Research

PHILADELPHIA
2Q15 OFFICE MARKET

Future Developments to
Reshape Existing Supply, Add
New Inventory
There was a sharp uptick in demand during the second quarter of 2015,
as more than 520,000 square feet of occupancy gains pushed overall
vacancy down 50 basis points to settle at an even 15.0%. The suburban
submarkets claimed the largest portion of positive net absorption, as
tenancy grew by more than 415,000 square feet over the past three
months. The professional and business services sector drove these
gains. Of these types of companies, engineering, accounting, research
and management companies alone grew their combined footprints by
more than 115,000 square feet since the start of the year. Tech-related
services companies also grew their real estate portfolios during the
second quarter. One such company was Oracle, which expanded by
35,000 square feet at Five Tower Bridge in West Conshohocken.
Occupancy grew modestly Downtown, although future performance is
inclined toward the upside following Independence Blue Cross
announcement that it will be consolidating operations at Horsham and
Fort Washington into a single facility across the street from its
headquarters at 1901 Market Street. This continues a trend of suburban
companies either relocating or expanding in the Central Business District
(CBD). Wipfli, a Milwaukee-based accounting firm that opened its first
Philadelphia-area location in Media, Pennsylvania, earlier in the year,
announced plans to open a satellite location at Three Logan Square in
order to take advantage of the CBD labor pool.

Current Conditions
Demand from business services companies, specifically
in the suburbs, pushed demand higher during the second
quarter.
Several developments were announced during the past,
three months that will significantly transform the regions
real estate supply mix in the coming years.
Investors appetite for well-tenanted, stabilized core CBD
assets remains strong.
Market Analysis
Asking Rent and Vacancy
$27

20%

$26

18%

$25

16%

$24

14%

$23

12%

$22

10%

Av erage Asking Rent (Price/SF)

Net Absorption
Square Feet, Millions
1500000.0
1000000.0

Overall Rents Soften; Suburban Class A Rents Move Higher

Overall asking rents softened during the second quarter. Downtown, this
statistical anomaly resulted from fewer available quality spaces being
offered as demand removed them from the market. New construction in
the CBD pipeline commands rents north of $30/SF, with Cira South
approaching $50/SF. In the suburbs, total asking rents shrank by just
$0.03/SF, yet Class A space grew to a 22.0% premium above Class B
space, up from 20.3% during the first quarter. Supply of Class A space
remained constrained in the suburbs, particularly in key western
suburban submarkets, resulting in three consecutive quarters of
price appreciation.

Vacancy (%)

500000.0
0.0
-500000.0
-1000000.0

Market Summary
Current
Quarter

University City Development Activity Remains Robust

Total Inventory

From a development standpoint, the second quarter witnessed the

unveiling of several new and adaptive reuse projects slated to change the
future supply landscape. Downtown, Science Center and Wexford
Science + Technology announced a partnership to construct up to 10
acres of office, residential and retail space at the innovation hub in
University City. Wexford Science + Technology and Drexel will also work
together to renovate the former University City High School into a

Vacancy Rate
Quarterly Net Absorption
Average Asking Rent
Under Construction
Deliveries

Prior
Quarter

107MSF

Year Ago 12 Month

Period Forecast

107MSF

106MSF

15.0%

15.5%

16.3%

524,642

220,534

-88,532

$25.70

$26.01

$25.56

2,001,400 2,001,400 2,501,836

0

12,319

Research
PHILADELPHIA
2Q15 OFFICE MARKET

kindergarten through eighth grade charter school. In the West Market submarket, Liberty Property Trust acquired another parcel of land on the 19th block
of Arch Street for what is rumored to be site of the third Comcast tower. Rumor also has it that bidding on the project is in its early stages.
In the suburbs, The University of Pennsylvania Health System purchased the 18.2-acre lot on King of Prussia Road, where research and office facilities
formerly occupied by Centocor now sit vacant. The health system plans to create a healthcare campus that would complement its nearby facility at 250
King of Prussia Road. Prior to this sale, seller BioMed Realty attempted to gain approval for a 400,000 square-foot office campus on the site, but the
township rejected the request, citing density issues. This sale effectively reduced the supply of developable office land in Radnor to zero.

Supply Evolves through Reuse Projects

Further west, Liberty Property Trust announced its plans to demolish nine buildings on 50 acres in the Great Valley Corporate Center to make way for an
820,000-square-foot development comprising three high-end apartment buildings with 800 units, a 130-room hotel and 25,000 square feet of retail and
office space. This follows a trend of replacing older, obsolete office buildings with newer, amenity-rich facilities such as the recent CrossPoint at Valley
Forge project in Wayne, Pennsylvania.
Downtown, the trend of adaptive reuse is well established. It was bolstered by news that both 260 South Broad Street and The Curtis Center will undergo
partial renovations, creating multihousing space on several floors. This adds to a mushrooming supply of center city

residential units reacting to the influx of millennials and empty-nesters. Alliance Partners HSP of Bryn Mawr, Pennsylvania, also disclosed plans to
convert the warehouse at Fifth and Spring Garden streets, formerly occupied by Destination Maternity, into a creative workspace. The company plans to
market the space to technology, advertising and
media firms.
This sale effectively reduced the supply of developable office land in Radnor to zero.

Investors Maintain Focus on Downtown Office Product

Sales volume is on track to exceed last years totals, as $535 million worth of sales closed in the second quarter alone. The largest single-building sale
from a pricing perspective was Shorenstein Properties acquisition of 1818 Market Street for $184.75 million or $188/SF. The accelerated pace of sales
reflects growing demand among investors for quality, well-tenanted Philadelphia CBD office assets. In the suburbs, year-to-date sales totaled slightly
more than $200 million, less than half of the total volume in 2014. Very few value-add trades occurred, as most of the product that was traded boasted
high occupancy levels. Looking forward, expect more money to flow into the regions office market, especially the CBD, where the downtown urban
renaissance is becoming more evident to people outside of the region.

Lease/User Transactions

Tenant

Submarket

Type

Independence Blue Cross

Building
Square Feet
1900 Market St
112,000

West Market

New/Relocation

ExcelleRx

Three
99,675Parkway

West Market

Renewal

The Board of Pensions of the

2000
Market St
76,998

West Market

Renewal

Oracle

Five
Tower Bridge
35,000

Conshohocken

Expansion

Verizon Wireless

512
Township Line Rd
27,876

Blue Bell/Plymouth Meeting

New/Relocation

1650 Arch St & United Plaza

Submarket
Square Feet
West
Market
1,170,825

$190,800,000

$162.96

1818 Market St

West
Market
981,783

$184,750,000

$188.19

833 Chestnut St

East Market
705,061

$160,750,000

$227.99

Paoli Medical Office Park Portfolio

Exton/Malvern
100.828

$24,820,000

$246.16

1060 Andrew Dr

Southern
43,180 202 Corridor

$6,550,000

$151.69

Presbyterian Church

Select Sales Transactions

Building

Sale Price

Price/SF

Research
PHILADELPHIA
2Q15 OFFICE MARKET

www.ngkf.com

Submarket Statistics
Total
Inventory
(SF)

Under
Construction
(SF)

Total
Vacancy
Rate

Qtr
Absorption
(SF)

YTD
Absorption
(SF)

Class A
Asking Rent
(Price/SF)

Class B
Asking Rent
(Price/SF)

Total
Asking Rent
(Price/SF)

East Market

6,288,490

11.9 %

-10,035

17,609

$26.68

$24.04

$23.49

Independence Square

4,852,963

12.4 %

24,154

104,657

$27.59

$26.16

$25.58

University City

2,868,880

2.6 %

18,936

105,625

$41.16

$30.75

$35.08

Walnut/South Broad

4,062,064

11.8 %

13,559

-570

$21.00

$25.83

$23.09

West Market

25,160,472

1,956,000

13.4 %

59,573

77,021

$29.56

$27.02

$28.84

CBD Total

43,232,869

1,956,000

12.2 %

106,187

304,342

$29.44

$26.13

$27.35

Bala Cynwyd

3,048,722

12.6 %

31,814

35,386

$33.60

$29.59

$30.56

Blue Bell/Plymouth Meeting

8,052,896

20.0 %

153,408

330,328

$26.68

$21.60

$22.86

Bucks County

8,234,716

22.4 %

28,909

28,569

$28.96

$22.18

$24.40

Central/S Delaware County

5,369,292

11.9 %

11,554

20,908

$26.84

$24.41

$25.25

Conshohocken

3,333,055

12.8 %

-25,289

-81,974

$35.24

$28.02

$32.15

Exton/Malvern

7,881,901

45,400

15.8 %

40,579

103,278

$25.41

$25.07

$25.00

Fort Washington

3,408,004

28.2 %

-13,851

49,174

$26.85

$19.83

$22.44

Horsham/Willow Grove

4,579,233

18.8 %

114,983

-33,507

$27.95

$24.51

$23.98

Jenkintown

1,081,401

11.7 %

5,775

3,451

$25.60

$21.23

$23.53

13,196,464

17.5 %

63,149

-46,306

$29.35

$23.53

$25.62

Radnor/Main Line

2,798,355

3.0 %

9,709

49,300

$38.89

$32.85

$36.14

Southern 202 Corridor

2,487,081

10.8 %

-2,285

-17,773

$28.45

$23.22

$26.19

63,471,120

45,400

17.0 %

418,455

440,834

$28.53

$23.39

$25.01

106,703,989

2,001,400

15.0 %

524,642

745,176

$28.87

$23.96

$25.70

King of Prussia

Suburban Total
Market Total

Research
PHILADELPHIA
2Q15 OFFICE MARKET

Economic Conditions

Employment By Industry

Downtown Philadelphias unemployment rate fell to 6.5% in April from

7.1% in March, according to the Bureau of Labor Statistics. Across the
greater MSA, unemployment held steady at a seasonally adjusted rate of
6.6%. The leisure and hospitality and personal and other services sectors
led these gains. The more traditional office-occupying sectors of financial
and business services also grew, albeit at a modest year-over-year rate
of less than 1.0% combined.

Philadelphia, PA Metropolitan Div ision, 2014 Annual Av erage

Downtown, the trend of robust economic growth unaccompanied by

significant employment gains in the office-occupying sector has tempered
occupancy growth to some extent in recent years. With a new city
government to be installed following this Novembers mayoral election,
how government institutions handle barriers to office employment growth,
particularly infrastructure and fiscal policy, may define the CBD office
landscape to some extent during the current economic cycle.

Health
4%

2%
4%2%

Trade/Transportation/Utilitie
s

21%

6%

Gov ernment
Business & Prof essional

9%

Leisure/Hospitality
15%

Education
Financial Activ ities

10%

Other Serv ices

13%

14%

Manuf acturing
Construction
Inf ormation

Source: U.S. Bureau of Labor Statistics

Unemployment Rate

Payroll Employment

Seasonally Adjusted

Total Nonf arm, Not Seasonally Adjusted, 12-Month % Change

13%

6%

10%

4%

8%

2%

5%

0%

3%

-2%

0%

-4%
United States

United States

Philadelphia MSA

Philadelphia, PA Metro Div ision

Source: U.S. Bureau of Labor Statistics, Philadelphia Federal Reserv e Bank

Source: U.S. Bureau of Labor Statistics

Consumer Price Index (CPI)

Employment Growth by Industry

All Items, 12-Month % Change, Not Seasonally Adjusted, 1982-84=100

Philadelphia, PA Metropolitan Div ision, May 2015, 12-Month % Change

4%

Total
Construction
Manuf acturing
Trade/Transportation/Utilities
Inf ormation
Financial Activ ities
Business & Prof essional
Education/Health
Leisure/Hospitality
Other Serv ices
Gov ernment

3%
2%
1%
0%
-1%
U.S.

Philadelphia MSA

-2.0%

Source: U.S. Bureau of Labor Statistics

0.0%

Source: U.S. Bureau of Labor Statistics

2.0%

4.0%

6.0%

8.0%

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Joe Gibson
Research Manager
610.879.4506
jgibson@ngkf.com

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has
been revised. With this expansion and refinement in our data, there may be adjustments in historical
statistics including availability, asking rents, absorption and effective rents.
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