The Greater Philadelphia region’s first quarter of 2011 reported an overall positive net absorption of 488,900 square feet, a significant turn in the right direction when compared to fourth quarter 2010’s negative net absorption of 257,200 square feet. This is a solid indicator that the commercial real estate market is beginning to emerge from the recession with encouraging signs of recovery on the horizon.
Total vacancies for the Greater Philadelphia region, including sublet space, decreased to 24.35 million square feet, or 18.8% in the first quarter of 2011 compared to Q4 2010’s 24.8 million square feet or 19.2%. Average asking rental rates continue to decline from $21.36 at the close of the fourth quarter 2010 to $20.52 in the first quarter 2011.
The decreasing vacancy and rental rates is contrary to the typical trend when rental rates increase as the supply of available space lessens. When a market is emerging from a significant economic downturn, such as now, it is not uncommon to see these two metrics move in the same direction. This is a short term trend caused primarily by a significant supply of space made available when there is less demand in the market. Owners often respond during these times by reducing rental rates in order to retain tenants, be more attractive and competitive in the market, and to maintain higher occupancy levels.. As vacancy rates continue to decrease, we’ll most likely see a return to the fundamentals of supply and demand and we’ll start to see rental rates begin to increase.
Philadelphia CBD
The Philadelphia Central Business District (CBD) reported its first quarter of positive absorption in nearly two years (176,000 square feet). The turnaround was fueled primarily by strong leasing activity in the Market Street West submarket, predominantly in the Class A category. Overall vacancy rates improved slightly quarter-over-quarter, with Q1 2011 closing at 14.9% compared to Q4 2010’s 15.3%. While current leasing activity does not compare to a few years ago when commercial real estate was at its peak with net absorption in excess of 1 million square feet, transactions continue to get completed and we expect this trend to continue through 2011. Average asking rental rates have decreased slightly from $25.88 at year-end 2010 to $24.56 in Q1 2011, indicating the continued existence of a soft market, as well as the fact that landlords today are more focused on retaining or attracting tenants to maintain occupancy levels rather than pushing rates. Although the first quarter produced positive leasing activity, we are also aware of large blocks of space that will be coming into the market in the not too distant future. More specifically, GlaxoSmithKline’s plans to vacate One and Three Franklin Plaza in the CBD putting more than 600,000 square feet back on the market, as they relocate their Philadelphia Headquarters to the Navy Yard Corporate Center in South Philadelphia.
Market Street West reported positive net absorption of 197,300 square feet, a favorable improvement over Q4 2010’s positive net absorption of 32,600 square feet. As mentioned earlier, the first quarter positive absorption was driven primarily by activity in Class A properties within Market Street West, reporting a positive net absorption of 162,100 square feet. Recent Class A activity introduces a new tenant to the market Catalyst Rx, taking 26,200 square feet at 1650 Arch Street, as well as The Neat Company, another new tenant to the CBD, leasing 19,800 square feet at 1601 Market Street. Market Street West Class AA also reported a positive net absorption of 35,200 square feet. This was primarily due mainly to BrasKem taking 34,000 square feet of Sunoco’s sublet space off the market at the Mellon Bank Center (1735 Market Street). Interestingly, Class B had no leasing activity to report for this quarter which puts 2011 off to a slow start for this submarket. The total vacancy rate for Market Street West is down to 14.9% in Q1 2011 from year-end’s 15.6% and getting closer to where we were a year ago when the total vacancy rate was 14.2%.
Market Street East is the only submarket in the CBD reporting negative absorption in Q1 2011 (80,800 square feet). This follows Q4 2010’s negative net absorption of 144,000 square feet. Class A reported a positive absorption of 13,300 square feet, with the largest block of space being leased by Janney Montgomery Scott LLC (23,200 square feet) at 833 Chestnut Street. The Market Street East submarket was sprinkled with negative absorption this quarter totaling 94,000 square feet with the most significant activity being reported at One South Broad Street which is PNC Bank’s sublet space of 16,140 square feet. The Witherspoon Building located at 130 S. Juniper Street also reported 137,500 square feet of sublease space previously occupied by Wachovia, now Wells Fargo. Overall total vacancy rates have increased to 13.9% in Q1 2011, compared to 13.4% at year-end 2010. Average asking rental rates in Q1 2011 are reported at $21.17, down from $25.47 in Q4 2010.
The Chestnut/Walnut submarket reported a positive net absorption of 59,500 square feet. This submarket has been teetering back and forth from positive to negative for the past year….Q4 2010 reported a negative 16,260, Q3 2010 - positive 19,900, Q2 2010 - negative 45,800, and Q1 2010 reported a positive 11,800. Activity in Q1 2011 was comprised of the U.S. Marshall’s leasing 19,800 square feet at 2401 Walnut Street and a handful of smaller lease transactions. This was offset by significant negative absorption that occurred in Q1 2011: 13,100 at 230 South Broad Street, 17,100 at the Atlantic Building (260 South Broad), and 18,900 at 2300 Chestnut Street with the downsizing of Kling Stubbins. Vacancy rates declined quarter-to-quarter from 20.3% in Q4 2010 to 18.4% in the first quarter 2011. Rental rates continue to increase to $21.52 in Q1 2011, compared to Q4 2010’s average asking rental rate of $21.04.
Suburban Philadelphia
The Philadelphia Suburban office market begins 2011 on a positive note, reporting an overall positive net absorption of 295,900 square feet. This follows Q4 2010’s positive absorption of 172,600 square feet. Vacancy rates in the Philadelphia Suburbs continue to decline from Q4 2010’s rate of 21.5% to 21.0% at the close of Q1 2011. The trend of stabilization that we reported at year-end 2010 continues to be apparent in the first quarter 2011. Average rental rates remain relatively flat at $21.75 compared to $21.77 in Q4 2010.
Submarkets with the strongest quarterly positive net absorption were King of Prussia/Wayne with 185,400 square feet, Plymouth Meeting / Blue Bell with 98,000 square feet, Delaware County with 42,800 square feet, Radnor/Conshohocken with 36,300 square feet, and Lower Bucks County with 31,900 square feet. Radnor/Conshohocken reported the lowest vacancy rate of 15.2%, followed closely by Jenkintown/Huntingdon Valley at 15.6%. The highest vacancy percentages this quarter, ranging from 23.3% to 36.8%, were North Penn, Fort Washington, Plymouth Meeting/Blue Bell, Lower Bucks, and Malvern/Exton/West Chester, which is consistent with the last three quarters.
As we take a closer look at the suburban submarkets individually, the King of Prussia/Wayne submarket reported positive net absorption this quarter of 185,400 square feet, compared to Q4 2010’s negative net absorption of 54,800 square feet. First quarter leasing activity was steady, with several large moves impacting the overall absorption rate. Driving the positive absorption was Triad leasing 33,460 square feet at the Freedom Business Center (640 Freedom Drive), the Nuclear Regulatory Commission leasing 82,900 square feet at Renaissance Park (2100 Renaissance Boulevard), and 34,400 square feet being leased at Parkview Tower (1150 First Avenue). Driving the negative absorption was 59,930 square feet of space coming onto the market at the Valley Forge Corporate Center (2750 Monroe Boulevard) and several smaller availabilities of less than 10,000 square feet. Total vacancy has decreased from 20.7% at year-end 2010 to 19.4% at the close of Q1 2011. Rental rates also declined from Q4 2010’s $21.60 to $21.08 at the close of Q1 2011.
Plymouth Meeting/Blue Bell reports a positive net absorption of 98,000 square feet in Q1 2011, over Q4 2010’s 6,100 square feet of negative net absorption. Class A bolstered the lion share of positive absorption with 49,300 square feet. The most significant leasing activity is due to Wisler Pearlstine taking approximately 20,000 square feet at Blue Bell Executive Campus II (470 Norristown Road) in Class A, and Brokerage Concepts taking 40,000 square feet and McDonald’s taking the remaining 22,000 square feet of space at 801 Lakeview Drive (aka 760 Jolly Road) in Class B. Total vacancy rates dropped from 26.6% at year-end 2010 to 24.9% at the close of Q1 2011. Average rental rates increased to $22.26, up from Q4 2010’s reported $22.19.
Delaware County exhibited an encouraging positive net absorption of 42,800 square feet in the first quarter 2011, compared to Q4 2010’s negative net absorption of 38,000 square feet. Attributing to the positive absorption was the SAP Building 1 (3809 West Chester Pike) leasing 56,740 square feet and the Benson Building (295/297 S. Newtown State Road) leasing 35,000 square feet. Total vacancy rates decreased from Q4 2010’s 21.1% to 20.3% in Q1 2011. Rental rates dropped from $20.58 in Q4 2010 to $19.87 in Q1 2011.
The Radnor/Conshohocken submarket although showing light activity, reported positive leasing activity in the first quarter 2011, primarily in the Class A office category. Net absorption is reported at a positive 36,300 square feet, compared to Q4 2010’s positive 155,500 square feet, with the total vacancy at 15.2% in Q1 2011 versus 15.8% at the close of 2010’s fourth quarter. Leasing activity was a smattering of modest lease transactions throughout the submarket, with the most notable being a lease for 17,700 square feet at the Radnor Financial Center (201 King of Prussia Road). Rental rates declined to $27.49 this quarter, in comparison to Q4 2010’s rental rate of $28.29.
Lower Bucks submarket is showing positive net absorption for the third consecutive quarter with 31,900 square feet in Q1 2011, following Q4 2010’s positive net absorption of 52,400 square feet. Unlike last quarter, it was Class B that showed the strongest leasing activity in Q1 2011, producing a positive net absorption of 53,000 square feet. Unlike most of the submarkets in the Greater Philadelphia region, asking rental rates for the Lower Bucks submarket continue to increase, reporting $20.38 this quarter, up from Q4 2010’s rate of $19.08. Total vacancy rates decreased from Q4 2010’s 24.4% to 23.6% in Q1 2011.
Malvern/Exton/West Chester continues to show overall negative net absorption for the ninth consecutive quarter. Q1 2011 reports a negative net absorption of 48,600 square feet, which follows Q4 2010’s negative net absorption of 33,820 square feet. Single story was the only building class in the Malvern/Exton/West Chester submarket to exhibit positive absorption of 24,980 square feet this quarter. Overall vacancy rates have risen to 23.3% this quarter from Q4 2010’s 22.4%. Rental rates have declined to $19.78 from Q4 2010’s $20.11.
The Main Line (excluding Radnor) begins 2011 reporting a negative net absorption of 32,000 square feet, which is the net effect of Class A reporting a positive 19,800 square feet and Class B reporting negative 51,800 square feet. Contributing to the negative absorption in Class B is Station Square 4 (Valley Road at Central Avenue) putting 31,600 square feet into the market. Compared to Q4 2010’s vacancy rate of 16.3%, Q1 2011’s vacancy rate increased to 18.3%. Asking rental rates have decreased significantly from $21.40 in Q4 2010 to $18.46 at the close of Q1 2011.
Northern Delaware
The Northern Delaware office market begins 2011, with a negative net absorption of 65,000 square feet. This follows Q4 2010’s negative net absorption of 96,250 square feet. Total vacancy rates increased slightly to 18.7% in Northern Delaware from 18.3% in Q4 2010. Rental rates have decreased from $21.38 at year-end 2010, to $20.59 at the close of Q1 2011. While most submarkets throughout the region reported negative absorption, New Castle County Class A took the most considerable hit with the largest negative absorption of 107,400 square feet.
Overall leasing activity in the Wilmington CBD is light in Q1 2011, with Class A reporting a positive net absorption of 10,000 square feet with various smaller transactions throughout the class. Class B reports a negative 10,900 square feet with two notable transactions to report…The Law Offices of Peter G. Angelos moving out of approximately 7,000 square feet at 1300 Market Street, offset by Marx O’Neill leasing 10,400 square feet at 300 Delaware Avenue. Overall vacancy rates in the Wilmington CBD remained unchanged from year-end 2010 at 21.7%.
Q1 2011 leasing activity in New Castle County (NCC) North was inconsequential. Class A reported a negative absorption of 20,800 square feet, with 200 Bellevue Parkway (Bellevue Park Corporate Center) reporting the largest negative absorption of 15,200 square feet. Class B reported a mixed bag of smaller transactions under 10,000 square feet with the exception of 3411 Silverside Road reporting a positive absorption of 11,900 square feet, offset by 3509 Silverside Road reporting a negative absorption of 26,260 square feet due to the reduction of Astra Zeneca. Total vacancy rates increased a full percentage point to 21.3% at the end of Q1 2011, compared to Q4 2010’s 20.3%. Asking rental rates are down slightly from $20.60 in Q4 2010 to $19.85 in Q1 2011.
NCC West reported a negative net absorption of 29,300 square feet at the close of the first quarter 2011 with a total vacancy rate of 6.7%, compared to a positive absorption of 13,300 square feet and a total vacancy rate of 5.8% at the close of 2010. The cause for the increase in vacancy is due to several minor transactions under 8,000 square feet. Rental rates have risen from $22.54 in Q4 2010 to $24.29 at the close of the first quarter 2011. Although net absorption is a negative 29,300 square feet, NCC West continues to maintain the lowest vacancy rate, and the only single digit vacancy rate throughout the Greater Philadelphia region, at 6.7%.
NCC South broke its fifth quarter positive absorption streak this quarter and reports a negative net absorption of 7,900 square feet for Q1 2011. Typical of the region as a whole NCC South also reported a mixture of positive and negative transactions throughout the quarter. Some of the more noteworthy transactions that occurred this quarter were AET vacating 15 Read’s Way, putting 50,300 square feet back into the market and 56 W. Main Street also adding 16,700 square feet to the NCC South market. On a more positive note, 500 Creek View signed two leases this quarter; WSFS signed a lease for 10,000 square feet and Computer Aid leased 20,000 square feet of sublease space from Computer Sciences Corporation. Overall vacancy rates increased to 19.8% when compared to 19.6% in Q4 2010. Asking rental rates increased to $19.04 - up from $18.79 at the close of Q4 2010.
Southern New Jersey
The Southern New Jersey office market reported a positive net absorption of 82,000 square feet in Q1 2011, which is a significant increase from Q4 2010’s negative absorption of 205,900 square feet. Rental rates in the Southern New Jersey commercial office market continue to drop - $15.16 in Q1 2011 from $16.42 in Q4 2010. Overall vacancy decreased from 22.5% at the close of 2010 to 21.9% in the first quarter 2011.
The Camden submarket reported a vacancy rate of 26.1% and negative net absorption of 61,500 square feet in Q1 2011, compared to Q4 2010’s 24.8% vacancy rate and negative absorption of 8,500 square feet. Class A reported a negative absorption of 20,500 square feet comprised of transactions less than 10,000 square feet. Class B posted negative net absorption of 40,090 square feet. Class B negative absorption was driven primarily by the Fairway Corporate Center (4350 Haddonfield Road) putting 52,100 square feet on the market. Camden’s average asking rental rate in Q1 2011 is $17.14, down from $17.79 reported in Q4 2010.
The 3M submarket reported a large shift in the positive direction with a positive absorption of 143,500 square feet, especially when compared to Q4 2010’s 197,440 square feet. Class A, B, and single story all showed positive absorption in Q1 2011 with Class A making up 74% of this and single story being 22% of the total. In Class A, 9000 Midlantic Drive showed a positive absorption with Parker McCay leasing 49,000 square feet, as well as the Moorestown Corporate Center (224 Strawbridge Drive) leasing 24,500 square feet, and the Moorestown Corporate Center III (232 Strawbridge Drive) leasing 52,800 square feet. On the other hand, 6000 Midlantic Drive put 24,700 square feet back into the market, as well as Lake Center I (10 Lake Center Executive Parkway) adding 15,380 square feet to the market. Class B reported a mixed bag of positive and negative absorption activity with the majority of the transactions being less than 9,000 square feet. The one exception being Lake Center IV (40 Lake Center Executive Parkway) leasing 15,170 square feet. Single story leasing activity has picked up a bit in Q1 2011 with several small transactions taking place. The two most notable being 11,900 at 521 Fellowship Road and 20,100 square feet at the Mount Laurel Office Center I (532 Fellowship Road). Vacancy rates in 3M decreased from 21% at year-end 2010 to 19.1% in Q1 2011. The average asking rental rate in the first quarter is reported at $13.87, down from $15.53 in Q4 2010.
The overall slowing of new vacancies between years, the increase in new leasing activity and, most importantly, the positive absorption in the first quarter suggests that we continue a slow, yet steady recovery. While the market continues to show improvement the ability to sustain this momentum will be the true indicator of whether the market has stabilized. Certain submarkets will continue to outperform others based on type and quality of space available, as well as asking rental rates. For example, large users in the Philadelphia suburban market are seeking large blocks of contiguous space yet there are limited options immediately available. While new construction is not on the horizon to fill this demand we may see well capitalized owners pursue the upgrading of buildings to attract such users. Overall rental rates dropped in most submarkets (only a small handful saw rates increase), which indicates owners are responding to the continued tenant driven market. We will continue to monitor the Greater Philadelphia region’s office market activity with the expectation that businesses will demonstrate continued confidence in the economic recovery and spur new leasing activity through the next quarter of 2011.
Newmark Smith Mack
Newmark Smith Mack is a partner’s with Newmark, one of the largest independent real estate service firms in the world. 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 27 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, Newmark Smith Mack discovers, develops, and implements full service solutions. 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 220 offices in established and emerging property markets on six continents. With a combined staff of 7,300 and revenues last year exceeding $861 million, 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.