NORTHEAST SNAPSHOT, MARCH 2008

Philadelphia Office Market

The Philadelphia office market continues to make headway in 2008. Rental rates have increased 14 percent in the Philadelphia Central Business District (CBD) over the past year and should continue to trend upward, albeit at a slightly slower pace throughout the rest of 2008. Previously, many office tenants were making a “flight to quality,” but the current vacancy rate of less than 9 percent in trophy class buildings in the CBD has grounded much of this activity.

A majority of the new office development in the city is taking place in University City, the West Market Street submarket, the Navy Yard and North Broad Street. The University City area has become increasingly popular. Vacancy rates in this submarket are hovering between an incredibly healthy 2 and 3 percent.

The University of Pennsylvania announced additional development plans this year for the development parcel the school purchased from the U.S. Postal Service. The 14-acre site will connect University City with Philadelphia’s CBD. Brandywine Realty Trust is leasing a portion of the land from the University to develop Cira Centre South, an $800 million, 2.8 million-square-foot mixed-use development that will feature up to 500,000 square feet of office space as well as a hotel, residential units, retail space and parking. The University has committed to leasing at least 100,000 square feet office space once the project is complete.

The recent completion of the 1.2 million-square-foot Comcast Center at 1701 John F. Kennedy Boulevard is also expected to spur additional developments and activity. Walnut Street Capital has already gotten a foothold on the surface parking lot at 18th and Arch Streets, purchasing the 1.5-acre parcel for $30 million last summer with plans for a mixed-use development.

Urban Outfitters and the Tasty Baking Company both recently moved their headquarters to The Navy Yard, which should push additional companies to follow suit. The Convention Center expansion is expected to draw additional developments along North Broad Street as well.

Several other tenants have also made moves within Philadelphia recently. Most notably, Comcast will have absorbed more than 600,000 square feet of additional space from its original occupancy of approximately 500,000 square feet 2 years ago.

Unisys took 95,000 square feet of space at Two Liberty Place on 1601 Chestnut Street, and AIG leased 120,000 square feet at One Liberty Place at 1650 Market Street. Morgan Lewis signed on for 95,000 square feet of space at 10 Penn Center on 1801 Market Street, and the University of Pennsylvania Health System took 177,627 square feet with a 85,530-square-foot expansion option at Centre Square at 1500 Market Street. Average rental rates for Class A space is sitting at about $29.50 for Philadelphia’s CBD, and the range of rents between typical Class A space and trophy product is approximately $27 to $33 per rentable square foot. This $8 delta was just $4 at the beginning of 2007.

— Jack Soloff and Craig Scheuerle are both senior vice presidents at Grubb & Ellis in Philadelphia.

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