Philadelphia’s Office Market Had a Mixed 2023

The Philadelphia office market had a mixed performance throughout 2023. The development pipeline grew, with construction starts significantly increasing compared to the previous year, this activity being mainly bolstered by life science projects. Investment volume however dropped massively, reaching about a third of that recorded in 2022.

Office debt in the metro also continued increasing as maturities expected in the near future outpace national figures. Flexible space in the metro has continued to maintain its hold, representing however a smaller share than most other comparably sized markets.

Life science projects bolster development

As of December, the Philadelphia office market had nearly 3.8 million square feet under construction across 14 properties, accounting for 1.7 percent of stock. The pipeline was on par with the national construction rate and surpassed comparably sized markets such as Phoenix (0.6 percent), Houston (1.1 percent) and Baltimore (1.5 percent), but lagged other secondary markets including Charlotte (3.1 percent) and Nashville (4.4 percent).

The most sizeable project currently under construction is the Quartermaster Science + Technology Park. Developer SkyREM is leading the $250 million venture which involves converting the historic Quartermaster site into a mixed-use property slated to include 1 million square feet of wet and dry lab space for R&D and bio-manufacturing purposes.

Another large development underway is 3151 Market, a 435,000-square-foot life science project, developed by a joint venture of Brandywine Realty Trust and Drexel University. The partners recently topped out the 14-story building in October and expect completion in 2024. It will be part of the $3.5 billion, 14-acre Schuylkill Yards mixed-use master plan in Philadelphia’s University City district.

Throughout 2023, seven properties broke ground in Philadelphia’s office market for a total of 2.3 million square feet, accounting for 1 percent of existing stock, double the national rate of development. This activity was mostly bolstered by the life sciences sector, as of the total, nearly 2.1 million square feet belonged to this asset type. Compared to the previous year, development activity increased, as in 2022 only 1.4 million square feet broke ground.

One of the most significant projects to commence construction this year is Gattuso Development Partners and Vigilan Holdings of New York’s life sciences development at 3201 Cuthbert St. The 519,647-square-foot property is slated for completion in early 2025 and is valued at more than $400 million. The partners secured a $290 million loan for the venture in late 2022.

Nearly 1.6 million square feet of office space entered the Philadelphia market in 2023 across 7 properties, accounting for 0.7 percent of existing stock, on par with the national rate of deliveries of 0.8 percent. In terms of volume, the metro considerably surpassed secondary markets such as Baltimore (648,625 square feet), San Diego (559,964 square feet) and Phoenix (528,890 square feet) but lagged others including Austin (2.8 million square feet) or the Bay Area (4.1 million square feet).

The largest property to come online in 2023 was One uCity Square, a 400,000-square-foot lab and office building. The $300 million project was developed by Ventas in partnership with Wexford Science + Technology and the University City Science Center. It is part of the 4 million-square-foot uCity Square mixed-use project salted to comprise two residential buildings, five office and lab buildings, a public school and an academic building for Drexel University.

Investment volume drops by two thirds

Throughout 2023, some 5.5 million square feet traded across 45 properties in the Philadelphia office market for a total investment volume of $523.3 million. These figures represent a tremendous drop from the previous year when 9.1 million square feet changed hands for nearly triple the investment at $1.6 billion.

The price per square foot in the metro clocked in at $127.5 as of the end of the year, a roughly 25 percent decrease from 2022. Prices in Philadelphia surpassed secondary markets such as nearby Baltimore ($100.4), but considerably lagged others such as Austin ($304.1) and the Bay Area ($341.4).

The largest sale recorded in 2023 was David Werner Real Estate Investments’ $71.5 million acquisition of the 885,233-square-foot Dow Chemical Northeast Technology Center. Pfizer sold the asset and continues to occupy space at the location through its subsidiary Wyeth. It is part of a campus including 14 interconnected office, life science and mixed-use buildings. DWREI, in partnership with GreenBarn Investment Group, acquired the entire park in August for $180 million, involving a $95 million CMBS loan. Recently, materials science company Dow signed a lease for 800,000 square feet at the asset.

Another sizable transaction was the $67.8 million sale of One Tower Bridge, a 270,000-square-foot office building in suburban Philadelphia. The Buccini/Pollin Group acquired the asset, which was 92 percent occupied at the time of the transaction. The acquisition also involved a $59 million loan from Citibank, according to CommercialEdge data.  

Office debt increases in Philadelphia

A large leasing deal in the past year is architecture firm EwingCole’s 55,000-square-foot renewal at 10 North Independence Mall West. Owned by The Federal Reserve Bank of Philadelphia, the Class A office building spans 775,000 square feet across eight stories. Newmark represented the tenant in the transaction.

The total debt in the Philadelphia office market amounted to nearly $23.2 billion as of October 2023, according to a recent CommercialEdge market bulletin. By the end of 2024, 20.5 percent of it will be maturing, above the national rate of 16.1 percent, and through 2026 the figure rises to 36.4 percent, the same source shows.

One of the largest notes originated during 2023 was the $409 million in credit tenant lease financing for Parkway Corp.’s development of Chubb’s new headquarters. UMB Bank provided the fixed-rate long term note as trustee of the JLL Securities Credit Lease-Backed Pass-Through Trust. The project will break ground in early 2024 and is expecting completion by 2026.

Coworking remains an option

As of the end of 2023, there was more than 2.5 million square feet of flexible space in Philadelphia’s office market accounting for 1.3 percent of total stock. The share of coworking space was smaller than the national average of 1.7 percent and lagged comparably sized markets such as Houston (1.7 percent) or Atlanta (2.1 percent). It was on par with Charlotte’s 1.3 percent and above Baltimore’s 0.8 percent.

The largest flexible space operator in Philadelphia was Regus with a total of 463,363 square feet across 25 properties. Other key players in the market include Industrious with 122,774 square feet in three locations, as well as WeWork with two coworking properties totaling 106,564 square feet.