Q2 2012 Philadelphia, Pennsylvania Office Market Trends

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Q2 2012 Philadelphia, Pennsylvania Office Market Trends

The 112-million-square-foot Philadelphia general purpose, multi-tenant office market is making limited, halting progress at best as a strong first quarter of 2011 was followed by a disappointing second quarter. Vacancy has been elevated and rents weak here since a 1999 to 2008 suburban development boom, and the pipeline remains full of proposals. Meanwhile, despite an office-to-residential conversion boom in the mid-2000s, the market struggles to absorb the space already in place.


The vacancy rate for the second quarter of 2012 was 14.9% according to Reis, down 40 basis points from the high point of the cycle in the third quarter of 2011, but up 20 from the quarter before. The rate hasn’t been below 10.0% since 2000. The Class A vacancy rate of 13.9% was down 20 basis points from a year earlier, but up 20 during second quarter. The Class B/C rate of 16.3% is down 20 basis points over twelve months but up 10 over three months. For July, moreover, Reis records an overall vacancy rate of 15.1%, up 20 basis points in just one month.

“Although there was more leasing during the first quarter, the slowdown in the second quarter was more of a lull than the virtual shutdown in activity,” according to Colliers. This source puts the mid-year vacancy rate for 153 million square feet, including the Wilmington Delaware area and the Lehigh Valley (which Reis does not include) at 13.9%. For a 132- million-square-foot market that also includes the northern Delaware, Cushman & Wakefield reports a vacancy rate of 14.9%. “The Philadelphia Region took a few steps back” in the second quarter according to Studley, Inc., which puts the availability rate at 18.1%. Reis predicts the vacancy rate will end 2012 at 14.9%, then improve only modestly through 2016. By that year, the Philadelphia rate is expected to be higher than the U.S. average as well as the Northeast Region average.


Following a strong 390,000 square feet of positive net absorption in the first quarter of 2012, the second quarter saw a disappointing minus 106,000 square feet according to Reis. Most of the first quarter gains and second quarter losses were in Class A properties, at plus 421,000 and minus 143,000 square feet, respectively. In July net absorption was even weaker at minus 175,000 square feet, reducing the seven month total to about 110,000 square feet. Reis predicts a 2012 total of 674,000 square feet, less than in 2011 and modest compared with recession-era occupancy losses.

The completion of 120,000 square feet of new general purpose, multi-tenant office space during the second quarter left 477,000 square feet under construction with 2012 completion dates within Reis submarkets. The completion total is accordingly forecast at just under 600,000 square feet for 2012, a fourth consecutive year of modest completion totals. Reis reports an additional 573,000 square feet under construction for later delivery, and despite extensive planning does not expect more than 1 million square feet to be added in a year until 2016. In addition, the conversion of older, obsolete office properties to residential or hotel has resumed, with Studley, Inc. reporting the upcoming conversion of two buildings with 140,000 square feet in Center City Philadelphia. Medical office construction, however, continues to be strong with 89,000 square feet completed in the first half of 2012 leaving 506,000 square feet under construction.

Despite limited new supply and resumed conversions, however, Reis predicts the decrease in vacancy will be slow due to continued weak demand. The market will average just over 900,000 square feet of net absorption per year from 2013 to 2016 according to Reis, far less than the average space absorbed during the mid-2000s or 1990s expansions. Not until sometime in 2015 is the occupied inventory forecast to regain the level recorded at year-end 2015, at with at least some new space completed the vacancy inventory is expected to remain just below 17 million square feet.


Philadelphia’s office rents barely increased during the second quarter according to Reis, as both the average asking rent and the average effective rent edged up 0.1% to $24.59 psf and $20.08 psf, respectively. The weak quarter reduced the year-over-year increases to 1.3% asking and 1.6% effective. The Class A average asking rent increased 0.2% during the quarter to $27.67 psf, but the Class B/C asking average was up just a penny at $20.18 psf. In July, according to Reis monthly data, the asking average was unchanged, while the effective average added another penny.

“The total weighted average asking rent increased by less than 1.0% to $23.35 full service,” according to Colliers. “There were a handful of buildings in Central Business District (CBD) Philadelphia and in suburban markets such as Conshohocken that had asking rent increases. However, this increase is for face rents only” as concessions remain generous, particularly for relocations as tenants upgrade their space. Cushman & Wakefield reports an overall weighted average all classes gross rental rate of $23.61 psf, down from the previous quarter. “Regional asking rents declined by 0.5% from $24.09 psf to $23.97 psf in the second quarter, hitting their lowest mark since the end of the recession,” according to Studley, Inc.

Reis predicts a third year of very limited rent gains in 2012 following an effective rent decline in 2009. The 2012 gains are forecast at 1.3% asking and 1.4% effective, about the same as 2011. Since rent decreases have been limited here in bad years, the effective average is expected to end this year at a new high—albeit one barely above the level of 2000 and 2007. The 2013 increases are forecast at 2.0% asking and 2.8% effective. Philadelphia’s rent gains generally trail the U.S. and Northeast region averages in market upturns, and this one is no exception. Gains of no more than about 3.0% for the asking average and 4.0% for the effective average are forecast through 2016.