Asking rental rates in the Philadelphia Central Business District (CBD) remained strong despite a slight increase in vacancy, while demand for Class A product in suburban office markets continued to drive vacancy rates down and rental rates up in 2017, according to Cushman & Wakefield. The commercial real estate services firm’s Philadelphia research team released its fourth-quarter 2017 Office MarketBeat reports for the region.

Philadelphia CBD Market

The vacancy rate for the CBD increased by less than a full percentage point year-over-year to 10.7 percent in the fourth quarter. The increase can be attributed to an accumulation of small vacancies in the East of Broad submarket during the year, most notably the completion of the Family Court building renovation at 1100 Ludlow Street.

“Despite the increase in vacant space, asking rental rates have remained strong in the Philadelphia CBD in 2017,” said Jared Jacobs, Cushman & Wakefield Research Manager. “In the East of Broad submarket, rates increased by 7.5 percent year-over-year to $28.09 per square foot. Landlords are continuing to raise rents as mixed-use redevelopment projects like the East Market and Fashion Outlets of Philadelphia at Market East have elevated the appeal of that side of the city for office space end-users.”

Leasing activity totaled 2.2 million square feet in 2017. The largest lease of the year was the 300,000-square-foot renewal and expansion inked by Comcast at Three Logan Square. Jefferson Health took 237,000 square feet at 1101 Market Street, which it will occupy when Aramark relocates to its new headquarters at 2400 Market Street in late 2018.

“Leasing activity in 2017 slightly surpassed the most recent 10-year annual average in the CBD,” said Jack Meyers, Executive Director, Brokerage Services, for Cushman & Wakefield. “The continued growth of Comcast, along with large leases signed by Jefferson Health and Spark Therapeutics, helped offset the familiar trend of densification by many users who opt for a more open and efficient workplace designed to encompass fewer square feet.”

Comcast’s recent lease expansion is evidence that it continues to expand within the downtown market. When the company broke ground on its 1.3 million-square-foot building at 1800 Arch Street in 2014, it was anticipated that large vacancies would be created at Logan and Centre Square as a result of consolidation in the new building. The scheduled delivery of Comcast’s new tower in the next quarter is no longer expected to have a negative impact on 2018 absorption and vacancy.

Other notable leases in the CBD market in 2017 included PNC Bank renewing and downsizing its footprint at 1600 Market Street from 350,000 square feet to 230,000; First Judicial District of Pennsylvania taking 120,000 square feet at 714 Market Street; Morgan, Lewis & Bockius renewing for 98,180 square at 1801 Market Street; and Brandywine Global Management leasing 88,713 square feet at 1735 Market Street.

Philadelphia Suburban Market

The suburban Philadelphia office market saw overall vacancy decline to 11.2 percent in the fourth quarter of 2017, down 60 bps year-over-year. With no new speculative construction scheduled to deliver, the vacancy rate is expected to decline further in 2018.

Average asking rents increased steadily in the suburbs throughout the year, increasing 3.1 percent year-over-year to $24.86 per square foot for all classes. Overall asking rental rates for all classes in the suburbs are forecasted to increase by 1.6 percent in 2018.

With the Class A vacancy rate dropping below the 10 percent mark, landlords have been raising rents on this product throughout the suburbs. The Class A market experienced the largest rent growth during the period, increasing by 4.1 percent to $26.68 per square foot.

Leasing activity increased by 7.1 percent year-over-year, and a total of 610 new leases were signed in 2017 compared to the 561 in 2016.

“The most noteworthy suburban leasing activity in 2017 was from tenants renewing or right-sizing into the most desirable locations, with easy access to amenities that are comparable to urban environments,” said Michael J. Sweeney, Cushman & Wakefield Director of Brokerage Services. “Because some older office parks have been repositioned – creating more modern, urban-like settings – significant leasing activity took place not just in the typical Class A ‘Crescent’ submarkets like Bala Cynwyd and Conshohocken, but also throughout Lower Bucks County, Fort Washington/Blue Bell, King of Prussia and the Malvern-Exton areas.”

Notable leases for 2017 included:

• In Bala Cynwyd, Philadelphia Insurance Companies renewed its lease for 285,000 square feet at One Bala Plaza, State Farm Insurance extended its lease for 272,523 square feet at One State Farm Drive in Concordville, and Siemens renewed for 184,872 square feet at 51 Valley Stream Parkway in Malvern.
• In the Blue Bell/Plymouth Meeting/Fort Washington submarket, Cotiviti Corp. signed for 86,621 square feet at 785 Arbor Way in Blue Bell; AON Insurance Companies took 76,475 square feet at 1100 Virginia Drive in Fort Washington; and Sicom Systems, Inc. inked a 71,290-square-foot lease at 1684 South Broad Street in Lansdale.
• In addition, Cenlar Capital Corporation took 105,000 square feet at 780 Township Line Road in Yardley, and J.G. Wentworth, Inc. leased 74,122 square feet at 1200 Morris Road in Wayne.

Sweeney noted that, as employee demographics and lifestyle demands evolve, tenants continue to look for quality space to attract and retain top talent. Significant tenants in the market for space in 2018 include AmeriHealth for 200,000 to 300,000 square feet, AmerisourceBergen for 250,000 to 300,000 square feet and Toll Brothers for 150,000 to 200,000 square feet.

“Barring any geopolitical events, look for these trends to continue in 2018 for the Philadelphia office suburbs,” said Sweeney.

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.