Why Things Are Getting Sunnier for Philadelphia’s Office Market

By Katie Burke CoStar News

To an outsider looking at office use statistics, Philadelphia should be one of the hardest-hit cities in the country as it struggles with reduced foot traffic and empty buildings.

Yet on the ground, the City of Brotherly Love is buzzing along, creating a blueprint for other urban office markets struggling with high vacancy rates and quiet downtowns as they navigate their own rebounds from the pandemic.

On a recent, 95-degree day in the central business district, men in suits with loosened ties queued up behind myriad falafel, smoothie and other food carts popping up on Center City sidewalks. Employees on their lunch break filled Rittenhouse Square benches for some air under the park's towering trees. And come rush hour, throngs of cars, buses and bicyclists took to the streets, honking and trying to find nonexistent openings in the traffic.

A few things are working in Philadelphia's favor. For one, its downtown residential population rivals larger top-tier cities such as New York and Chicago, and the concentration of office buildings and jobs in the central business district exceeds markets such as Boston and Los Angeles, a report from research firm Capital Frontiers shows.

Philadelphia officials have also enforced strict requirements that city workers return to the office for a full five-day workweek, the only major U.S. market to have such a mandate, making it a standout among cities that are working to regain the office momentum lost during the COVID-19 pandemic. 

The city is still grappling with a record amount of vacant office space, yet a push among local leaders to get employees back to the office — combined with an aggressive approach to combat Philadelphia's perception of crime, homelessness and other socioeconomic concerns — has resulted in what some local real estate stakeholders describe as a strong turnaround.

"If you're just walking on the street today, the vibe is totally different from what it was just a year ago," Ori Feibush, the founder and president of Philadelphia-based OCF Realty, told CoStar News. "We're seeing activity at every point here, and there are a whole host of really positive factors in the city that have made it so that we're seeing tenants who are hungry to find good spaces. The experience on the ground in Philadelphia is just night and day compared to what it was, and the office market is just one microcosm of that."

Some of the nation's largest cities, including New York, Los Angeles and Chicago, are working to rebuild the downtown foot traffic lost to the pandemic. That has been a challenging task in the face of higher interest rates and spotty office attendance, as some staffers across the country still work remotely. That has contributed to empty buildings and abandoned storefronts.

Based on widely used data tracking office usage rates, Philadelphia's Center City could easily be an almost barren scene with a market slogging along at one of the nation's slowest recovery rates since the onset of the pandemic. Some metrics peg office usage at less than half of what it was prior to COVID-19. The city's office vacancy rate of 10.7% is at a record high and is up from 7.9% since the start of COVID-19.

While Philadelphia hasn't been immune to pandemic-era struggles, the city's recovering population of office workers, residents and tourists makes it feel like a city on the rebound with bustling sidewalks, restaurant crowds overflowing to outdoor dining spaces and heavy rush-hour traffic throughout the workweek.

Rebounding Workforce

Along with some of the city's largest employers, Philadelphia officials last month called all city government employees back to the office for five days of the week as part of Mayor Cherelle Parker's unprecedented push to boost downtown foot traffic, support local retailers and make it easier for other companies to follow suit.

The policy is the latest component of the mayor's efforts to boost the city's downtown recovery and marked the end of a hybrid work policy enacted in 2021 that allowed employees to work from home up to three days a week.

"This city works and is powered because the men and women who come and they make it work on a daily basis," Parker said in a recent statement. "This policy is different; it is a change. But this administration [is] at war with the status quo right now."

The new policy is estimated to bring upward of 25,000 city employees back to their offices on a full-time schedule. Parker's office said about 80% of the city's workforce worked fully on-site last year.

As workers return to the office, ridership across SEPTA, the city's public transportation system, jumped 20% last year from 2022, according to Center City District data. That figure was even higher for bus ridership, surging about 40% over the same year-to-year period. About 45% of downtown workers living in Center City either walked or biked to work, with others cramming into subway trains that are now standing-room only.

"It used to be filled with empty seats, but now you've got to squish yourself on," said CoStar Associate Director of Market Analytics Brenda Nguyen of her own roughly 30-minute commute between Center City and Fishtown, a neighborhood popular among young professionals and luxury multifamily developers.

'Decoupled From Reality'

Those signs of optimism prompted OCF Realty, a longstanding multifamily and industrial developer in the Philadelphia area, to make its foray into office property ownership last month with the purchase of a 136,000-square-foot building at 399 Market St. The company acquired the property from Colonial Penn Life Insurance for $14 million, a 38% discount from its assessed value of $22.6 million.

The deal, Feibush said, was especially attractive given the decline in valuations that Philadelphia — similar to other major office markets across the United States — has faced as some distressed landlords look for the nearest exit. In Philly, property appraisals over the past year show values have fallen as much as 72%, according to CoStar data.

Of the nearly 580 properties that have sold within the past 12 months, only seven have closed for more than $10 million. Private and entrepreneurial buyers such as OCF accounted for about 80% of them, a figure that has soared as many firms look beyond the challenged financing environment to take advantage of what many consider to be "the best real estate opportunities we've seen in our professional lives," according to Feibush.

While there are more companies in the market willing to sign deals for space, CoStar's Nguyen said they are outweighed by those that are downsizing or terminating leases altogether. City office tenants have collectively handed back about 250,000 square feet more than they took over the past year, compounding the losses that have added up since the beginning of 2020.

Leasing volume in the past year has totaled about 10 million square feet, according to CoStar data, down from an average of 13 million square feet prior to the pandemic.

Still, Philadelphia's 15% availability rate is the fourth-lowest among major markets in the U.S., the average for which is more than 16.5%.

"It's definitely not as bad as some headlines suggest," Nguyen said of the city's perceived office woes. "More people have returned to the office, more developers are building. There is a lot happening here."

For investors such as OCF's Feibush, Philadelphia's dip in valuations is temporary, providing a window to capitalize on what he said is a noticeable resurgence.

"When we look at some office buildings in the city, they are trading at a valuation that is decoupled from the reality on the ground," the OCF president said. "Obviously there are a lot of reasons why that's occurring, like how it's hard to get financing, and that the feedback is the office market is dead. There are all kinds of headwinds supporting that narrative, but in practice, that's not at all what we're seeing."

From Job to Home

Philadelphia's post-pandemic recovery was evident on a recent Wednesday evening when after-hours workers flooded nearby bars and restaurants, their conversations spilling out from open windows and patio doors.

The day prior, a young boy, who described himself as "an almost third grader," was restocking a lemonade stand he had set up on South 12th Street, right where the bustling downtown begins to blend into the quieter stretches of historic row houses.

"It's been really busy," he said, shutting the lid on a cooler earlier filled with ice. "People get thirsty on their way home from work."

The city has one of the largest downtown residential populations in the country, according to data from the business improvement group Center City District, a position some stakeholders have pointed to for its role in supporting the city's office market as it navigates its own recovery. As street conditions improve, demand to live in and near Center City has jumped, with developers eager to capitalize on the momentum with luxury projects, such as the new 32-story, nearly 380-unit tower at 210 S. 12th St.

Philadelphia's downtown residential population has been bolstered by the push to convert older office buildings into new residential uses, Center City District CEO Prema Katari Gupta said. More than 40 buildings in the core central business district area have been converted over the past 25 years, and that residential backbone has been critical in rebuilding Center City's foot traffic and making it easier for employees who are asked to commute to an office.

"We've confirmed the correlation between shorter commutes and the likelihood of returning to the office, which means that Center City's residential core reinforces the office and employment core," she said, adding that about 70% of local employees who don't live in and around downtown have returned to their offices on any given day.

Different Perspective

That return-to-office figure is far higher than what some office tracking metrics suggest, driving a deeper wedge between the perception of a city in distress versus one rebounding back to pre-pandemic levels of normalcy.

"The city is absolutely energized," Brandywine Realty Trust CEO Jerry Sweeney, the leader of Philadelphia's largest office real estate investment trust, told CoStar News. "We have a new mayor who has done a tremendous job to accelerate plans for a safe and clean environment and implement business-friendly tax policies. And we've seen big companies like Comcast, Blue Cross and Aramark that have pushed a big uptick in foot traffic as they get more employees back to the office itself."

Even so, "The unfortunate reality is that the office sector as a whole is going through a cyclical-secular shift, but there's the level of expectation that Philadelphia, having survived the downturn, is in a strong position," Sweeney added.

Sweeney's perspective, along with those of some other local developers, landlords, investors and business owners, stands in contrast to widely reported office use rates that have long shown Philadelphia as one of, if not the most, challenged market in the country in terms of getting employees back to the office.

Most office workers in and around the city still work remotely for most of the time compared to pre-pandemic attendance rates, according to Kastle Systems, a security firm that tracks employee badge swipes in and out of buildings. The firm has reported Philadelphia’s office occupancy rate as hovering at about 40% in recent months, significantly below the national average of more than 50%.

"I take a bit of an exception to the characterization that Philadelphia is one of the slower cities in the country to get back to the office," Sweeney said. "We've been a large player here for a number of years at this point and have a good feel for the demand drivers. A lot of the data is a bit of an anomaly since it doesn't take into account most of the city's largest buildings and tenants."

Rather, Sweeney said, weekly occupancy across Brandywine's greater Philadelphia office portfolio is right in line with Center City District figures and now averages more than 70% each week, with Tuesdays and Wednesdays nearing levels of activity reported in the years before the pandemic.

Entering New Era

The office return has resulted in a marked difference for local businesses, said Matthew Fisher, a barista at the Elixr Coffee outpost on the ground floor of the PNC Bank Building high-rise at 1600 Market St.

"We opened in 2020, and for years it was nearly dead and we barely saw anyone," Fisher said. "Now we've extended our hours and I've had to bring on another person to help during the morning rush. There are a lot more people out and about and heading back to offices."

OCF's Feibush said the building momentum is a sign that the city is on track to boomerang beyond what it was prior to the pandemic when it was grappling with rampant drug use, a rising crime rate and what he said was a mounting perception of a region on the decline.

"I used to have to go by my luxury [multifamily] sites twice a day to pick up needles and move people along," Feibush said. "It's hard to envision a person who would want to live in an environment like that, and nobody wants to make a huge investment if they don't have confidence that the experience for their staff and customers and tenants will be safe."

Now, however, he said it's a far different picture.

"The core of our city is a thousand times better than it was, and that's a function of leadership and small, anecdotal things like picking up trash that make such a difference," Feibush said. "There's a renewed appetite and interest in leasing office space, so I believe things will improve and move in the right direction. Coupled with value, and you’re off to the races."

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