The Greater Philadelphia region’s mid-year 2010 year-to-date reported a negative net absorption of <780,852> square feet, with 80 percent of this occurring in Q2 2010. When compared to year-end 2009’s negative net absorption of <3,499,581> square feet, the overall market is showing a more favorable trend thus far in 2010. The market is still soft, however mid-year leasing activity has shown signs of improvement, with rental rates continuing their descent from $22.44 at the close of 2009 to $21.05 in the second quarter of 2010.
Philadelphia CBD
Philadelphia Central Business District (CBD) office market ended the first half of 2010 with an overall increase in negative net absorption in the second quarter of <120,100> square feet, up from last quarter’s negative net absorption of <50,500> square feet. This brings year-to-date absorption to a negative <170,700> square feet. Looking back on the first half of 2010’s activity, the Philadelphia CBD, although showing negative net absorption in both quarters, is still experiencing a dramatic improvement compared to year-end 2009, when the fourth quarter reported a negative net absorption of <434,600> square feet and year-to-date was negative <1,451,400> square feet.
Market Street West closed the second quarter at 14.5% total vacancy, which is only .3% higher than that of Q1 2010. Class AA office space continues to improve, reporting positive Q2 2010 absorption of 45,300 square feet and total vacancy of 8.8%, down from Q1 2010’s 9.2%. Much of this sublease activity happened at the Cira Centre, as well as One and Two Liberty Place. Class A total vacancy crept up a bit to 18.7%, compared to last quarters 18%, while Class B remained flat quarter-over-quarter.
Market Street East finished the second quarter with minor negative net absorption of <2,200> square feet and a flat total vacancy rate of 12.4%, an improvement over first quarter’s negative net absorption of <38,700>, and a significant improvement when you compare it to the negative net absorption of <223,700> square feet reported for 2Q 2009. Asking rental rates decreased slightly to $24.67, compared to last quarter’s $24.86. Notable activity within the Market Street East submarket is the Philadelphia Bar Institute leasing 24,414 square feet at The Wanamaker Building.
The Chestnut / Walnut Streets submarket dipped into a negative net absorption of <45,800> square feet, compared to Q1 2010’s positive net absorption of 11,800 square feet, with the negative net absorption occurring completely in the Class B office market. The two most significant contributors to the vacancies were 34,624 square feet at 1500 Walnut Street and 25,252 square feet at 1608 Walnut Street. Rental rates in the Chestnut / Walnut submarket remained flat over the past three quarters.
When measuring mid-year 2010 numbers against the same period in 2009, it is evident that the pace of new availabilities has slowed dramatically, and stronger leasing activity is anticipated within the Philadelphia CBD office market for the balance of the year.
Suburban Philadelphia
The Philadelphia Suburban office market vacancy rates continue to show a mixed performance at mid-year 2010, which is consistent with the last few quarters. Overall the Philadelphia suburbs reported a Q2 2010 negative absorption of <133,600> square feet, which is consistent when compared to Q1 2010’s negative <121,800>, and Q2 2009’s <89,500>. Although 2010 year-to-date absorption is negative <255,500> it continues to be a significant improvement over the last two quarters of 2009 when combined negative absorption was <1,403,000>.
Submarkets showing the healthiest positive net absorption were Delaware County with 116,000 square feet, Jenkintown / Huntington Valley with 43,900 square feet and North Penn with 37,300 square feet. The Main Line, Central Bucks and Jenkintown / Huntington Valley reported the lowest vacancy rates with the Main Line and Central Bucks reporting 15.1%, and Jenkintown/Huntington Valley reporting 15.9%. North Penn, Lower Bucks County, Fort Washington and Plymouth Meeting are reporting the highest vacancy percentages within the suburban office markets, ranging from 23.3% up to 38.1%. Overall rental rates continue their gradual descent reporting $21.75 compared to Q1 2010’s $21.86 and mid-year 2009’s rental rate of $22.09.
As we take a closer look at the suburban submarkets individually, Delaware County is showing signs of a slow, yet steady path to recovery with improved net absorption for the third straight quarter in a row, reporting a positive 116,000 square feet in the second quarter 2010 bringing the mid-year net absorption up to 141,000. This positive absorption was primarily reported at The Wharf at Riverton in Chester with 60,200 square feet and International Plaza in Tinicum with 42,500 square feet where Regus Executive Office Group leased 13,000 square feet at One Plaza and the Iron Workers District Council leased 7,000 square feet, plus two tenant expansions at Two Plaza. Total vacancy rate of 22.9% for the Delaware County submarket is down by 2.4% from Q1 2009’s 25.3%.
Fort Washington is another suburban submarket that has reported 2010 positive year-to-date absorption in excess of 100,000 square feet, i.e. 134,400. This consists mostly of positive net absorption of 129,400 square feet in the first quarter and a marginal second quarter gain of 5,000 square feet. Although the total vacancy rates in the Fort Washington submarket remain on the higher end of the Suburban Philadelphia submarkets the positive absorption thus far has reduced the total vacancy rate from 32.4% at Q 4 2009 to 27.7% at mid-year 2010. Rental Rates are down slightly from $20.24 in second quarter 2009 to $20.03 in second quarter 2010.
Central Bucks is the third submarket that had an overall favorable first half of 2010 with a year-to-date positive net absorption of 105,600, compared to year-end 2009’s year-to-date negative net absorption of <82,500> square feet. Q2 2010 reported a total vacancy rate of 15.1% compared to year-end 2009’s 17.6%. The average rental rate dropped 3% from Q4 2009’s reported rate of $21.27 to $20.55 at the close of Q2 2010.
Also showing signs of recovery is Jenkintown/Huntington Valley, with a positive net absorption of 43,900 square feet reported at the close of Q2 2010 versus a negative net absorption of <24,300> in Q1 2010. 2Q 2010 total vacancy rates are down, at 15.9% - only one of three submarkets reporting less than 16% total vacancy rates. Rental rates on the other hand continue to decline, dropping by $0.52 per square feet when comparing year-end 2009 to mid-year 2010, which may be a factor in the increase in leasing activity.
The North Penn submarket achieved a positive net absorption of 37,300 square feet in Q2 2010, compared to Q1 2010’s negative net absorption of <51,000> Total vacancy rates are the highest of the suburban submarkets at 38.1%, however signs of improvement are evident when compared to Q1 2010’s 42.1%. Keeping with the trend of most submarkets within the suburbs, rental rates continue to decrease. Q2 2010 reports a rental rate of $20.62, compared to Q1 2010’s $20.94, however Q2 2010’s rental rate is still $0.22 higher than what was reported at the close of 2009.
Malvern/Exton/West Chester continues in the negative net absorption arena for the sixth consecutive quarter. Q2 2010 reports a negative net absorption of <85,200> square feet compared to Q1 2010’s negative net absorption of <171,200> and Q4 2009’s negative net absorption of <22,900>. As a result, total vacancy rates continue to rise, i.e. Q2 2010’s total vacancy rate of 20.6%, compared to Q1 2010’s 19.3%, Q4 2009’s 16.6% and Q2 2009’s 10.5%. Despite the overall increasing vacancy, positive leasing activity has occurred, such as Microsoft leasing 21,894 square feet at 45 Liberty Boulevard, NAVTEQ leasing 45,566 square feet at 1000 N. Cedar Hollow Road, and Benten Bio Services Inc. leasing 35,194 square feet at 335 & 395 Phoenixville Pike. It is interesting to note that while overall vacancies have nearly doubled in the past 12 months, rental rates remain relatively stable, and actually increased over the first quarter 2010 by $0.10 per square foot to $20.25.
The Radnor/Conshohocken submarket showed negative leasing activity in the second quarter 2010, primarily due to a few large blocks of space that came back onto the market in Conshohocken….16,357 at Six Tower Bridge, 46,841 at Quaker Park, and 26,566 at the Spring Mill Corporate Center. There was a mixed bag of smaller transactions under 10,000 square feet that helped offset these new vacancies. Net absorption for Q2 2010 is a negative <41,500> square feet, compared to Q1 2010’s positive 18,200. The total vacancy is 18.7% in Q2 2010 versus 18% at the close of 2009’s fourth quarter.
The King of Prussia / Wayne submarket reported marginal change between quarters with overall Q2 2010 negative net absorption of <10,300> square feet, compared to Q1 2010’s negative net absorption of <7,200> square feet, which translates to total vacancy remaining relatively flat, with a slight increase of .1% quarter-to-quarter, however the second quarter results between building classes was significant. Although the overall change was slight, the Class A category reported negative net absorption quarter-over-quarter of <109,100> square feet. Highview at Providence, located at 400 Campus Drive contributed 78,564 square feet of office space to the negative absorption. Class B, on the other hand, witnessed positive quarter net absorption of 19,700 square feet, as did single story with a positive 79,100 square feet. In addition, the positive absorption continues to be in the sublet vacancy category with 129,400 square feet, offset entirely by a direct vacancy negative absorption of <139,600> square feet. Rental rates are beginning to show signs of stabilization…$21.99 as reported in Q2 2010 versus $21.92 at the close of the first quarter 2010. Larger recent leasing activity includes Hav Pak moving into 10,952 square feet at 791 5th Avenue, and Ametek signing a lease for 43,480 square feet at 11,000 Cassatt Avenue, with the move-in date projected for February 2011.
Lower Bucks, has continued to report increased vacancy rates for the past seven quarters for a cumulative negative absorption of <436,500> square feet. Q2 2010’s total vacancy rate is 23.3%, up from Q4 2009’s 20.6% and Q2 2009’s 19.9%. In the second quarter there is a negative net absorption of <26,500>, compared to Q1 2010’s negative net absorption of <103,800>, with asking rental rates continuing to decline, to $18.41 from $18.47 in Q1 2010. On a positive note, single story activity posted a positive net absorption of 15,900 square feet over first quarter 2010.
Plymouth Meeting/Blue Bell’s negative net absorption of <133,200> square feet in the second quarter over first quarter 2010’s <5,500> was driven by Fed Ex’s move out of 719 Dresher Road (35,212 square feet), the downsizing of PPD at 9880 Harvest Road, Advanta leaving 700 Business Center Drive due to dissolution, and Aetna vacating 920 Harvest Road, among others. Q2 2010 total vacancy rate of 26.8% is up from 22.3% at mid-year 2009 and 24.9% at year-end 2009. Despite the increasing vacancy rate, asking rental rates for the Plymouth Meeting / Blue Bell submarket continued to increase over the past four quarters with $21.57 at the close of 2009, and $21.91 in the second quarter 2010.
Northern Delaware
The Northern Delaware office market returned to overall negative absorption in Q2 2010 as a direct result of the addition of new vacancy from previous owner/occupied properties that are now being marketed to third party occupants, as further explained below. Without the addition of the new building vacancy the overall Delaware market reported positive net absorption of 78,000 square feet. The mid-year 2010 total vacancy rate of the Wilmington CBD, New Castle County North, West and South (the four submarkets tracked) reports 19.7%, compared to Q1 2010’s 19.8%. Overall rental rates decreased from Q1 2010’s reported asking rate of $20.47 to $19.97 in Q2 2010.
Wilmington CBD Class A direct vacancy rate as of the second quarter 2010 remained in the low 20’s, i.e. 21.2%,, which continues to be significantly higher than the direct vacancy rate of 14.4% for the same time last year. The current quarter negative absorption of <260,900> square feet is exclusively due to the Brace Bridge buildings owned and occupied by Bank of America that are now being marketing to outside parties. Of the four buildings added to the market, only Building II is currently reporting 242,000 square feet available. Other availabilities from these buildings may follow in future quarters. CBD Class B direct vacancy rates have been in the mid 20’s for over a year and has reached a high of 27.5% at Q2 2010. A strong indicator of soft leasing market is the average rental rate for Class A direct which declined by $6.16 compared to the same time last year as asking rates dropped from $25.16 at mid-year 2009 to $19 at Q2 2010.
Overall New Castle County (North, West and South) reported positive absorption in Q2 2010 of 97,400 square feet, which actually reflects a net effect of negative absorption in North and West Counties, offset by 173,000+ square feet of positive absorption in South County.
New Castle County (NCC) North experienced an overall negative net absorption of <70,500> square feet, compared to Q1 2010’s negative <54,200> square feet, with the majority of the negative absorption continuing to happen in the Class A category - <66,900> square feet. Q2 2010 reported a total vacancy rate of 20.1% compared to 18% at the close of 2009. Asking rental rates continue their descent over the past year starting out at $21.90 at 2Q 2009 and ending up at $20.64 at second quarter 2010. NCC North has experienced increasing vacancy rates over the past six quarters.
New Castle County West is the only Delaware submarket that continues to report single digit vacancy rates with Q2 2010 at 6.6%, 5.3% at year-end 2009 and 5.9% at this time last year. Class A has reported negative absorption in both Q2 and Q1 2010 at <20,400> square feet and <36,600> square feet, respectively. Class B, however, has been more stable with 2010 year-to-date positive absorption of 14,400 square feet. Rates remain relatively stable in NCC West with only a variance of $0.29 year-over-year.
New Castle County South has shown significant rebounding in both first and second quarters of 2010. Class A direct has strong Q2 2010 positive net absorption of 113,700 square feet, although the total vacancy rate remains in the low-twenties at 23.2%. This is down from 26.4% at Q1 2010, yet higher than the 22.1% at mid-year 2009. Class B direct has also shown a healthy positive net absorption of 60,100 square feet in Q2 2010. NCC South sublease space has become a larger component of vacancy space since this time last year, increasing from 24% to 35% of the total vacant space available. Most recently is the new sublease space in the Iron Hill Corporate Center’s Red and Blue Wings. Overall rental rates are at $18.83, a $1.19 decrease since Q1 2010. The year-to-date activity in this submarket is by far the strongest, but whether the market will manage to sustain the pace of leasing activity remains to be seen.
Southern New Jersey
The Southern New Jersey office market continues to see a steady increase in direct vacancy from 17.5% at the close of 2009, to 18% in Q1 2010, and then to 19.6% at the close of 2Q 2010. In addition, absorption swung significantly from positive 6,700 square feet in Q1 2010 to negative <206,500> square feet in Q2 2010. Rental rates decreased dramatically in the Southern New Jersey office market from $21.02 at the close of Q1 2010 to $17.70 in Q2 2010. This however is due to the fact that certain landlords are now quoting triple net rental rates rather than full service rates, whereby causing a false variance.
The Camden submarket experienced negative net absorption of <90,500> square feet at the close of Q2 2010, compared to a positive net absorption of 54,678 in Q1 2010. Several large blocks of office space over 10,000 square feet, primarily in Class B, contributed to the additional vacancies….12,000 square feet at 2250 Chapel Avenue W., 10,198 square feet at Cherry Hill Plaza, 15,506 square feet at 2 Executive Campus, 28,648 square feet at 111 Woodcrest Road and 21,991 square feet at 51 Haddonfield Road, which was due to Nations Mortgage moving out. Two sizeable new vacancies are also reported in the single-story category: 41,822 square feet at 6 E. Clementon Road, due to Virtua moving out, and 29,000 square feet at 400 Laurel Oak Road.
The 3M submarket reported a negative net absorption of <116,000> square feet at the close of Q2 2010, compared to Q1 2010’s negative net absorption of <48,000>, a reverse trend for 2010 thus far when you compare those numbers to Q4 2009’s positive 253,000 square feet. The most significant new Class A vacancy is 52,784 square feet at 232 Strawbridge Drive in Moorestown. Additional vacancies occurred in Class B office space, with the largest block being 66,867 square feet becoming available at 4000 Midlantic Drive
Mid-year 2010 is closing out with constant reminders of the challenges that are still looming, and while we don’t assume increased vacancies in the third quarter, we are also cautious about predicting a rebound until a few more quarters of stabilization occur.
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.