The end of 2014 in the Philadelphia office market saw postitive changes, and as they say “some things remain the same…
The Philadelphia regional office market vacancy rate remained unchanged at 10.8% from the previous quarter. Net absorption was a positive 408,343 square feet in the fourth quarter. Vacant sublease space decreased in the quarter, ending the quarter at 1,363,785 square feet. Rental rates for the region averaged $21.80 a slight increase over the preceding quarter. New construction in the office sector also increased with 344,000 square feet delivered to the market and a significant 2,966,000 square feet under construction and expected to be delivered in the next few years.
In looking at each Class of building, we see continued decreases in vacancy rates. The Q4 Class A rate was reported at 11.9% down from 12.6% at the end of Q3 as reported by CoStar. This downward trend was a continuation of decreases from previous quarters. And, is a reflection of continued corporate expansion among several key user groups in the region. Contrary to the decreasing rate in the Class A market, the regional Class B vacancy rate increased to 11.4% from 11.0 % at the end of Q3 2014. And Class C property vacancy rates also continued to increase slightly, ending the year at a slight up-tick to 8.4% from 8.3% at the end of Q3 2014.
Philadelphia’s CBD continued to show strong momentum as vacancy rates were reported by CoStar to be at 8.7% a good sized drop from the previous quarter at 9.2%. This decrease in vacancy rate was supported by several large lease signings including 982,275 square feet signed by Comcast Corporation for their new property called the Comcast Innovation and Technology Center, just next to the current headquarter property. There is even talk that Comcast may construct yet another third tower in the market. Many companies are moving into the City in order to take advantage of the strong Millennial work force. One can also see this in the increased amount of residential towers being built to support this demand. Companies like Eisner Amper and Hill International as well as Saxby’s Coffee have all relocated into the Philadelphia marketplace.
Rental rates continued to remain strong in the region with the average across all Classes standing at $21.80/square feet which according to CoStar is a 0.7% increase in quoted rents from the end Q3 2014. Specifically, Class A rates were noted to be $25.85 and Class B rates were $19.97 at the end Q4 respectfully. Class C rates were reported to be $17.14.
Philadelphia’s CBD continued to show strength as the average overall rate was $27.44. In the suburban markets, the average overall rate crept up to $20.78. Market Street West had a rental rate average of $28.05. Market Street East had an average rental rate of $24.02. University City continued to show some of the strongest average rents in the region at nearly $38.25.
What is driving all the strengthening in the market? Increased activity from larger users and continued expansions by existing tenants. A strong economy has helped many organizations execute on growth plans. In Philadelphia several large tenants are examining the market. These include Cigna looking in several markets for between 150,000-300,000, the Board of Pensions seeking 60,000 square feet, the law firms of Eckert Seamens and Obermayer Rebman Maxwell & Hippel are looking for 50,000 and 65,000 respectfully. SCA North America is also considering its options as it faces a lease expiration in 2018 at the Cira Center. They are rumored to be considering north of 90,000 square feet. Brandywine Global is also seeking to potentially acquire additional space in University City.
Philadelphia’s investment sales markets continued to be incredibly active with over 9% of the market trading in 2014. Properties such as 1835 Market Street ($102 million), Seven Penn Center ($40.0 million), and 1515 Market Street ($85.0 million) all sold in the last 12 months.
The Philadelphia regional market will remain strong through the first half 2015 as key market fundamentals look to be unchanged and increasing capital continues to look for solid investment opportunities throughout the region.