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Landlord's Market

Regional Overview

  • The vacancy rate decreased during the last two quarters of 2016 from 11.8 to 11.4 percent.
  • Annual absorption totaled just under 1.0 million square feet and, while positive, was down from 2015’s annual total of 3.1 million.
  • Build-to-suit activity increased, while speculative projects were still in a holding pattern.
  • Asking rents increased by approximately $0.36 per-square-foot from the end of the second quarter to an average of $25.37 at year-end.
  • Investment sales volume was boosted by multiple portfolio transactions.

Q4 2016 Office Market IndicatorsThe regional office market had a solid, but not stellar performance in 2016. The vacancy rate decreased from the end of the second quarter, but ended the year at the same level as 2015. The largest lease deals were lateral moves within the market, renewals, or build-to-suit transactions that have not yet impacted absorption. There was stronger Class B absorption in a few submarkets but, overall, the flight to quality buildings was still prevalent. As the Class A supply continues to decrease, Class B buildings, particularly those that have been upgraded, are likely to have increased activity in 2017.

Q4 2016 Office Supply Vacancy AbsorptionFree rent periods for deals have shortened and landlords are beginning to cap tenant improvement allowances. Despite the mediocre market performance, owners remain bullish and it has turned into a landlord’s market. >

In New Jersey, Liberty Property Trust broke ground on American Water’s 222,376-square-foot build-to-suit headquarters facility in Camden, joining Subaru’s 250,000 square feet, which was already underway. In Delaware, CSC’s 148,000-square-foot building is scheduled for 2Q 2017 completion, and Incyte has a 154,000-square-foot expansion to its headquarters underway. Build-to-suits for Highway to Health and the Franklin Mint Federal Credit Union were progressing in suburban Philadelphia.Q4 2016 Office Vacancy

Submarket Reviews

CBD Philadelphia

After increasing during the first six months of 2016, the vacancy rate decreased to 9.6 percent. Annual absorption lagged behind 2014 and 2015’s totals. The perception of a strengthening market has pushed lease negotiations in favor of the landlord. Rents increased during the last six months, while concessions tightened. Landlords are offsetting the rising construction costs for tenant improvements by requiring longer terms.

The outlook for the first quarter of 2017 is for a continued drop in vacancy. The delivery of renovated space at One Franklin Tower may increase vacancy during Q2. PMC Property Group and Lubert-Adler Real Estate will commence on the renovation of 2400 Market Street after landing Aramark as the lead tenant for the nine-story project. Oliver Tyrone Pulver is proposing a 840,000-square-foot tower at 1301 Market Street.

Suburban Pennsylvania

The Suburban Philadelphia office market ticked up slightly during the third and fourth quarters to 12.5 percent. However, the increase was minor and reflects the trend of tenants moving between and within submarkets without expanding.

Class A absorption continues to outpace Class B product. The tightening supply of Class A supply will increasingly benefit Class B product, but primarily to buildings that have been upgraded. Additionally submarkets that have been stagnant over the past year, such as Bala Cynwyd and Valley Forge/Route 422, are likely to have increased activity due to the lack of product in neighboring areas.

Southern New Jersey

The Southern New Jersey office sector had a strong finish to 2016. Class A absorption outpaced Class B, but there were occupancy gains in Class B buildings as well. Camden County’s vacancy rate dropped from 14.9 to 14.2 percent, marking it the first time it fell below fifteen-percent vacancy since 2008. Burlington County’s vacancy also decreased, from 10.8 to 10.7 percent.

There has been more activity from tenants over 10,000 square feet and less velocity from smaller companies. There is a pipeline of deals that will spill into 2017, indicating further activity and decreasing vacancy. However, new medicare/medicaid rules have already impacted the local health systems’ requirements, with Cooper Health cancelling its plans to consolidate in Moorestown.

New Castle County, DE

The vacancy rate in New Castle County decreased from 12.6 to 12.5 percent. Leasing activity stagnated in the third and fourth quarters, and annual absorption was forty-percent less than in 2015. Downtown Wilmington had a net occupancy loss for the year, but there was positive absorption in the 4th quarter. The commitment of Chemours to stay downtown, the delivery of new housing units and restaurants will help to bring more activity to the city. The suburban vacancy decreased to 10.4 percent, but absorption lagged in the fourth quarter. The outlook for 2017 and beyond will be impacted by the outcome of possible relocations and consolidations by the county’s large employers, and potential redevelopments.

Lehigh Valley, PA

The vacancy rate in the Lehigh Valley increased during the last two quarters to 9.9 percent. Class A space accounted for all of the market absorption in 2016, and Class B buildings lost occupancy. This was due in large part to Guardian’s consolidation from existing buildings into the new facility. New landlords are putting capital into modernizing buildings including upgrading common areas and adding amenities that tenants are demanding.

Alvin H. Butz completed the second addition to the complex at 842 Hamilton Street. Buildings at New and Third Street in Bethlehem were being demolished to make way for the planned Gateway at Greenway Park. The 125,000-square-foot office building will be anchored by St. Luke’s and Lehigh University. Developer J.B. Reilly plans to commence on the twelve-story Tower 6 of City Center following the demolition of existing buildings.

There was a pipeline of requirements in the 20,000 to 60,000 square-foot range searching the market, which may decrease vacancy in early 2017. However, additional Guardian Life space may come back on the market as the company shifts to its new building.

Click here to download the full report as a PDF.

Suburban Office Market 2016 Fall/Winter Report

Suburban Philadelphia 2016 Fall/Winter Report

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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