NORTHEAST SNAPSHOT, JANUARY 2008

Philadelphia Office Market

Sall

Over the last several months, the office market in Center City Philadelphia has been moving from a sustained tenant friendly market to a landlord friendly market. Overall, rents in Center City are pushing up, especially in the trophy Class A and A+ buildings such as Mellon Bank Center and One Liberty Place, where occupancy is pushing above 90 percent. Negotiated rents have jumped nearly 10 percent to 20 percent over the last 6 months in these trophy buildings, which range from $27 to $30 per square foot with some buildings asking up to $40 per square foot, while average asking rents for Class A buildings in the area range from $23 to $26 per square foot. Vacancy rates in Center City hover just below 10 percent.

Over the last couple of years, the Suburban Philadelphia submarkets have generally trended positive for landlords as well. However, the positive environment for landlords has reached a plateau in some submarkets due to the country’s pervasive subprime lending woes creating a credit crunch across the nation. ResCap, for example, which is relocating its 427,000-square-foot Horsham office to 450,000 square feet in Fort Washington, has suffered losses that have led to several rounds of layoffs. There is concern that not only is this company leaving a huge vacancy in Horsham, but that it will also put some of its space in Fort Washington on the market for sublease. 

Soffian

The vacancy rates in the stronger suburban submarkets just outside of Philadelphia sit between 10 percent and 12 percent, while the vacancy rates in the weaker suburban submarkets sit between 18 percent and 20 percent. Although the weaker submarkets are in a precarious state, landlords there have not started dropping their asking rents. The Horsham and Fort Washington submarkets, however, offer unique opportunities for large, 100,000-square-foot or larger tenants. There are a number of high quality buildings with large blocks of space in these submarkets, and asking rents are competitive when compared to Radnor and the 202 Corridor, which run approximately $8 to $10 per square foot higher. 

Many tenants are moving within Center City to ensure prime locations and rental rates for the future. AIG took 123,000 square feet at One Liberty Place, and accounting firm Parente Randolph relocated its headquarters from 2 Penn Center to 43,000 square feet at One Liberty Place. Kleinbard Bell & Becker also relocated to 20,000 square feet at One Liberty Place from 16,000 square feet at 1900 Market Street, while Morgan Lewis took 105,000 square feet at 1801 Market Street, and Dilworth Paxson is set to relocate from Mellon Bank Center to Center Square.

Lincoln Financial is moving some of its operations out of Center City to 180,000 square feet at Radnor Financial Center in the suburbs, while Unisys, a worldwide information technology consulting services and solutions company currently headquartered in Blue Bell, Pennsylvania, is rumored to be moving its headquarters to Center City Philadelphia. This would be significant and positive absorption for the city.

Both health providers and insurers have also impacted leasing fundamentals in Center City Philadelphia, as several tenants have moved from the University City District. The Hospital of the University of Pennsylvania and Children’s Hospital of Philadelphia have taken a couple hundred thousand square feet in Center City, and Blue Cross has expanded at 1500 Spring Garden Street.

One of Center City’s most significant developments in recent years is the Comcast Building, which is almost fully leased with Comcast occupying 90 percent of the building. Additionally, Brandywine Realty Trust is getting started on its retail, office and residential mixed-use project Cira Centre South, where The University of Pennsylvania has already committed to take 100,000 square feet. Since the project, set to be complete in 2010, is located within a Keystone Opportunity Zone, or KOZ, Cira Centre South will allow tenants to enjoy tax breaks until 2018. Based on the success of Cira Centre, it is expected that Cira Centre South will be leased up successfully.

There are few projects set to come out of the ground in Center City in the next 6 to 9 months, as many developers are waiting to secure tenants prior to building. However, there are still a few buildings that have or will have large blocks of space available in the coming months allowing larger tenants with good credit needing 20,000 to 25,000 square feet of space or more to attain aggressive deals from landlords.

Outside of Center City, there is significant new construction and renovation in King of Prussia, Radnor, Bala Cynwyd and Plymouth Meeting. These buildings have been slower to lease up, however, due to landlords pushing asking rents higher and higher. In reaction to the subprime lending crisis, there are more and more availabilities in the suburbs as tenants sublease or give their space back to the landlords.

Developers new to the Center City Philadelphia market include Transwestern, which entered the market just 2 years ago and now has its two buildings for sale, and Behringer Harvard, which has done very well since it entered the market last year with Three Parkway, having increased the occupancy rate in the building in a very short period of time. Behringer Harvard has also just acquired four buildings in Center City positioning the company as one of the largest landlords in the area.

DRA Advisors, a New York-based investment manager in a joint venture with Pennsylvania office REIT Brandywine Realty Trust, has entered the Suburban Philadelphia market with its purchase of an 80 percent interest in 1.6 million square feet office space valued at $245 million in the northern suburbs. 

— Gregory S. Soffian is a corporate managing director, and Matthew Sall is a senior managing director for Studley in Philadelphia.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.