RESEARCH PHILADELPHIA 1Q18 OFFICE MARKET THE SUBURBS START 2018 HOT Current Conditions Philadelphia Central Business District (CBD) • Suburban Philadelphia posted its highest quarterly Occupancy was slow at the start of 2018, but absorption is expected to absorption since 2007. pick up over the next several months as the new Comcast Tower delivers • The rise in CBD and suburban rental rates is expected in April, and companies from the suburbs and southern New Jersey to continue. secure additional outpost offices in the Central Business District. Overall • Outside investors continued their activity in the Greater vacancy rose 30 basis points from year-end 2017 to 13.3%, although Philadelphia area. several large blocks of space were leased to companies both new and familiar to Philadelphia. The consulting firm McCormick Taylor leased • Suburban owners are renovating older properties with 55,000 square feet of space at 1818 Market Street, while the law firms amenities attractive to the millennial workforce. Kleinbard LLC and Gordon & Rees took 21,000 and 17,000 square feet, respectively, at 3 Logan Square. Additionally, Neumann Finance, a newly Greater Philadelphia Market Analysis created equipment leasing firm in partnership with Beneficial Bank, leased 21,695 square feet at 123 South Broad Street. Asking Rent and Vacancy $29 20% The CBD recorded 107,812 square feet of lost occupancy, driven mainly by negative absorption among Class A buildings in the West Market $28 18% submarket. For instance, Brandywine Global will leave 48,006 square feet $27 16% at Cira Centre North, a Class A building, to move to 1735 Market Street, $26 14% another Class A building, in July. A third Class A building, the former $25 12% Comcast space at Two Logan, also came on the market this quarter, adding 95,062 square feet to the negative side of the ledger. Class A $24 10% 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 vacancy increased 40 basis points to end the first quarter of 2018 at 12.6%. This is in contrast to Class B space, which fell 40 basis points Average Asking Rent (Price/SF) quarter-over-quarter to 12.5%, with the aggressive pursuit of low-rise Net Absorption Class B space by tech and media tenants. Square Feet, Millions Southeastern Pennsylvania 1.5 Philadelphia suburbs started 2018 with a bang, posting 479,344 square 1.0 feet of positive absorption. This is 82.0% of last year’s total absorption amount and above the yearly average absorption of 422,723 square feet 0.5 (since 2010). There are several tenants with large requirements currently 0.0 searching the market, and the suburbs could be on track to reach a 1.0 -0.5 million square feet in positive absorption by the end of the year. Despite high vacancy rates, the northern submarkets posted two of the three -1.0 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 highest quarterly gains in occupancy. In Blue Bell/Plymouth Meeting, Cotiviti occupied 86,621 square feet at 785 Arbor Way, while Aon PLC occupied 85,000 square feet at 1100 Virginia Drive in Fort Washington. Greater Philadelphia Market Summary Absorption in the western submarkets was just as positive, powered by Current Prior Year Ago 12 Month activity in the Central/South Delaware County, King of Prussia and Quarter Quarter Period Forecast Radnor/Main Line submarkets. The overall vacancy rate for the suburban Total Inventory 109MSF 109MSF 108MSF market fell 50 basis points to 14.5%, the lowest rate in over 10 years. In Vacancy Rate 14.0 % 14.2 % 14.4% Central/South Delaware County, Keystone Sports and Entertainment and PowerHome Remodeling expanded into 23,000 and 40,000 square feet, Quarterly Net Absorption 371,532 477,697 (454,487) respectively, at 2501 Seaport Drive. King of Prussia also kept up its Average Asking Rent $28.28 $27.81 $27.04 heated pace, as Alcaris occupied 33,019 square feet at 610 Lee Road. Under Construction 2,553,853 2,553,853 2,865,324 Radnor/Main Line’s vacancy declined by 360 basis points over the past Deliveries 0 0 37,899 90 days after a large block of vacant space at the Radnor Financial Center was filled by CBRE occupying 25,735 square feet and Brandywine backfilling approximately 40,000 square feet. RESEARCH Rent Schuylkill Yards, a multiphase development backed by a partnership Although vacancy increased this quarter, so did asking rental rates between Drexel University and Brandywine Realty Trust, broke ground in among Class A properties in the CBD rose, which were up by $1.33/SF November 2017. The development will ultimately consist of 6.9 million to end at $33.90/SF. Some of the largest landowners in the city, including square feet of R&D, office, residential, hotel and retail space. The first Brandywine and Nightingale, have raised their asking rents, while others, project, called Drexel Square, will be a 1.3-acre park that is scheduled to like Shorenstein, now market their properties as “negotiable.” A general be completed in the fourth quarter of 2018. Schuylkill Yards will change rise in occupancy costs have contributed to a growth in lease rates for the face of University City, particularly the area surrounding Amtrak’s all classes. All landlords are now fully applying the new increase in 30th Street Station. Philadelphia real estate taxes, leading to an approximately $1.00/SF rise across the board. Additionally, construction costs have continued to rise, Investment Activity with a wage increase among select union professions expected in May At the start of 2018, the region continued to attract investors from of this year. Higher construction costs are expected to lead to higher Washington, D.C. and New York City, with these outside investors rents in the new buildings. accounting for three of the largest investment deals of the quarter. American Real Estate Partners Management (AREP) purchased 1600 Quarter-over-quarter, Class A rents in the suburban market increased Market Street in Philadelphia from Equity Commonwealth. The 825,968- $0.19/SF to start $30.00/SF. The Central/South Delaware County square-foot building sold for $160 million, or $193.71/SF. Along similar submarket led the charge, as Class A rates rose $1.04/SF to $28.12/SF. lines, Thor Properties LLC purchased an office condo at 907 Market Still, the highest Class A and highest overall rates belong to the Street from PREIT for $41.8 million, or $195/SF. NKF brokers assisted Radnor/Main Line submarket, which posted a rate of $39.12/SF and with the deal. A local investor, Victor F. Keen, purchased 1760 Market an overall rate of $38.71/SF. Radnor’s rates are expected to increase Street from Stockton Real Estate Advisors for $31.5 million, or $249/SF. as tenants rush to fill temporarily vacant space in this desirable location. The submarket could see the first $40.00/SF lease rate in the suburbs by There was a major investment shakeup in the Philadelphia suburbs, as year’s end. Liberty Property Trust sold part of its suburban office portfolio so that it can better focus on its industrial holdings and remaining office space in Lease rates rose as well in the Class B market, climbing $0.23/SF to the Philadelphia CBD. Equus Capital Partners purchased the eight $24.59/SF. The largest uptick came from Conshohocken, which jumped building, 593,701-square-foot portfolio for $92.0 million, or $153/SF. $3.83/SF to $31.01/SF because of rent increases at the Spring Mill Corporate Center and new office availabilities at the Spring Mill Pavilion. Outlook The Conshohocken Class B rate is the highest in the suburbs. Expect market conditions to continue to improve in the CBD throughout 2018. Twelve new companies from outside the CBD are searching for Construction Pipeline significant space, with one, Neumann Finance, leasing space this Across Greater Philadelphia, owners upgraded existing properties quarter. Much of the vacant space currently on the market is expected with amenities attractive to the growing millennial workforce. Buildings to be leased shortly. Additionally, five new KOZs were announced this still undergoing renovation at the start of 2018 include 650 East quarter, including 3.0 University Place and 3675 Market Street. Although Swedesford Road and 500 North Gulph Road, both in King of Prussia, not yet delivered, 3675 Market is 60.0% preleased. and 10 Valley Stream Parkway at the Great Valley Corporate Center in Malvern. Additionally, the Wanamaker building in Philadelphia Suburban Philadelphia’s market fundamentals are expected to announced a $10.0 million renovation of their lobby, gym and other remain steady throughout 2018. The blocks of space returned to the common areas. Radnor/Main Line market are already being filled, with more leases expected because of the submarket’s high degree of desirability. Further In the suburbs, no new office projects broke ground this quarter, though outside the city, the activity in King of Prussia is expected to grow in Equus Capital Partners’ 42,000-square-foot headquarters located in Ellis tandem with the continued development of the King of Prussia Town Preserve is under construction and is expected to deliver in April 2018. Center and other lifestyle and amenity improvements. News that The Ellis Preserve project also contains several mixed-use developments SEPTA will be extending a train line to service the King of Prussia Mall and is expected to contain 160,000 square feet of retail and restaurants and the Town Center sometime in the near future will also enhance and another 150,000 square feet of office and residential units.