts, a growing number of buildings risk obsolescence. Furthermore, financing hurdles, structural limitations, and investor risk aversion hinder large-scale renovations or repurposing efforts in 2024, leaving the office market in flux.

Looking ahead, both Center City and the suburbs face a wave of expiring office leases. Over 2.3 million square feet in Center City and 5.3 million square feet in the Pennsylvania suburbs are slated to expire over the next two years. With office tenants downsizing by an average of between 20% and 35%, the Philadelphia region’s office availability is projected to continue to climb, adding to mounting pressures on the office sector.

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