Overall, the first quarter of 2012 brought improving market trends to the office sector in Philadelphia and Delaware. The number of tenants in the market has increased, although this has not translated into a significant increase in occupancy. Some tenants are growing, but it is still common for companies to make lateral space moves or take smaller, more efficient offices.
In CBD Philadelphia, occupancy decreased slightly during the first quarter from 88.6 percent to 88.4 percent. The main reason for the loss in occupancy during the first quarter was due to banking sector tenants Citizens and Wells Fargo consolidating space in the Market East submarket. The Lehigh Valley also had a decrease in occupancy, mainly due to the closing of a 100,000-square-foot T-Mobile call center. On the other hand, the Pennsylvania suburbs, Southern New Jersey and Northern Delaware all registered low, but positive absorption for the first quarter.
Numerous large tenants are looking in the market. However, many of these leases are likely to be renewals or moves without significant additional occupancy. With the exception of a rumored 145,000-square-foot Capital One lease in Wilmington, Delaware, which is a new requirement, none of the deals in the market are anticipated to have a major positive or negative impact on the market at this point.
The major REITs continue to be the most dominant landlords in terms of size and competition for tenants. Liberty Property Trust and Brandywine Realty Trust set the bar for rent and concession trends.
Asking rents have remained unchanged, and one month of free rent per year of term and generous tenant improvement allowances are still common. Landlords are expected to begin to “reel in” concessions as the year progresses if the leasing market remains active.
Asking rents in CBD Philadelphia are $28-plus for trophy class buildings, $23 to $27 per square foot for Class A space, and in the high teens to low $20 range for Class B space. In the Pennsylvania suburbs, asking rents average $25.07 full-service for Class A space and $21.07 full-service for Class B space. In Southern New Jersey, the average Class A asking rent is $20.97 full-service and $19.67 for Class B space. In New Castle County, Class A rents average $27.75 in Downtown Wilmington and $22.18 in the suburban markets. Class B rents average $17.73 downtown and $21.57 in the suburbs. Lehigh Valley rents average $20.95 for Class A and $16.78 for full-service Class B space.
In terms of investment sales, it has been difficult to establish a pricing trend because of the limited number of sales in submarkets such as CBD Philadelphia and the number of lender sales in the suburban markets.
Private investors, particularly private-equity funds, have become more active over the last 18 months, and have been able to take advantage of distressed property offerings and non-core REIT asset sales to expand their market holdings. Currently, an undisclosed buyer is under contract to purchase the 502,531-square-foot Two Penn Center in CBD Philadelphia from Crown Properties. MIM-Hayden closed on the 228,056-square-foot Five Tower Bridge in Conshohocken at the beginning of the year. Brandywine Realty purchased a 154,000-square-foot, former user building in Plymouth Meeting. Rubenstein Partners acquired the 107,742-square-foot 1150 Northbrook Drive in Trevose (Bucks County) from the lender. In addition, Liberty Property Trust finalized the sale of a multi-state portfolio, which included four buildings in Southern New Jersey
The three most significant developments are build-to-suits for tenants relocating from other buildings in the market. GlaxoSmithKline will be moving into its new 205,000-square-foot building at a new $81 million development by Liberty Property Trust at the Philadelphia Navy Yard at the end of the year, vacating over 800,000 square feet in two CBD Philadelphia buildings. Endo Pharmaceutical has a 320,000-square-foot building underway at Atwater Corporate Center in Malvern. Endo will be vacating three buildings totaling more than 160,000 square feet in Chadds Ford, Delaware County when they relocate to in December. West Company will also be moving within Chester County with a new 170,000-square-foot building in Exton.
Occupancy growth will continue to be sluggish over the next 12 months, driven primarily by three factors that will continue throughout the year: there have been very few net new users to the region of meaningful size to impact occupancy; sluggish job creation has put limited pressure on existing space requirements; and, the trend to creative and more efficient workplace solutions will continue to enable companies to maintain if not contract their office footprints.
— Joseph Fetterman is executive vice president of Strategic Initiatives with the Philadelphia office of Colliers.