Unlocking Philadelphia’s Office Market Potential

David Fahey, Principal & Managing Director, Avison Young

Philadelphia recorded healthy fundamentals driven by strong job growth throughout 2018. Its deep talent pool successfully led to the diversification of the metro’s business ecosystem, resulting in a rise in the number of tech and life sciences startups. According to Avison Young’s 2019 North America, Europe and Asia commercial real estate forecast, overall vacancy in the metro hit a 17-year low, despite slow leasing activity. Yardi Matrix’s national office report shows that Philadelphia posted the second most rapid office rent growth from December 2018 through February 2019.

Yardi Matrix data shows that the development pipeline is strong, with more than 2.4 million square feet of office space under construction as of March 2019. The long-awaited completion of Philadelphia’s tallest skyscraper, Comcast Center, paved the way for further development in the urban areas, as well as redevelopment in the suburban submarkets. In an interview with Commercial Property Executive, Avison Young Principal & Managing Director David Fahey discusses the office sector’s strengths and weaknesses, and how upcoming deliveries will accelerate further growth.

What drives positive absorption and growth in the Philadelphia office market? 

Fahey: Total employment in the Philadelphia metro area increased by 13,700 jobs during the fourth quarter 2018. A strong economy and continued job growth will be the biggest driver for positive absorption. 

What are the trends shaping up the current office landscape?

Fahey: Continued job growth within the economy is the main ingredient shaping the office landscape. Current Employment Statistics reported that among the office-based sectors, tens of thousands of jobs were added between the financial activities, professional services and education/health sectors. Additionally, premier office space with amenities is becoming more and more desirable, and with little new space under construction, demand and the price for premium facilities will only continue to rise.

Demand for more creative office space stems from the new generation of Millennials and Generation Z professionals entering the workplace. This shift in demographics and new business growth is predicted to stay as the new generation fills more of the workforce. Other trends include larger tenants who wish to stay in the area having to pursue new construction opportunities due to the lack of inventory in the pipeline. 

Tell us about the submarkets we should keep an eye on and why.

Fahey: Regarding office space, Conshohocken, Pa., and Radnor, Pa., have always been strong. Currently, there is new construction occurring in both submarkets. These submarkets will remain strong and I think rental rates will strengthen as well. Additionally, I believe we will see a spillover from these areas that will strengthen nearby submarkets such as King of Prussia.

How will the large number of office deliveries impact the market in 2019?

Fahey: A couple of new construction projects have been accomplished by having long-term tenants in hand. Backfilling those spaces is a function of market strength driven by job growth and the economy. We believe those vacancies will be absorbed in the next year. 

In terms of new projects, 1301 Market St. is a proposed 735,000-square-foot office tower with retail space located on the bottom floors. The property’s developer, Oliver Tyrone Pulver Corp., previously developed 1234 and 1600 Market St. The site is currently a 35,000-square-foot surface parking lot. However, the developer has the property under agreement of sale. Additionally, preliminary plans for 510 North Broad call for residential, retail and office use. The plans include a $480 million investment of the 800,000-square-foot space. 

What are the main challenges for the Philadelphia office market?

Fahey: In an economy that is still growing, we are seeing that the supply of quality big blocks of space for larger tenants is low in Philadelphia’s Center City. Additionally, challenges facing developers stem from the high cost of construction as well as strict regulatory requirements for environmental sustainability. Construction costs are also playing an important factor in improvements to tenant spaces, helping drive up rents.

How do you see the Philadelphia office market going forward? 

Fahey: Philadelphia has always been a “steady Eddie” market. Historically, there has not been much spec development and not a tremendous amount of growth. I do not expect spec office buildings will thrive. That said, we might see more of a focus on securing large tenants in time to look at new development.

Image courtesy of Avison Young