The Greater Philadelphia region’s first quarter of 2010 reported a negative net absorption of <157,000> square feet, an addition of only .1% of new vacant space since year end 2009. When compared to Q4 2009’s negative net absorption of <691,400> square feet, and an annual 2009 negative absorption of <3.5 million> square feet, this is a solid indicator that the market may be leveling off and early signs of recovery are emerging. If this trend continues, we would expect to see improved lease term conditions for landlords and the early renewal of tenant leases to take advantage of lower rental rates in the current market diminish.
Total vacancies for the Greater Philadelphia region, including sublet space increased to 24 million square feet, or 18.5% in the first quarter of 2010 compared to Q4 2009’s 23.9 million square feet or 18.4%. Rental rates proceeded to decline from $22.44 at the close of the fourth quarter 2009 to $22.10 in the first quarter of 2010.
Philadelphia CBD
Philadelphia Central Business District (CBD) office market started out 2010 with no major swings in either direction, ending the first quarter of 2010 with overall negative absorption of <50,500> square feet. As we review the past activity of 2009, it certainly appears that the Philadelphia CBD market is beginning to level off. Leasing activity is still down in the CBD when compared to a few years ago when annual positive absorption was in excess of 1 million square feet, but transactions are still getting completed and we expect this trend will continue throughout 2010.
Market Street West closed the first quarter at 14.2% vacancy, which is only .1% higher than that of year-end 2009. While Class AA direct vacancy space is still lingering in the single digits at 9.2%, when you compare it year-on-year, it is still 3.5 percentage points higher than Q1 2009. Class B space on the other hand went from 18.6% in Q4 2009 to 12.7% in Q1 2010, with Thomson Reuters leading the charge by leasing 65,000 square feet at 1500 Spring Garden Street. Overall the Market Street West net absorption for the first quarter 2010 ended with a negative <23,600> square feet, a far cry for Q4 2009’s negative net absorption of <218,000>. Additional positive net absorptions contributing to the recovery efforts in the Market Street West submarket is Segal McCambridge leasing 18,000 square feet at 1818 Market Street and the United States Post Office leasing 28,000 square feet at 2 Penn Center.
Market Street East reports a negative net absorption of <38,700> in the first quarter 2010, compared to a negative <42,000> net absorption as reported in the fourth quarter 2009. The most significant activity in Market Street East comes from the expansion of 14,000 square feet by Digitas at the Wanamaker Building, PHY Engineering moving out of 30,000 square feet at 833 Chestnut East, and SMG leaving 25,000 square feet at the Mellon Independence Center.
Leasing activity in the Chestnut/Walnut Streets submarket resulted in a positive net absorption of 12,000 square feet compared to Q4 2009’s negative net absorption of <174,500>. Helping to offset the negative net absorption of the fourth quarter 2009, were 13,600 square feet at The Belleview, and several other transactions under 10,000 square feet.
Overall, the Philadelphia CBD rental rates remained stable, with a slight increase from $24.74 at the close of 2009 to $25.05 in Q1 2010.
Suburban Philadelphia
The Philadelphia Suburban office market vacancy rates showed a mixed performance in the first quarter 2010, which is consistent with the fourth quarter 2009. Overall the Philadelphia suburbs reported a Q1 2010 negative absorption of <121,800> square feet, which is substantially less than the Q4 2009 negative absorption reported of <371,000> square feet.
Submarkets showing the healthiest positive net absorption were Fort Washington with 129,400 square feet, Central Bucks with 93,900 square feet and Bala Cynwyd with 45,000 square feet. Despite some signs of overall improved conditions, North Penn, Delaware County, Fort Washington and Plymouth Meeting are reporting the highest vacancy percentages within the suburban office markets, ranging from 24.5% up to 42.1%, with North Penn reporting the highest. The Main Line and Central Bucks reported the lowest vacancy rates at 15.2% and 15.6% respectively. Overall rental rates remained relatively flat at $21.86.
As we take a closer look at the suburban submarkets individually, Malvern/Exton/West Chester reported a negative net absorption of <171,200> square feet over 2009’s fourth quarter, which reported a negative net absorption of <22,900> square feet. Q1 2010 reported a total vacancy rate of 19.3% verses 16.6% in Q4 2009. Contributing to the increased negative net absorption is 52 East Swedesford Road, with 131,000 square feet becoming available due to Verizon vacating and Brandywine, the owner, considering redevelopment at that location. This could potentially bring an additional four buildings to the market. Other noteworthy losses in this submarket are 39,500 square feet at 333 Technology Drive, and 10,200 at 495 Thomas Jones Way.
On a more positive note, Fort Washington reported a positive net absorption of 129,000 square feet over fourth quarter 2009’s negative <38,000> square feet. This was driven primarily by NutriSystem signing a 120,000 square feet long-term lease at 600 Office Center Drive.
The Radnor/Conshohocken submarket also showed positive leasing activity in the first quarter, primarily in Conshohocken’s Class B office buildings. Net absorption is reported at a positive 18,200, compared to Q4 2009’s negative <24,200>, with the total vacancy at 17.6% in Q1 2010 versus 18% at the close of 2009’s fourth quarter. Leasing activity included 36,500 square feet at 101 West Elm Street, Chamberlain Hrdilcka’s renewal and expansion into 12,300 square feet at 300 Four Falls, and the British Technology Group renewing their lease of approximately 15,000 square feet at 5 Tower Bridge.
Delaware County, which was plagued by negative net absorption in every quarter of 2009, exhibited an encouraging positive net absorption of 25,000 square feet in the first quarter 2010, compared to 2009’s year-to-date negative net absorption of <282,300>. With the Wharf at Riverton absorbing 19,368 square feet, and the Spring Valley Business Park leasing 12,600 square feet, the Delaware County submarket certainly appears to be heading in the right direction.
King of Prussia is showing some signs of leasing activity as well. The overall Q1 2010 negative net absorption of <7,200> square feet, compared to Q4 2009’s negative net absorption of <226,000> square feet is due more to volume rather than large lease transactions. Total vacancy remained flat at 21.7% quarter-to-quarter however the positive absorption was in the sublet vacancy category with 82,800 square feet, offset entirely by a direct vacancy negative absorption of <89,900> square feet.
Lower Bucks on the other hand showed a negative net absorption of <103,800> square feet in Q1 2010, compared to a negative net absorption of <12,300> at the close of Q4 2009, with total vacancy at 23.1% versus 20.6% at the close of Q4 2009. Several mid-size vacancies contributed to the losses. They include: 12,400 square feet at Horizon Corporate Center Tower 1; 33,900 square feet at 3333 Street Road; 20,000 square feet at 2221 Cabot Boulevard and 20,800 square feet at 1-95 Technology Center.
Northern Delaware
The Northern Delaware office market appears to be beginning its slow ascent into positive net absorption territory with a reported 8,500 positive net absorption in the first quarter 2010 compared to a negative <52,000> net absorption in Q4 2009. The total vacancy rate of the Wilmington CBD, New Castle County North, West and South (the four submarkets tracked) remains flat at 19.8% quarter-to-quarter. Overall rental rates slipped from $22.26 at the close of 4Q 2009 to $20.47 at the end of the first quarter 2010.
Wilmington CBD showed positive absorption with Electronic Payment Exchange leasing 16,800 square feet at the Chase Manhattan Center, and Amtrak leasing an additional 9,000 square feet at the Renaissance Center.
New Castle County (NCC) North experienced an overall negative net absorption of <54,200> square feet, compared to Q4 2009’s negative <9,700> square feet, with total vacancy of 18.1% compared to 18% at the close of 2009.
New Castle County West reported a negative net absorption of <36,500> square feet at the close of the first quarter 2010 with a total vacancy rate of 6.4%, compared to a positive absorption of 4,800 square feet and a total vacancy rate of 5.3% at the close of 2009. The most significant increase in vacancy in NCC West was due to 35,000 square feet of sublet space becoming available from the Red Clay School District at 4550 North Linden Hill Road.
New Castle County South reported a positive net absorption of 54,000 square feet at the close of Q1 2010 and a total vacancy of 25.1%, compared to Q4 2009’s negative absorption of <45,200> square feet and total vacancy of 21.8%. This was due to several smaller lease transactions being signed throughout the submarket, along with Barclay’s listing 23,200 square feet for sublet at Iron Hill Corporate Center.
Southern New Jersey
The Southern New Jersey office market saw an increase in direct vacancy from 17.5% at the close of 2009 to 18% in Q1 2010. Interestingly enough, when you compare total vacancy, which includes sublet space, the percentage is the same at 18.9%, showing that the Southern New Jersey office market has experienced a decrease in sublet space, all of which happened in the 3M submarket. Rental rates in the Southern New Jersey office market increased slightly to $21.02, compared to $20.97 at the close of the fourth quarter 2009.
The Camden submarket experienced a positive net absorption of 64,100 square feet at the close of Q1 2010, compared to a negative net absorption of <87,200> at the close of the fourth quarter 2009. We can attribute the majority of the positive net absorption to the direct space lease activity of 13,400 square feet at 200 Lake Drive East, 19,600 square feet at 100 Main Street, 20,000 square feet at 401 White Horse Road, and 14,700 square feet at 53 Haddonfield Road.
The 3M submarket reported a negative net absorption of <31,900> square feet at the close of Q1 2010, compared to Q4 2009’s positive 253,000 square feet. The most significant new Class A vacancies are 25,000 square feet at 1000 Howard Boulevard and 33,800 square feet at 1120 Route 73 CSC Plaza. Optimistically, Class B properties within the 3M submarket showed a positive net absorption of 53,688 square feet. Despite overall negative absorption in the first quarter of 2010, rental rates increased slightly from $21.94 at the close of 2009 versus $22.03 in Q1 2010.
A new challenge that the Greater Philadelphia commercial real estate industry is facing, and that has surfaced more prominently in late 2009 and early 2010, is the affect of underperforming building loans and loans that are maturing without the ability to refinance due to declining building values. Tenant due diligence of owners is on the rise in the current market and will most likely continue in 2010. There will be opportunistic investors looking to buy distressed properties in 2010 at significantly reduced prices. Ultimately this should generate more activity and help stabilize the market, however immediate recovery is not anticipated. In closing, the Greater Philadelphia region is beginning 2010 with cautious optimism from a leasing activity standpoint and we expect that the balance of the year will show similar positive trends.
About Newmark Smith Mack
Newmark Smith Mack (NewmarkSM) is a partner with one of the largest independent real estate service firms in the world, operating from over 200 offices in established and emerging property markets on six continents. Our local presence in Center City Philadelphia, Suburban Philadelphia, Wilmington, Delaware and Southern New Jersey, has secured us a leading position in the Greater Philadelphia region’s commercial real estate market for over 26 years through our commitment to service excellence. With multi-disciplined competency in Tenant Brokerage, Ownership Representation, Investment Sales, Corporate Advisory Services, Property Management, Market Research and Lease Administration, NewmarkSM discovers, develops, and implements full service solutions. With a combined staff of more than 6,300, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide. For complete information on NewmarkSM, visit www.NewmarkKFSM.com
About Newmark
Newmark is one of the largest independent real estate service firms in the world. Headquartered in New York, Newmark and London-based partner Knight Frank operate from over 200 offices in established and emerging property markets on six continents. Last year, transactions were valued at more than $32 billion with annual revenues of over $811 million. With a combined staff of more than 6,300, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide. For further information, visit www.newmarkkf.com.