The Greater Philadelphia region posted an overall negative net absorption of 257,160 square feet in the fourth quarter 2010. This is a surprising swing to the negative after 3Q 2010’s positive net absorption of 158,130 square feet. Despite this, vacancy rates remain relatively stable with Q4 2010 reporting 19.2%, which is slightly higher than Q3 2010’s vacancy rate of 18.9% and prior year 2009 of 18%. Average asking rental rates increased to $21.36 in Q4 2010 from Q2’s average rate of $21.05. Despite mixed results quarter-to-quarter in 2010, and across submarkets, absorption rates in the Greater Philadelphia Region are a great improvement over 2009. The year-to-date net absorption at the end of 2010 is a negative 932,500 square feet, compared to the year-to-date negative net absorption in 2009 of 3,499,500 square feet.
Philadelphia CBD
The Philadelphia Central Business District (CBD) reported its seventh straight quarter of negative net absorption at 127,610 square feet. This was fueled primarily by new vacancies in Market Street East. Overall vacancy rates have remained relatively stable from 15% in Q3 2010 to 15.3% in Q4 2010. In Q4 2010, year-to-date net absorption stands at a negative 575,100 square feet. When compared to Q4 2009’s negative net absorption of 1,451,400 square feet, it is evident that the commercial office vacancies have slowed in the last year. Average asking rental rates have steadily increased from $24.74 at year-end 2009 to $25.88 in Q4 2010, indicating some improved confidence by owners of CBD buildings.
Market Street West reported positive net absorption of 32,630 square feet, a sharp improvement over Q3 2010’s negative net absorption of 336,100 square feet. The fourth quarter positive absorption was driven primarily by activity in Class AA properties. Class AA reported a positive net absorption of 70,480 square feet. Unisys took 27,450 square feet of sublet space off the market at 1601 Chestnut, and First Niagara took 7,100 square feet at 2001 Market Street. Market Street West Class A reported a negative net absorption of 24,730 square feet. This was due mainly to a large negative absorption of 52,309 square feet at Three Parkway (1601 Cherry Street). There was heavy leasing activity in Class B in Q4 2010, but this was confined to smaller transactions. Total vacancy rates for Market Street West are up to 15.6% in Q4 2010 from mid-year’s 14.5% and 2009 year-end of 14.1%. Asking rental rates have increased from $25.37 in Q2 2010 to $26.67 in Q4 2010. Year-to-date, Market Street West had a negative net absorption of 399,200 square feet, which is 37% lower than 2009’s year-to-date negative net absorption of 633,500 square feet.
Market Street East reported a large negative net absorption of 143,980 square feet. This follows Q3 2010’s positive net absorption of 39,400 square feet. Class A reported multiple buildings with negative net absorption, including the Strawbridge and Clothier Building at 801 Market Street at 80,000 square feet, The Wanamaker Building (100 Penn Square East) with 34,930 square feet, and the Widener Building (1 South Penn Square) with 32,300 square feet. At the Widener Building, the District Attorney’s Office took 24,000 square feet, but this was offset entirely by Hillier closing their Philadelphia office and vacating 20,000 square feet, plus other vacancies. One South Broad Street also posted a negative net absorption of 16,140 square feet; Dorland Global renewed on two floors for five years, and gave back the third floor which is now available direct. One South Broad is also anticipating new vacancies in the coming months, with Red Tettemer giving back a portion of their space, and the Ashbridge Investment space is also expected to become available (top floor) in early 2011. On a more positive note, The Mellon Center at 701 Market Street leased spaces of 18,200 square feet and 7,940 square feet, with tenants move in dates scheduled for early February 2011. Overall total vacancy rates are up in Q4 2010 at 13.4%, compared to 12.4% in Q2 2010 and 12.1% at year-end 2009. Despite this, average asking rental rates in Q4 2010 have risen to $25.47, up from $24.67 in Q2 2010. Year-to-date Market Street East reported a negative net absorption of 145,480 square feet, suggesting increased market stabilization compared to Q4 2009’s year-to-date negative net absorption of 573,100 square feet.
The Chestnut/Walnut submarket reported a negative net absorption of 16,260 square feet. This reverses the positive net absorption of 19,900 square feet in Q3 2010. Activity in Q4 2010 was comprised of small transactions of both positive and negative absorption of less than 6,000 square feet. The one exception was at 200 South Broad Street, where 16,500 square feet became available. Vacancy rates rose quarter-to-quarter from 19.8% in Q3 2010 to 20.3% in the fourth quarter 2010. However, Chestnut/Walnut reported a year-to-date negative net absorption of 30,400 square feet, which is a large decrease to the negative net absorption of Q4 2009, which stood at 244,700 square feet. Rental rates continue to increase to $21.04 in Q4 2010, compared to Q2 2010’s average asking rental rate of $20.44.
Suburban Philadelphia
The Philadelphia Suburban office market achieved an overall positive net absorption of 172,630 square feet in Q4 2010. This follows Q3 2010’s positive absorption of 111,400 square feet thereby ending 2010 on a positive trend. Vacancy rates in the Philadelphia Suburbs have declined slightly from Q2 2010’s rate of 21.6% to 21.5% at year-end 2010. Suburban Philadelphia’s year-to-date net absorption rate is a negative 61,040 square feet; however this is a dramatic improvement over 2009’s negative year-to-date absorption of 1,778,700 square feet. This signals that although there are mixed results within the individual submarkets, the overall suburban market has stabilized as a whole in 2010.
Submarkets with the strongest quarterly positive net absorption were Radnor/Conshohocken with 155,470 square feet, Lower Bucks with 52,400 square feet, and Horsham with 31,340 square feet. The submarkets with the strongest year-to-date positive net absorption were Delaware County with 223,240 square feet, Fort Washington with 152,570 square feet, Radnor/Conshohocken with 131,150 square feet, and King of Prussia/Wayne with 124,190 square feet. Jenkintown/Huntingdon Valley reported the lowest vacancy rate of 15.4%, followed closely by Radnor/Conshohocken at 15.8%. The highest vacancy percentages this quarter, ranging from 24.4% to 37.1%, were North Penn, Fort Washington, Plymouth Meeting/Blue Bell and Lower Bucks, which is consistent with the last two quarters. Overall rental rates remained flat at $21.77 in Q4 2010 compared to $21.75 in Q2 2010 and $21.80 at year-end 2009.
Examining the suburban submarkets individually, the King of Prussia/Wayne submarket reported negative net absorption this quarter of 54,800 square feet, compared to Q3 2010’s positive net absorption of 201,860 square feet. In the fourth quarter, activity was heavy, with several large moves impacting the overall absorption rates. Driving the positive absorption was Farmers Insurance moving into 1000 Continental (26,500 square feet), Styron Corporation moving into 1000 Chesterbrook (24,400 square feet), and Gardner Denver moving into 1500-1550 Liberty Ridge East (22,000 square feet). Driving the negative absorption was the relocation and consolidation of Broadview Networks, leaving 101,900 square feet of space at 2100 Renaissance Boulevard, and taking 57,210 square feet of space at 1018 West 9th Avenue, resulting in 44,690 square feet of vacant space in the Class A market. In addition, Oracle moved out of 400 Berwyn Park Road to consolidate and backfill offices in Bala Cynwyd and Conshohocken (27,950 square feet), and Drinker Biddle & Reath vacated 21,550 square feet of space at 1000 Westlakes Drive to consolidate their offices downtown.
Despite overall negative absorption in Class A and B, single story in King of Prussia/Wayne experienced a good quarter, reporting 10,680 square feet of positive net absorption. Overall, King of Prussia/Wayne achieved a positive net absorption of 124,190 square feet year-to-date. Year-on-year vacancy rates decreased from 21.7% in 2009 to 20.7% at year-end 2010. Average asking rental rates remain soft, dropping from $22.14 at year-end 2009 to $21.60 at year-end 2010.
The Horsham submarket reported positive net absorption of 31,340 square feet in Q4 2010 compared to Q3 2010’s reported negative net absorption of 50,000 square feet. This is attributed to Class A positive absorption of 31,530 square feet from leasing activity at 220 Gibraltar Road (27,030 square feet), and 12,780 square feet taken off the market at One Progress Drive. Compared to mid-year, Q4 2010’s vacancy rate at 20.5% was higher than Q2 2010’s rate of 19.4%. Despite this, average asking rental rates for the Horsham submarket increased to $20.60, up from $18.69 in Q2 2010.
Leasing activity in the Central Bucks submarket was relatively quiet in Q4 2010. Overall, Central Bucks showed a positive net absorption of 17,130 square feet this quarter, moderating last quarter’s strong negative absorption of 141,540 square feet, bringing the year-to-date net absorption to negative 18,780 square feet. The largest noteworthy vacancy changes were a negative net absorption of 18,720 square feet at 411 South State Street, and a positive net absorption of 17,070 square feet at 100 Highpoint Drive in the Highpoint Business Campus. Q4 2010 reported a total vacancy rate of 20% compared to mid-year’s 15.1% and 2009’s year-end 17.6%. The average asking rental rate in Q4 2010 dropped to $19.40 compared to Q2 2010’s average rental rate of $20.55 and year-end 2009’s $21.27.
Delaware County showed the first setback this year with 38,025 square feet of negative net absorption in Q4 2010. Despite this, the year-to-date absorption remains positive at 223,240 square feet, the strongest performance in the Philadelphia suburbs. Total Q4 2010 vacancy rates are down to 21.1%, compared to Q2 2010’s vacancy rate of 22.9% and 2009’s year-end of 23.5%. Average asking rental rates have decreased in Q4 2010 to $20.58, from Q2 2010’s rate of $22.00. Activity in Delaware County contained mostly small positive and negative absorption changes on an individual building level (under 10,000 square feet). The most notable move was at 206 Eddystone Avenue, which showed a negative net absorption of 38,400 square feet.
Malvern/Exton/West Chester continues to show overall negative net absorption for the eighth consecutive quarter. Q4 2010 reports a negative net absorption of 33,820 square feet, which follows Q3 2010’s negative net absorption of 53,470, and brings the year-to-date negative absorption to 343,660 square feet. In Class A, the largest negative absorption occurred at 350 Eagleview, as Sunoco vacated 45,200 square feet of office space. Class B reported positive net absorption of 31,940 square feet and single story shows a negative absorption of 23,430 square feet. Overall vacancy rates have risen to 22.4% from 16.6% when compared to a year ago, yet negative net absorption rates have consistently decreased quarter-to-quarter in 2010 offering a sign that the downward trend is turning around. Rental rates remain relatively stable at $20.11… down only $0.14 from Q2 2010.
Lower Bucks submarket is showing positive net absorption for the second quarter in a row with 52,400 square feet in Q4 2010 following Q3 2010’s positive net absorption of 48,870 square feet. Lower Bucks year-to-date negative absorption is 11,850 square feet compared to 2009 year-to-date negative absorption of 225,680 square feet, which indicates this submarket stabilized in 2010. Class A activity showed strong leasing activity in Q4 2010, producing a positive net absorption of 59,720 square feet. The Police and Firefighter Credit Union purchased Four Greenwood Square from Pennmark, filling up 40,000 square feet of previously vacant space, and One Greenwood Square leased 19,610 square feet. In addition, Class A shows a positive net absorption year-to-date of 61,200 square feet, compared to the negative net absorption of 43,070 reported in 2009. Asking rental rates for the Lower Bucks submarket increased to $19.08 this quarter, up from Q2 2010’s rate of $18.41.
Fort Washington reports a minor negative net absorption of 7,330 square feet in Q4 2010, but ended 2010 with a year to date positive net absorption of 152,570 square feet due exclusively to Class A activity. Class A reported a positive net absorption in Q4 2010 of 12,380 square feet, as did Class B with 15,290 square feet; however single story reported a negative absorption of 35,000 square feet. Q4 2010 activity included negative absorption at 414 Commerce Drive (11,800 square feet), offset by leasing activity at 475 Virginia Drive (27,090 square feet), both in Class B, and 500 Virginia Drive vacancy (35,000 square feet) in single story. Total vacancy rates have decreased from 32.4% at year-end 2009 to 27.7% in Q2 2010 and to 27.1% in Q4 2010. While this is an encouraging trend, the Fort Washington submarket continues to report the second highest vacancy rate in the suburbs. Rental Rates decreased from $20.03 in Q2 2010 to $19.93 in Q4 2010.
Plymouth Meeting/Blue Bell reports a negative net absorption of only 6,090 square feet in the Q4 2010, over Q3 2010’s 9,550 square feet of negative net absorption. Class A reported a positive net absorption of 19,320 square feet. While the last two quarters have remained stable, the 2010 year-to-date net absorption is negative 133,100 square feet, compared to 2009 year-end of negative 33,060 square feet. This pushed total vacancy rates from 24.9% at year-end 2009 to 26.6% at the close of 2010. Despite the increase in vacancy, rental rates still increased to $22.19, up from 2009’s reported $21.57.
The Radnor/Conshohocken submarket experienced strong positive net absorption in Q4 2010 of 155,470 square feet. This was entirely within Class A, with a major contributor being the now fully leased Radnor Financial Center with 33,900 square feet of positive absorption. As a result of the strong Q4 2010 activity, the Radnor/Conshohocken submarket reported year-to-date positive net absorption of 131,150 square feet. This compares to the 2009 year-to-date negative absorption of 127,800 square feet. Vacancy rates have therefore decreased from 18% at year-end 2009 to 15.8% at year-end 2010. Rental Rates have increased from $27.94 in Q4 2009 to $28.29 in Q4 2010.
The North Penn, Bala Cynwyd and Jenkintown/Huntington Valley submarkets ended 2010 with moderate year-to-date positive absorption of 2,136 square feet, 14,892 square feet, and 50,460 square feet, respectively. Consistent with many other suburban submarkets, this signals that the markets are showing signs of stabilization.
Northern Delaware
The Northern Delaware office market continues its mixed performance in Q4 2010, with a negative net absorption of 96,250 square feet. This follows Q3 2010’s positive net absorption of 354,660 square feet. In the last six months, total vacancy rates dropped to18.3% in Northern Delaware from 19.7% in Q2 2010, although this is still higher than the 17.3% reported at year-end 2009. Rental rates have increased from $19.97 at mid-year to $21.38 in Q4 2010. Results vary throughout the region, with New Castle County West and South reporting positive absorption, New Castle North taking the hit in Class B, and CBD struggling with a major new vacancy in Class A.
Wilmington CBD Class A accounted for the majority of the negative net absorption in Northern Delaware with 82,200 square feet of new vacancy. This occurred entirely within Class A, the largest negative absorption being at the Brandywine Building (1000 N. West Street), at 90,000 square feet with Young Conway moving into the Courthouse. In Class A, overall leasing activity was light in Q4 2010. CBD Class B reported nominal positive net absorption of 1,730 square feet however it was due to offsetting activity. 300 Delaware Avenue reported 23,090 square feet of positive absorption due to several small new leases, counterbalancing negative absorption at Excelsior Plaza (10,265 square feet), and Buchannon Ingersol vacating the Nemours Building (12,466 square feet). Overall vacancy rates in CBD increased from 20.2% at mid-year to 21.7% at year-end 2010.
In New Castle County (NCC) North, the big story was within the Class A submarket with Cigna relocating from 590 and 650 Namaans Road (leaving 106,250 square feet vacant) to 300 Bellevue Parkway (occupying 70,000 square feet), which is now fully leased. 300 Bellevue Parkway also reported positive absorption of 32,700 square feet, bringing the Class A positive net absorption to 3,090 square feet in Q4 2010. Class B had a large negative net absorption of 64,690 square feet, which was the result of several buildings adding new vacant space, the largest block being 13,480 square feet at the Concord Plaza-Plaza Centre building. This leaves NCC North with an overall negative net absorption of 61,600 square feet. In the past six months, vacancy rates have increased slightly from 20.1% in Q2 2010 to 20.3% in Q4 2010. Asking rental rates are down slightly from $20.64 in Q2 2010 to $20.60 in Q4 2010.
NCC West has experienced its second quarter of positive net absorption with 13,320 square feet in Q4 2010. This follows Q3 2010’s positive net absorption of 53,340 square feet. Rental rates have risen from $21.78 in Q3 2010 to $22.54 in Q4 2010. Although the year-to-date net absorption is a negative 16,090 square feet, NCC West maintains the lowest vacancy rate in Northern Delaware at 5.8%, down from 6.6% at mid-year 2010.
NCC South achieved its fifth straight quarter of positive net absorption with 32,500 square feet in Q4 2010. In addition, NCC South reported a positive net absorption of 341,420 square feet year-to-date. Tempering this positive absorption, however was Coventry vacating 42,145 square feet at 211 Lake Drive in Class B. Despite this, overall vacancy rates continue to decline in NCC South, from 21.8% at mid-year 2010 to 19.6% in Q4 2010. Asking rental rates are down to $18.79 in Q4 2010 from Q2 2010’s rate of $18.83.
Southern New Jersey
The Southern New Jersey office market reported a negative net absorption of 205,930 square feet in Q4 2010, which is a significant increase from Q3 2010’s negative absorption of 31,120 square feet. Average asking rental rates continue to drop to $16.42 from $17.70 in Q2 2010. Overall, the net absorption at year-end 2010 was a negative 416,500 square feet, which indicates that the Southern New Jersey market continues to be weak, especially when compared to a year ago when year-to-date net absorption was reported at a negative 292,050 square feet.
The Camden submarket had a vacancy rate of 24.8% and negative net absorption of 8,490 square feet in Q4 2010, compared to Q3 2010’s 22.8% vacancy rate and negative absorption of 83,270 square feet. Class A reported a negative absorption of 22,310 square feet driven by 1000 Main Street putting 44,070 square feet on the market. Class B and single story posted positive net absorption with 3,930 square feet and 9,900 square feet respectively. In Class B, Actillion Clinical Research, Inc., renewed 30,380 square feet at 1820 Chapel Avenue West, and 4350 Haddonfield Road leased 39,490 square feet. This leasing activity was offset by various new vacancies throughout the submarket. In single story, 400 Laurel Oak Road showed a positive absorption of 22,000 square feet, also offset by new vacancies in other buildings. Camden’s average asking rental rate in Q4 2010 is $17.79, down from $17.99 reported in Q2 2010.
The 3M submarket reported a large negative net absorption in Q4 2010 at 197,440 square feet. This is despite third quarter 2010’s positive net absorption of 52,150 square feet. Class A, B, and single story all showed negative absorption in Q4 2010 with Class A making up 48% of this and Class B being 45% of the total. In Class A, 7001 Lincoln Drive showed a negative absorption (17,930 square feet), as did 6000 Midlantic Drive (20,075 square feet), 1120 Route 73 (36,120 square feet - 65% of which was sublet space), and 224 Strawbridge Drive (24,470 square feet, which was all sublet space). The bulk of negative absorption in Class B was derived from ARI (Automotive Resources International) moving out of 11000-13000 Midlantic Drive (114,260 square feet), offset by 27,860 square feet of positive absorption at 800 Sagemore Drive. Single story leasing activity in Q4 2010 was extremely quiet, with the only negative net absorption reported at 521 Fellowship Road of 15,590 square feet. Vacancy rates increased in 3M from 19.2% at mid-year 2010 to 21% in Q4 2010. The average asking rental rate in fourth quarter is reported at $15.53, down from $17.51 in 2Q 2010.
2010 was a year of continued volatility in commercial office real estate in the Greater Philadelphia market. The market has shown some improvement since 2009, although still faces challenges. Rental rates remain soft, but in some markets are improving. Variations among submarket performances indicate that recovery will continue to develop on a piecemeal basis driven by the supply and demand for each submarket. The overall slowing of new vacancies between years and the increase in new leasing activity suggests that we are in the midst of a slow, gradual recovery. We will continue to monitor the Greater Philadelphia region’s office market activity with an optimistic outlook that the positive trends seen in 2010 will be sustainable.
About Newmark Smith Mack
Newmark Smith Mack is a partner of Newmark, one of the largest independent real estate service firms in the world, operating from over 220 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 7,300, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide. For complete information on Newmark Smith Mack, 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.