Dir: +1 215 928 7505
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103
Main: +1 215 925 4600
Fax: +1 215 925 1040
7535 Windsor Drive
Allentown, PA 18195
+1 610 770 3600
Eight Tower Bridge
161 Washington Street
Conshohocken, PA 19428
+1 610 684 1850
300 N. Second Street
Harrisburg, PA 17101
+1 717 730 3752
1317 Route 73
Mount Laurel, NJ 08054
+1 856 234 9300
300 Delaware Avenue
Wilmington, DE 19801
+1 302 425 4000
The momentum built during the first half of the year carried into the last two quarters, and the regional markets ended 2015 on a strong note with decreased vacancy and increased demand. Single digit Class A vacancy has increased demand for Class B space.
The overall weighted average asking rent increased by $0.45 per square foot from Q2 and by $0.73 per square foot from the end of 2014. It was not unusual for landlords to raise rents by $1.00 per square foot. Class B rents increased by $0.76 per square foot since Q2 and by $1.63 per square foot since the end of 2014. The exit of the occupancy-focused REITs from the suburban markets and entrance of new landlords has been a major factor in rent increases. While Class B rents have been spiking, new landlords vying for tenants has resulted in a competitive leasing environment in the suburban markets.
Development and redevelopment activity in urban locations outpaced suburban construction. In addition to the new Comcast and FMC towers in Philadelphia, Subaru’s headquarters in Camden will be fully underway in early 2016 and a new office building will be starting in Bethlehem.
More companies were expanding in 2015, but the list of largest leases for the final two quarters reflected the persistent downsizing and consolidation still occurring in the market.
Cigna renewed longterm at Two Liberty Place, but will be giving back floors. Independence Blue Cross is expanding its overall CBD Philadelphia footprint, but will be vacating other CBD and suburban offices. Cerner signed a full building lease in Malvern, but will also be consolidating space.
REIT divestitures continued to dominate the investment market. Private entrepreneurial ownership groups have stepped up to establish a presence or increase holdings in the region. Liberty Property Trust divested over 2.6 million square feet of suburban office space in Wayne and office/flex in Horsham. Brandywine Realty Trust sold assets in Wayne and Mount Laurel with additional properties under agreement. Equity Commonwealth sold One Franklin Plaza and has put 1525 Locust Street on the market. Tier REIT is selling additional CBD Philadelphia and South Jersey buildings.
The downtown market had a solid performance in 2016 despite a few bumps. While the vacancy rate was at its lowest level in fifteen years, absorption for the fourth quarter dipped after three strong quarters. This was mainly due to Bank of New York Mellon’s contraction from six floors at 1735 Market Street. However, the conversion of a portion of One Franklin Tower to apartments, and the deferment of the balance of the office space for retrofit, removed over a half-million square feet of vacancy.
There will be additional spaces vacated in 2016 by Dow, Cigna and FMC, and 200,000-square-feet of renovated space at One Franklin that will be available in Q3. However, it is likely that a portion of these vacancies will be leased. Demand for loft-style offices is influencing the retrofit and conversion of traditional office space.
The 1.8 million square feet of absorption was at its highest level since 2007. Class B absorption had outpaced Class A during the first half of the year, but Class A occupancy was boosted in the last two quarters by multiple large lease deals and the completion of new buildings for IFM Efector and Saint Gobain.
Limited Class A space choices will increasingly drive tenants to Class B buildings in 2016. With no spec construction on the immediate horizon, more aging buildings will be retrofitted and repositioned. There are still no signs of any developer starting a purely speculative building, but there is the potential for a partially preleased project to start in the next year.
Southern New Jersey rebounded strongly in 2015. More tenants were upgrading locations and expanding within the market. Companies such as Carekinesis used economic incentives to grow significantly. With Class A vacancy below 10 percent, Class B vacancy is likely to decrease further in 2016.
The ownership mix continues to change. Brandywine Realty Trust and Liberty Property Trust have been divesting suburban buildings, but both have development plans in the city of Camden. Brandywine recently broke ground on Subaru USA’s new headquarters.
The vacancy rate decreased in both Suburban and downtown Wilmington in the third and fourth quarters.
The northern suburban market had strong absorption from organic tenant growth. Downtown tenants continued to make lateral moves to better buildings, and law firms were still shrinking their footprints. However, the financial technologies sector was expanding. PA-based Alpha Technologies bought One Customs House. FinTech companies Prosper and Zenbanx signed large leases in the suburban market.
New Castle County’s major employers will impact the office market over the next year. CSC is building a new 148,000-square-foot headquarters, consolidating multiple locations. JPMorgan Chase plans to expand its Technology Center on Concord Pike, another sign of Delaware FinTech growth. Incyte has filed plans for a new building, while leasing space across the state line in Delaware County. However, the future of DuPont’s and Dow’s occupancy in New Castle County is a potential concern.
The vacancy rate in the Lehigh Valley was down a full percentage point from the end of 2014, but flat during the last two quarters of 2015 at 9.9 percent. Neighborhood and city improvement zone incentives have increased new office construction in Allentown and Bethlehem, but also resulted in conversions of office buildings to multi-family, such as 65 E. Elizabeth Avenue in Bethlehem.
Lehigh University and St. Luke’s Health Network will be the lead tenants in a new 125,000-square-foot office building in south Bethlehem. Construction is scheduled to commence in early 2016.
Guardian Life’s 281,680-square-foot office building is scheduled for 3rd quarter 2016 completion.
Click here to download the full report as a PDF.
The Colliers International Suburban Office Market Report is a practical analysis of the greater Philadelphia suburban office market featuring market trends, statistics, and notable transactions.
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