Mixed Bag for Philadelphia Commercial Real Estate

Compared with more volatile markets, Philadelphia did not have much of a downturn to recover from. With little new construction during the recession, some pockets of commercial real estate have seen increased net absorption due to pent up demand. As has often been the case for Philadelphia during economic upturns, rent growth has trailed national and regional averages having fallen less during the downturn.

 Apartment Demand is Surging

Net absorption surged to nearly 2,700 units in 2010 and nearly 2,300 in 2011. It has started 2012 just as strong, with a first quarter total of 1,145. The solid demand continued in April, when 161 additional units were absorbed, and Reis predicts net absorption will total more than 2,600 in 2012 as a whole. That would make 2010 to 2012 the strongest three-year period for demand since 1992 to 1994. The vacancy rate for 201,274 market-rate apartment units was 3.9% in the first quarter of 2012 according to Reis, down 40 basis points from the prior quarter, and 110 from a year earlier. The last time the year-end rate was this low was in 2003. Despite strong demand, Philadelphia’s rent gains are expected to underperform the U.S. and Northeast Region averages though 2016.

Retail is facing headwinds for Neighborhood/Community Centers

Philadelphia’s 61-million-square-foot community-neighborhood shopping center market remains besieged by weak demand and growth in other retail formats, particularly in mixed-use redevelopment projects. A slowdown in new community-neighborhood center space, meanwhile, will soon end according to Reis. Just 205,000 square feet was added in 2011, the least since 1983, and no new space had been added in 2012 through April. However, Reis reports 285,000 square feet under construction for completion later this year, in three centers. Reis doesn’t expect the march to recovery to really get going until 2013. This year, like last year, is expected to see flat vacancy and small rent gains.

Office Market Cools in April, Following Strong Q1

The 111-million-square-foot Philadelphia general purpose, multi-tenant office market surged during the first quarter of 2012, with the strongest net absorption in years and the eighth highest rent gain among the top Reis markets. Following the big vacancy drop in the first quarter, Reis reports a 10 basis-point increase during April. We project vacancies to end 2012 at 14.9%, down only slightly from the start of the year, and to decrease only slightly thereafter as well, reaching 14.6% in 2016. With larger occupancy gains elsewhere, Philadelphia’s rate is expected to be above the U.S. average that year. No new general purpose, multi-tenant office space completed construction during the first quarter, leaving more than 1 million square feet under construction, including 556,000 square feet currently projected to complete construction in 2012. Although Reis predicts limited occupancy improvement through 2016, it is more optimistic about rent increases starting in 2013.

Photo: Philly Skyline from Launch (photo: Flickr/Michael Murphy)