(From Philadelphia Business Journal, October 2018)
West Market Street Corridor in Philadelphia.
With fewer than three months left in the year, the Philadelphia office market appears to be hitting its stride with strong absorbancy, rising rents and lower vacancy rates, according to several third-quarter reports.
The quarter was also notable for other reasons. Several large companies made decisions on new office space and construction of the Comcast Technology Center was completed.
A handful of firms signed leases on new office spaces that have them crisscrossing the city as they shuffle up where they will call home but at the same time create vacancies in the buildings they are departing. Wells Fargo was among those tenants who decided to move and will relocate from South Broad Street to Two Logan Square.
It wasn’t the only one. Marquarie Investment Management punched a hole in Two Commerce Square when it signed a lease at 100 Independence Square, Reliance Standard Life Insurance Cos. will move to 1700 Market St. and that means One Commerce Square will take a hit, and Willis Towers Watson will vacate space in Centre Square to move to 1735 Market. Entercom Communications will move from Bala Cynwyd into 2400 Market St.
The reason so many tenants are moving is simple, said Matt Guerrieri, a broker with Newmark Knight Frank. “It’s hard to stay in place and renovate, and I think a lot of companies are realizing that,” he said “It’s easier to move over a couple of weeks rather than renovate in place.”
The pending moves have meant the spaces the companies are vacating are in limbo. “It’s space that is’t available today because it’s leased until 2020 and those spaces are hard to lease,” Guerrieri said.
This isn’t helping alleviate an issue that has bedeviled the market for the last couple of years. Large blocks of contiguous space have diminished and spaces that total a full floor or more, particularly those with views, have become scarce.
While companies taking new space was a hallmark of the quarter, it was also marked by a milestone for the office market. The Comcast Technology Center (CTC) at 1800 Arch St. was completed and the tower found its place in Philadelphia’s skyline. Comcast has started to relocate employees from other buildings into the new 1.3 million-square-foot building.
The opening of CTC helped push down the vacancy rate of West Market Street to 10.7 percent and resulted in net absorption of more than 1.5 million square feet for the quarter, according to JLL data. In addition to the Comcast building, 2400 Market St., at 600,000 square feet, and 3675 Market St., at 345,000 square feet, are on schedule to open in the next couple of months. That means more than 2 million square feet of new office space will have been added to Philadelphia this year.
That the Philadelphia office market would absorb more than 1.5 million square feet in a quarter — a number typically reserved for a good year — and would add 2 million square feet of new office space sounds as if the city is having a standout year.
“It’s all true, but it’s not as good as it is,” said Ian Anderson, director of research at CBRE Inc. “We added the Comcast Technology Center to our inventory so that is fully leased and makes the absorption look huge. That is a statistical anomaly.”
The building at 3675 Market, which is the first as part of the UCity Square development in University City, was also mostly pre-leased and boosted the overall data as well. The redevelopment of 2400 Market St. into office space was kicked off by Aramark Corp.’s decision to take half of the space for its new headquarters. In other words, the bulk of the new space was essentially build-to-suit for tenants already located in Philadelphia. In contrast, Newmark Knight Frank is tracking 16 companies totaling 254,000 square feet that are considering moves into the Central Business District.
The other dynamic that made third-quarter statistics standout involves conversions, which has buoyed the market over the last 20 years and continues to do so. One City Place at 1401 Arch St., a portion of the Public Ledger and the remainder of One Franklin Plaza — a total of 630,415 square feet of office space — was taken out of the inventory because they will be redeveloped into residential use. That also artificially inflated the strength of the market during the third quarter.
While there’s more going on than meets the eye, the overall market is doing well. The economy is humming along, Philadelphia remains a desirable place to live, the city is adding jobs though not at the pace of some of its counterparts and office rents are on the rise. Since the third quarter of 2013, rents have gone to $31.46 a square foot from $26.11 a square foot, according to CBRE data.
“New owners have really pushed the rents up,” Guerrieri said. “They are putting money into buildings and that’s great because they need it, but we’re still a bargain.”