TRENDS

The Greater Philadelphia office markets were extremely slow during the first two quarters of 2009, and occupancy eroded as companies downsized.  Office market vacancy has historically been a lagging indicator of economic performance, so it is unlikely that Philadelphia has hit the bottom of the market. 

The vacancy rate increased by 1.1 percentage points to 14.4% at the end of the second quarter and absorption slipped into negative territory.  Market vacancy increased overall, and absorption was negative, but a few submarkets showed comparatively positive results during the first half of 2009.  Southern New Jersey, New Castle County and the Lehigh Valley all had an increase in occupancy. 

There has been a sharp increase in the number of subleases, but the overall vacant sublease space has only increased by approximately 16% or 327,000 square feet.  However, there is a sizeable bank of sublease space being marketed for 30-90 day occupancy indicating that tenants would vacate for the right offer. 

New construction was down significantly; the lowest six month level of completions of the decade.  There was one major delivery, O’Neill Property’s 215,000 square-foot spec building in Bucks County.   Pettinaro Construction is developing a 164,000 square-foot spec building in Wilmington, Delaware.  There are two Unisys complexes in Montgomery and Chester counties that are undergoing a major retrofit for multi-tenant occupancy.  Unisys will still be the major tenant, but there will be new space available in 2010. 

The largest lease deals were renewals and there were very few transactions over 25,000 square feet.  Although face rents have not decreased significantly yet, landlords are increasing tenant concessions, particularly free rent. 
The investment market slowed considerably, but there was some limited activity and two significant user purchases.  A few owners have put buildings on the market to “test the waters,” but the majority of these buildings were pulled when the offers were significantly below expectations.

After the 2001-2002 recession, the vacancy peaked during the third quarter of 2003.   There is likely to be a similar trend for this recession—it may be well into 2010 before peak vacancy is reached. 

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