NORTHEAST SNAPSHOT, APRIL 2006
Philadelphia Office Market
During 2005, the Philadelphia central business district experienced the largest amount of positive absorption in 15 years, with the amount of space taken totaling 1.49 million square feet. While similar absorption gains are unlikely to occur in 2006, the positive momentum generated last year should continue into this year. Unlike the prior 3 years, which were characterized by corporate downsizing, 2005 and early 2006 have seen expansion of small, medium and large tenants. Grubb & Ellis conducted a survey of recently completed deals, suggesting that on average, tenants are expanding with a healthy 19 percent growth rate.
Overall, the market fundamentals are improving, yet vacancy rates are still running high due to several large blocks of contiguous vacant space in the West submarket. Until this space is absorbed, there will be little upward movement on rents in the Class A market.
Cira Centre, a 727,000-square-foot office building developed by Brandywine Realty Trust, opened in the fourth quarter of 2005 adjacent to Amtrak’s 30th Street Station; the project was the first new office building delivered in the central business district since the early 1990s, and it came online almost totally pre-leased due in part to the building’s KOZ status, which offers generous tax abatements and concessions. In addition, Liberty Property Trust is developing the 1.2 million-square-foot Comcast Center, where Comcast is occupying 800,000 square feet. Retaining one of its largest corporate tenants is a positive factor for the city.
Aside from office development, Philadelphia is in the midst of a residential condominium building boom as well. In fact, building owners and developers have transitioned from repurposing vacant or underperforming assets in the Class B and C markets and have begun to terminate leases to facilitate conversion. For example, the new owners of Two Liberty, a defining trophy building on the Philadelphia skyline, have received zoning approval to convert the top portion of the property into luxury condominiums, and four other high-rise residential developments are being proposed or constructed on potential office sites in Center City. As the high-end residential market continues to grow, the Center City office market may benefit from the migration of corporate decision makers into the city if they base decisions upon where they live.
Brandywine Realty Trust has made a significant push into the Center City office market in the past 18 months, purchasing One and Two Logan Square from Rubenstein in late 2004, and then finishing the Cira Centre in 2005. With these developments, Brandywine controls approximately 2 million square feet of Class A product in the CBD. Triple Net Properties also has increased its office assets in the metropolitan Philadelphia area, having added to pre-existing inventory of The Public Ledger Building by acquiring 300 Four Falls in Conshohocken, Pennsylvania, and 1818 Market Street in Center City Philadelphia.
A couple major leases have been signed recently in the office market, including Children’s Hospital of Philadelphia leasing 153,000 square feet at the Wanamaker Building, which is located at 100 East Penn Square East. CBS Broadcasting also signed a deal for 128,000 square feet at 1500 Spring Garden Street, and Marketlab Research leased two spaces totaling 33,000 square feet that include 22,000 square feet at 100 East Penn Square East and 11,000 square feet at Two Logan Square.
— James Egan is a vice president for Grubb & Ellis Company in Philadelphia.
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