Newmark released its third-quarter 2020 office reports for Philadelphia’s Central Business District (CBD), suburbs, Southern New Jersey and Northern Delaware today. Market activity amid the ongoing pandemic signaled a challenging road ahead for the region’s office sector. However, numerous major tenants reaffirmed their commitment to the built office environment through significant move-ins, long-term lease transactions and groundbreakings on new buildings.
In the Philadelphia CBD, planned vacancies combined with COVID-19-related space givebacks in the third quarter drove nearly 330,000 square feet in negative net absorption. Thus far, average asking rents have not been impacted; some office landlords are instead negotiating for more attractive concession packages in order to keep face rates steady.
This quarter, construction began on two build-to-suit projects in the CBD: 2222 Market Street, the 308,000-square-foot headquarters for Morgan Lewis, and Drexel University’s 454,000-square-foot Academic Tower in University City. These two major projects moved forward while other tenants put plans on hold; 38.0 percent of tenant requirements for traditional office space that were in the market in February are now on COVID-19-related hold. However, some tenants, especially in the life sciences field, are ramping up their occupancy of space. Spark Therapeutics again transacted the largest new lease in the CBD this quarter (46,371 square feet at 3101 Market Street), having transacted the largest new lease in the second quarter. Newmark Executive Managing Director Jim Egan commented, “Life sciences demand has accelerated even amid the pandemic and this momentum will be an essential part of the stabilization and expansion of both the city’s economy and real estate market.”
In the suburban market, numerous major occupancies occurred this quarter, driving positive net absorption to nearly 80,000 square feet. Toll Brothers, Mullen Coughlin, Jefferson College of Nursing and PayPal were among the most significant tenants to move into new space. On the other hand, many office tenants in the region made the decision to sublet either a portion or the entirety of their space. Sublease volume in the suburbs increased 23.0 percent to approximately 1.6 million square feet, although in recent historical context, this volume is not yet at abnormal heights. Market participants are expecting that more sublease space will be added to the inventory in the quarters to come. Rising sublease volume has come to benefit some tenants, drawn to the lower cost and flexible terms, and at least one city-based tenant has subleased space to accommodate suburban employees amid ongoing pandemic conditions. On the subject of whether the suburbs may welcome greater numbers of urban tenants going forward, Newmark Associate Director Tim Morris noted, “Speculation about an exodus to the suburbs is high, but so far, we’ve only seen a few smaller companies from the city relocate to the suburbs or start to explore the option. Time will tell if this becomes a real migration pattern.”
Southern New Jersey’s office market was the only one in the Greater Philadelphia region to experience positive net absorption in the third quarter. Occupancies by tenants such as Conrail and Two Six Labs more than balanced out a major downsize in the market, and overall vacancy fell to its lowest measure since 2017. Newmark Associate Director Keith McClure said, “Leasing volume is more muted than pre-pandemic levels, but we’re not contending with a glut of new sublease space on the market yet and new deals continue to be signed, so we are cautiously optimistic about the local office sector’s resiliency.”
The Wilmington, Delaware office market was stable in the third quarter. A few thousand feet of negative absorption was tallied, as modest expansions and new occupancies nearly balanced out a handful of vacancies. A notable change to the market inventory occurred this quarter as demolition of the Barley Mill Plaza office park completed, removing over half a million square feet of office space from the inventory. A transformative redevelopment of this property spearheaded by local developer Pettinaro will yield a mixed-use campus anchored by Delaware’s first Wegmans grocery store. Finally, following a string of high profile, single-tenant office sales in 2019, another similar investment opportunity was introduced to the market this quarter. Newmark was retained to sell the 279,377-square-foot Crescent Building at 125 South West Street on the Wilmington Riverfront. Aside from ground-floor retail tenants, the building is fully leased to Barclays. Newmark Senior Managing Director Neal Dangello, who is on the team marketing the building, noted that, “In this period of market volatility, investors are increasingly drawn to the stability offered by Class A office product leased long-term by a single credit tenant.”
About Newmark Group, Inc. (NASDAQ: NMRK)
Newmark Group, Inc. is a world leader in commercial real estate services, with a comprehensive suite of investor/owner and occupier services and products. Our integrated platform seamlessly powers every phase of owning or occupying a property. Our services are tailored to every type of client, from owners to occupiers, investors to founders, growing startups to leading companies. Harnessing the power of data, technology and industry expertise, Newmark brings ingenuity to every exchange, and imagination to every space. Together with London-based partner Knight Frank and independently owned offices, our 18,800 professionals operate from approximately 500 offices around the world, delivering a global perspective and a nimble approach. In 2019, Newmark Group, Inc. generated revenues in excess of $2.2 billion. To learn more, visit nmrk.com or follow @newmark.
3Q20 Wilmington Office Market Report
