April 13, 2018 – Despite a slight increase in vacancy, asking rental rates continued to climb in the Philadelphia Central Business District (CBD) office market, while strong demand for Class A product in the suburbs drove rental rates for all classes above the $25-per-square-foot mark for the first time since 2009, according to Cushman & Wakefield. The commercial real estate services firm’s Philadelphia research team released its first quarter 2018 Office MarketBeat reports for the region.
Philadelphia CBD Market
The overall vacancy rate for the CBD increased slightly over the past year, from 10.3 percent in the first quarter of 2017 to 10.4 percent in the first quarter of 2018. Both overall and Class A rents remain strong, particularly in the East of Broad submarket, which has experienced an 8.9 percent year-over-year increase to $28.65 per square foot for all classes.
Class A rates in the East of Broad submarket increased 8.5 percent to $30.20 per square foot in the first quarter of 2018. Rents in the West of Broad submarket remain robust, both topping the $30.00 per square foot mark for all product classes.
“The completion of the 1.3 million-square-foot Comcast Technology Center, now set for the second quarter of this year, will contribute significantly towards the Philadelphia CBD’s positive absorption total for the year,” said Jared Jacobs, Cushman & Wakefield Associate Director – Philadelphia Research. “Asking rents for all classes are expected to climb by approximately 2.0 percent, while vacancy is projected to dip below the 10.0 percent mark for the first time since 2015.”
Leasing activity slowed in the first quarter, dropping 21.5 percent year-over-year to a total of 473,274 square feet. In the West of Broad submarket, notable leases included Fitler Club taking 75,000 square feet at 2400 Market Street; McCormick Taylor, Inc.’s 59,218-square-foot lease at 1818 Market Street; and Gordon Rees Scully Mansukhani inking for 20,618 square feet at 1717 Arch Street. In the East of Broad submarket, Neumann Finance Company signed the largest new lease for 21,695 square feet at 123 South Broad Street.
As far as notable investment sales activity was concerned, American Real Estate Partners purchased the 826,000-square-foot Class A office building at 1600 Market Street from Equity Commonwealth for $160 million.
Philadelphia Suburban Market
The suburban Philadelphia office market saw overall vacancy increase by 90 basis points year-over-year to 12.4 percent in the first quarter of 2018. With no new speculative construction scheduled to deliver in the suburbs in 2018, the vacancy rate is expected to remain relatively flat during the year. However, overall absorption is projected to be positive by year-end as several tenants who leased space in 2017 are scheduled for occupancy during the year.
Overall asking rental rates continued to climb in the Philadelphia suburbs, with an average gross asking rate of $25.01 per square foot in the first quarter, a 1.5 percent increase year-over-year.
“This is the first time since 2009 that asking rates for all classes have eclipsed the $25.00-per-square-foot mark,” noted Jacobs. “The increase has been driven by the rise in rents by landlords in Class A product. The first quarter direct average asking rate rose 2.8 percent year-over-year to $27.12 per square foot, the highest Class A average since 2008.”
Asking rental rates for Class A space are projected to increase by 0.4 percent by year-end 2018, with positive growth expected to continue over the next three years.
Main Line Health signed the largest lease of the first quarter, renewing for 100,462 square feet at 240 Radnor Chester Road in Radnor. Other noteworthy leasing activity throughout the suburbs included:
- In the Blue Bell/Plymouth Meeting/Fort Washington submarket, National Comprehensive Cancer Network signed for 65,244 square feet at 3025 Chemical Road in Plymouth Meeting, and T-Mobile took 24,112 square feet at 475 Virginia Drive in Fort Washington.
- Crown Cork & Seal USA, Inc. inked for 57,275 square feet in Yardley.
- Finisar Corporation leased 31,020 square feet at 767 Electronic Drive in Horsham.
- ACE Insurance Group renewed for 23,333 square feet at 3 Country View Road in Malvern.