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Rocketing Rents

Regional Overview

  • The vacancy rate increased during the first two quarters from an adjusted 11.5 to 11.8 percent.
  • Absorption rebounded during the second quarter but was behind 2015’s pace.
  • Build-to-suit activity increased, while speculative projects are still in a holding pattern.
  • Asking rents increased by almost 3.4 percent from the end of 2015.
  • Investment sales activity remained strong and the ownership mix further diversified.

Q2 2016 Office Market Indicators chartThe regional office market had mixed but generally positive results during the first two quarters of 2016. Lateral occupancy moves within or between submarkets and continued consolidation of multiple locations constrained absorption. As additional pending deals land in the third and fourth quarters, however, results should begin to meet expectations for stronger absorption.

Q2 2016 Office Supply Vacancy and Absorption chartThe overall weighted average asking rent increased by $0.43 per square foot from the end of 2015. Class A rents increased by 3.5 percent while Class B rents had a sharper 4.3 percent jump. High demand for building amenities and increased construction costs to provide these features have resulted in higher rents and lower tenant improvement allowances.

Q2 2016 Office Vacancy chartFMC began moving into its namesake tower at Cira Centre South during the second quarter. Subaru’s 250,000-square-foot headquarters was underway in Camden, as well as Corporation Service Company’s new building in suburban Wilmington. Buildto- suits were announced for Highway to Health and the Franklin Mint Federal Credit Union. Numerous speculative projects are being discussed but none will move forward without substantial preleasing.

Submarket Reviews

CBD Philadelphia

Vacancy in CBD Philadelphia increased as anticipated during the second quarter to 10.6 percent, due in large part to the delivery of new space at the 30,000-squarefoot Cira Centre South building and FMC’s subsequent move from 1735 Market Street. Newly renovated space at East Market and the office portion of One Franklin Tower will be adding new vacancy in the coming months.

There are some larger deals circulating that may reduce vacancy, particularly in the Market East/Independence Mall submarket. There has been a steady stream of suburban companies opening full-floor CBD offices such as Carpenter Technology. Coworking companies have expanded significantly in the CBD.

Suburban Pennsylvania

The Suburban Philadelphia office market had an overall vacancy decrease from 12.4 to 12.2 percent during the first two quarters. Class A buildings outperformed Class B space accounting for all of the positive absorption. The increasing limited choice of Class A buildings will begin to shift requirements to Class B buildings. This is already happening in submarkets such as King of Prussia and Plymouth Meeting/Blue Bell where Class B absorption outpaced Class A.

New availabilities in Main Line/Radnor may actually benefit this submarket that has had sub five-percent vacancy.

Southern New Jersey

Following a strong 2015, the Southern New Jersey market slowed during the first two quarters. The vacancy rate decreased from an adjusted 13.8 percent at the end of the fourth quarter, but ticked up slightly from 13.6 percent in the first quarter to 13.7 percent. Burlington County’s vacancy decreased from 10.7 to 10.6 percent. Camden County’s vacancy rate continued to be much higher and increased from 18.2 to 18.3 percent.

Bayada Home Health purchased the persistently vacant Fairway Corporate Center in Pennsauken. The company accepted an $18.4 million Grow New Jersey tax credit to stay in New Jersey. Bayada will keep its headquarters in Moorestown but consolidate multiple New Jersey and Pennsylvania satellite locations.

New Castle County, DE

The vacancy rate in New Castle County decreased overall, but the suburban market was on much more solid footing. The downtown vacancy rate increased from 14.4 to 15.1 percent, mainly due to former Ashland space at 1301 N. Market Street. The Delaware Board of Trade will be operating a new 10,000-square-foot startup stock exchange that may bring further growth to financial services. The vacancy outlook for downtown Wilmington is murky. Chemours still has not committed to stay in Wilmington. Capital One is considering building a new campus on the waterfront, and Bank of America may be selling its downtown buildings.

There was just under 100,000 square feet of absorption in the suburban market. The vacancy rate decreased from 12.0 to 11.0 percent. CSC continues to expand with the construction of a new 148,000-square-foot building and the purchase of an additional building in Little Falls Corporate Center.

Lehigh Valley, PA

The vacancy rate in the Lehigh Valley decreased to 9.8 percent from the end of 2015, but was up from the first quarter. Guardian Life began moving into its new building in Hanover Township. The company will be consolidating multiple Lehigh Valley locations.

Paychex will be expanding by over 20,000 square feet in its current Pond Road location.

A new office project in South Bethlehem, to be anchored by St. Luke’s and Lehigh University, was moving forward. The developer of City Center is proposing a new twelve-story office condo building in Allentown but has put additional office plans on hold.

Click here to download the full report as a PDF.

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