Job Growth Bodes Well for Greater Philadelphia Market
Philadelphia’s office and industrial markets have been on a hot streak for the past year, with lower vacancy rates and greater rent growth than the national average. Office vacancies are enjoying far lower vacancy rates than regional and national averages for both Class A and Class B properties in the central business district and the suburbs. Flex and industrial vacancy rates are below 7 percent overall, well below regional and national averages, with average asking rents at about $5 per square foot.
We see this upswing continuing in 2018 as demand keeps pace with or exceeds new development. Philadelphia has experienced seven years of uninterrupted job growth across all sectors, with 1.8 percent growth between August 2016 and August 2017 — outpacing the national average of about 1.5 percent, according to the U.S. Bureau of Labor Statistics. We saw job growth across the board, including the education, health, and leisure and hospitality sectors. But the biggest gain was in business and professional services, where Philadelphia added 16,700 jobs over 12 months. That represents a 3.6 percent year-over-year growth rate in high-end office jobs, compared to a national average of 3 percent.
Manufacturing employment declined over the past 12 months, despite the positive economic indicators appearing in the Philadelphia Federal Reserve’s Manufacturing Business Outlook Survey. However, the expansion of e-commerce increased regional employment within trades, transportation, and utilities. As a result, industrial rents have remained stable, and could turn upward as more new product comes online.
The Southern New Jersey industrial market recorded 1.5 million square feet in positive absorption for the third quarter. A majority of this gain was attributed to Amazon’s new distribution center. Burlington County posted 2.4 million square feet in year-to-date occupancy gains. Demand for space in this strategically located submarket is running into a shortage of inventory.
E-commerce firms are driving demand for warehouse space in the region. Unfortunately, not enough speculative projects are breaking ground, leaving tenants with a lack of existing product suitable for distribution requirements. In Philadelphia County, even developable land is scant.
There are four warehouse properties currently under construction in Greater Philadelphia. The 1.2 million-square-foot facility in Gloucester County, New Jersey, was entirely pre-leased by Amazon. The other three projects have not been pre-leased, but high demand makes it likely they will be occupied quickly. The lack of suitable development sites in and around the city will likely prop up rents and hold vacancy down. Meanwhile, occupiers anticipate the completion of massive road construction projects, which will open up new viable locations.
Industrial vacancy in southeastern Pennsylvania was flat quarter over quarter. Still, Bucks County and Delaware County recorded a combined 707,445 square feet in absorption. In contrast, Philadelphia County produced only 72,333 square feet in positive year-to-date absorption. The expansion of overnight and same-day delivery service by e-commerce requires the supply chain to be close to dense population centers. Unfortunately, Philadelphia County lacks development sites sufficient to fill these needs. The Berks County submarket, located 62 miles from the city of Philadelphia, has started to gain attention from developers and tenants for its proximity and lower costs.
Warehouse rents across the region flattened, with average direct asking rental rates for warehouse/distribution space increasing by 2 cents per square foot to an average rate $4.08 per square foot. However, R&D/flex properties increased by 23 cents per square foot over the past year, with new leases averaging $8.17 per square foot.
The favorable office and industrial market environment has caused property investors to look harder at Philadelphia. Median asking prices for office buildings rose 12.5 percent during the year on average, according to Loopnet. Industrial prices increased 7.2 percent overall, but infill locations saw the largest part of that increase. We’re seeing strong upside potential for older assets trading at extreme discounts to the replacement cost in Cherry Hill, Northeast Philadelphia, Lower Bucks County, and King of Prussia.
Philadelphia’s central location and strong labor pool make it attractive to office and industrial users. Investors and developers have focused on high-growth gateway cities, but as space in those markets becomes expensive or unavailable, the Philly region is seeing some of the positive effects of a low-vacancy market.
— By Jason Wolf, managing principal, WCRE/CORFACE International. This article first appeared in the January/February issue of Northeast Real Estate Business magazine.