Philadelphia Office Market
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RESEARCH 4Q 2019 PHILADELPHIA OFFICE MARKET LATE-CYCLE ACCELERATION IN THE CURRENT CONDITIONS MARKET BRINGS VACANCY TO The Philadelphia office market tallied 416,704 square feet in annual net RECORD LOWS absorption in 2019 Construction commenced on Seven Tower Bridge in the suburban market Philadelphia’s regional office market concluded 2019 with robust positive absorption, record low vacancy, continued rent growth, new construction, Overall asking rents grew over a dollar year-over-year to $29.86/SF and the promise of more demand-driven development to kick off in the new year. Market-wide vacancy was trimmed by 20 basis points to 13.4%, essentially on par with the lowest vacancy rate in this economic expansion MARKET ANALYSIS cycle, which was recorded in the third quarter of 2018 (13.3%). The decade Asking Rent and Availability can be characterized by steady recovery from the Great Recession, capped at the end with a positive surge in activity. Asking Rent and Vacancy $30 20% Philadelphia Central Business District (CBD) $29 18% $28 16% $27 14% The strongest performance of 2019 took place in the fourth quarter as the $26 CBD accumulated 142,976 square feet of net absorption. Each submarket $25 12% contributed positively to the gains; University City led with 54,117 square $24 10% feet of absorption driven primarily by two significant deals, both at 3535 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 4Q17 4Q18 4Q19 Market Street in University City. Continuing an expansionary streak, Average Asking Rent (Price/SF) Vacancy (%) Children's Hospital of Philadelphia leased a floor at the building, as did Limelight Bio, “graduating” from life sciences incubator space at Pennovation Works. These two deals decreased the CBD’s available Net Absorption (SF, Millions) selection of large blocks of space to four options: only Two Commerce Net Absorption Square, Three Parkway, 1650 Arch Street and Centre Square’s East Tower Square Feet, Millions now have contiguous blocks of 200,000 square feet or more. This is directly 1.5 affecting the push towards build-to-suit development in the city. 1.0 The two largest new office deals signed in the entire Philadelphia market 0.5 this year occurred in the CBD in the fourth quarter, and will kick off new 0.0 office construction: Morgan Lewis & Bockius signed with Parkway for a -0.5 308,000-square-foot build-to-suit at 2222 Market Street, and Drexel -1.0 University signed for a 258,000-square-foot build-to-suit at 60 N. 36th Street 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 4Q17 4Q18 4Q19 in University City, with an option of expanding the size. The latter will house the university’s College of Nursing and Health Professions presently located MARKET SUMMARY in approximately 180,000 square feet at Three Parkway and will mark an Current Prior Year Ago 12 Month expansion from the College’s current footprint. Another build-to-suit, a Quarter Quarter Period Forecast 400,000-square-foot office to be constructed at 2000 Arch Street, reportedly Total Inventory 109.2MSF 109.2MSF 109.3MSF for a major insurance provider, is in final negotiations and will likely sign in Vacancy Rate 13.4% 13.6% 13.9% 2020. The 390,000-square-foot One Ucity Square will officially break ground in January 2020 and currently stands as the sole project offering available, Quarterly Net Absorption 187K SF 236K SF 369K SF new space to the market. Finally, rounding out new proposed development, Average Asking Rent $29.86 $29.57 $28.83 Under Construction 1.0 MSF 0.8MSF 0.4MSF Deliveries 0.0 MSF 0.0 MSF 1.0MSF © NEWMARK KNIGHT FRANK | 2019 RESEARCH | 1 4Q 2019 PHILADELPHIA OFFICE MARKET Philadelphia’s “eds & meds” are driving additional projects: Children’s While some companies have relocated operations from the suburbs to Hospital of Philadelphia is reportedly considering constructing another the city recently, numerous high-profile tenants also arrived in the new building, and Jefferson announced plans for a $340 million, suburban market during 2019, capitalizing on the existing highly-skilled 220,000-square-foot biomedical research building to be a cornerstone of talent base: Connecticut-based Achillion Pharmaceuticals and Seattle, the health and education institution’s “research corridor” on Locust Washington-based Smead Capital Management both set up significant Street. Both projects would likely be owner-built and therefore not offices in the suburban market, and Eastern Airlines and Anpac Bio impact the statistical inventory, but nonetheless, signal the market’s both committed to relocating their U.S. headquarters from North healthy expansion. Carolina and California, respectively. Looking into 2020, the CBD stands to soon have a greater number of Joining the ranks of office development underway, the 260,000-square- ground-up office construction projects underway at a single time since foot Seven Tower Bridge officially commenced construction in the late 1980s. Conshohocken this quarter, over 50% preleased with Hamilton Lane signed on as the anchor tenant. The groundbreaking caused the total Other notable deals that drove the CBD’s strong performance this volume of space under construction to top a million square feet for the quarter included Fisher Phillips leasing approximately 21,000 square first time in this economic cycle. Reportedly, three different proposed feet at Two Logan Square, relocating from the suburbs and furthering projects are in advanced negotiations with anchor tenants to kick off the trend of new-to-market tenant in-migration. Also of note, multiple construction in 2020. Any of these deals coming to fruition would lead deals landed at 1600 Market Street, which is undergoing a substantial to additional new space availability in key areas of tenant interest, the renovation program: Cohen Seglias Pallas Greenhall & Furman PC, Klein Swedesford Road corridor in King of Prussia, and the tightest & Company, Arcadis, and Ryan, Brown, Berger & Gibbons, P.C all signed submarket in not just the suburbs but the entire greater Philadelphia for a combined approximate 53,000 square feet of space at the building. region, Radnor/Main Line (at 5.1% vacancy in 4Q 2019). While there are Average asking rents, just under $34.00/SF (full service) CBD-wide at a number of existing opportunities in the suburban landscape for year-end, have increased at a rate of 1% or more every quarter this year. sizeable tenants to explore, only the under-construction Seven Tower This real, sustained rent growth within the existing inventory serves to Bridge, and Discovery Labs – primarily marketed as a life sciences justify build-to-suit activity. The proposed new projects are being campus – currently offer tenants large blocks in the most highly- negotiated at rates around $55 to $65/SF – while setting an sought-after core geography, inclusive of Radnor/Main Line, unprecedented high-water mark for rent in Philadelphia, these rates are Conshohocken, Bala Cynwyd, and eastern King of Prussia. not at an untouchable premium over what current trophy space is Forecasting for 2020, it is likely the record-low vacancy charted at year- commanding ($43.48/SF in 4Q 2019). end will modestly rise as a number of large blocks are set to return to market in the new year. In Horsham, Toll Brothers will leave its current Southeastern Pennsylvania 203,000-square-foot office HQ at 250 Gibraltar Road, and Teva will vacate the 120,000-square-foot building at 425 Privet Road, as it In the suburban Philadelphia office market, approximately 44,000 consolidates its regional presence. AmeriSourceBergen will also vacate square feet of net positive absorption accumulated this quarter drove approximately 200,000 square feet in Chesterbrook and 100,000 square annual occupancy growth to 119,228 square feet. This positive feet in Conshohocken once their under-construction headquarters momentum pushed overall vacancy down to 14.0% by year-end, a rate elsewhere in Conshohocken is completed at the end of 2020. Morgan not seen since 2001. Annual absorption was modest in 2019 compared Properties has already committed to backfilling approximately 70,000 with the previous four years, which averaged 500,000+ square feet square feet of what AmeriSourcebergen will vacate in Conshohocken, annually, but considering a new factor of record-low vacancy, the signaling that space vacated in the Western suburbs will likely be filled absorption volume underlined the healthiness of the suburban market. faster than large upcoming vacancies in the Northern Suburbs. Notable occupancies in the fourth quarter were primarily driven by Significant office sales that closed in the fourth quarter included 200 N. intermarket relocations and included a mix of expansions and Warner Road in King of Prussia, and Four & Five Sentry Parkway in Blue densifications. Signant Health’s relocation and expansion into 105,000 Bell, which sold for $37.9 and $34 million, respectively. An additional square feet at 785 Arbor Way in Blue Bell, FXI’s relocation and slight 3.0 million square feet of space is on the market for sale in the downsizing into 34,122 square feet at 100 Matsonford Road in Radnor, suburbs, which should keep the capital markets environment healthy and Pilot Freight’s consolidation of multiple locations in non-competitive going into 2020. space to a 45,000-square-foot new global headquarters at 2 Braxton Way in Glen Mills were among the larger movements this quarter. © NEWMARK KNIGHT FRANK | 2019 RESEARCH | 2 4Q 2019 PHILADELPHIA OFFICE MARKET PHILADELPHIA CBD LEASE/USER TRANSACTIONS Tenant Building Submarket Type Square Feet Morgan Lewis & Bockius 2222 Market Street West Market Direct (Build to Suit) 308,000 Drexel University 60 N 36th Street University City Direct (Build to Suit) 258,000 Cohen Seglias Pallas Greenhall & 1600 Market Street West Market Direct 34,400 Furman, PC Akin Gump 1735 Market St West Market Direct 30,000 Limelight Bio 3535 Market Street University City Direct 25,121 SOUTHEASTERN PENNSYLVANIA LEASE/USER TRANSACTIONS Tenant Building Submarket Type Square Feet Greene Tweed 1684 S.