The Greater Philadelphia region reported a third quarter 2010 date positive net absorption of 158,100 square feet, compared to last quarter’s negative net absorption of 780,850 square feet. This represents a positive change between quarters, signaling a leveling off of increasing vacancies and stronger leasing activity in many markets. When compared to a year ago when negative net absorption was 2,618,700 square feet, the overall market shows a considerably more favorable trend in 2010. The market is still soft; however overall activity appears to be on the rise as leasing continues to show signs of improvement. Rental rates continue their descent from $22.47 at the close of Q3 2009 and $21.05 for Q2 2010, to $20.95 in the third quarter of 2010.
Philadelphia CBD
Philadelphia Central Business District (CBD) office market ended the third quarter of 2010 with a dramatic increase in negative net absorption of 276,800 square feet, up from last quarter’s negative 120,100 square feet. This spike in negative absorption is attributed mainly to the Market West Class AA activity that reflects Verizon downsizing and giving back a large block of space at the Bell Atlantic building, now referred to as 3 Logan, as a result of Brandywine Realty Trust’s recent purchase of the property. Verizon has signed a 5-year lease to occupy six floors of the building, which amounts to 122,000 square feet and has given back 278,000 square feet. Philadelphia CBD reported year-to-date negative absorption of 447,500 square feet, which compares to Q3 2009’s year-to-date negative net absorption of 1,132,450. Although remaining in the negative absorption arena, the Philadelphia CBD has shown signs that new vacancies are slowing down. Rental rates declined this quarter to $24.37, from $24.78 as reported at the close of Q2 2010.
Market Street West closed the third quarter at 15.8% total vacancy, which is 1.3% higher than the reported 14.5% total vacancy at the close of Q2 2010. This increase in vacancy is attributed to the large block of Class AA space becoming available at 3 Logan, as mentioned earlier. Total Q3 2010 Class AA office space negative net absorption is 362,100 square feet with a total vacancy of 12.3%, up 3.5% from last quarter’s reported 8.8%. Class A total vacancy decreased slightly to 18.5%, compared to second quarter’s reported 18.7%. Class B continues to remain flat quarter-over-quarter at 14.5%. Q3 2010 rental rates of $24.51 are down from second quarter’s $25.37.
Market Street East finished the third quarter with a shift into positive absorption of 39,400 square feet, compared to last quarter’s negative net absorption of 2,200 square feet. A few significant contributors that aided in the positive swing were 31,000 square feet at South Broad Street being leased, and 24,000 square feet being absorbed at the Widener Building. Q3 2010’s total vacancy decreased minimally to 12.2% compared to Q2 2010 of 12.4%. Asking rental rates increased to $25.07 compared to last quarter’s $24.67.
The Chestnut / Walnut submarket experienced a slight ascent into positive net absorption in the third quarter 2010, reporting a positive 19,900 square feet, compared to the Q2 2010 negative net absorption of 45,800 square feet. The majority of the absorption occurred in the Class B office market, although no large blocks of space contributed to the absorption, rather a smattering of smaller transactions. Rental rates in the Chestnut / Walnut submarket increased slightly to $20.66, compared to last quarter’s $20.44.
Suburban Philadelphia
The Philadelphia Suburban office market vacancy rates continue to show a mixed performance in Q3 2010. Overall the Philadelphia suburbs reported a Q3 2010 positive absorption of 111,400 square feet, which shows an improvement over Q2 2010’s negative 133,600 square feet. Although 2010’s year-to-date absorption is negative 127,000 square feet, it continues to be a significant improvement over that of a year ago when Q3 2009’s year-to-date absorption was a negative net absorption of 1,418,700 square feet.
Submarkets showing the healthiest positive net absorption were Delaware County with 103,900 square feet and King of Prussia / Wayne with 201,900 square feet. The Upper Main Line and Jenkintown / Huntington Valley reported the lowest vacancy rates with the Upper Main Line reporting 15.8% and Jenkintown/Huntington Valley reporting 16.5%. Consistent with last quarter, North Penn, Lower Bucks County, Fort Washington and Plymouth Meeting continue to report the highest vacancy percentages within the suburban office markets, ranging from 25.6% up to 39.2%. Overall rental rates increased slightly from $21.75 at the end of Q2 2010, to $21.81.
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 fourth straight quarter in a row, reporting a positive 103,900 square feet in the third quarter 2010 bringing the year-to-date net absorption up to 245,000 square feet. The Wharf at Riverton in Chester continues to experience an increase in leasing activity, showing 56,800 square feet of positive net absorption in Q3 2010. A few other noteworthy positive absorptions occurred at 206 Eddystone Avenue for 38,400 square feet and the Benson Buildings (One and Two) in Newtown Square reported 35,000 square feet of positive net absorption. Total Q3 2010 vacancy rates are at 20.9%, down from Q2 2010’s 22.9%.
The King of Prussia / Wayne submarket climbed into positive net absorption this quarter reporting 201,900 square feet, compared to Q2 2010’s negative net absorption of 10,270 square feet. This brings the year-to-date absorption into positive territory with 184,400 square feet and vacancy rates down to 20.3% compared to 21.8% at Q2 2010. All of the positive absorption in the third quarter occurred in the Class A office market with 245,900 square feet. Some of the more noteworthy transactions that contributed to the positive net absorption were, National Penn Bank leasing 15,750 square feet at 1000 Chesterbrook Boulevard, Quest Diagnostics leasing 136,920 square feet in the Valley Forge Corporate Center at 1001 Adams Avenue, IMS Health leasing 52,380 square feet at 400 Campus Drive and 104,800 square feet at 400 Campus Drive, with a move-in date projected for February 2011. Rental rates dropped slightly to $21.91 compared to $21.99 as reported in Q2 2010.
Central Bucks slipped into a negative net absorption of 141,540 square feet this quarter, compared to last quarter’s positive absorption of 11,750 square feet, bringing the year-to-date net absorption to negative 35,910 square feet. This completely reverses the mid-year 2010 year-to-date positive absorption of 105,630 square feet. Some recent activity contributing to the negative absorption was 31,900 square feet given back by Heritage at 2500 York Road due to downsizing, a 63,000 square foot sublease at Lower Makefield Corporate Center South being put back on the market by PMA, and ALMAC vacating 34,300 square feet at Lower Makefield Corporate Center North. Q3 2010 reported a total vacancy rate of 20.7% compared to Q2 2010’s 15.1%. The average rental rate dropped by $0.05 to $20.50 compared to last quarter.
Malvern/Exton/West Chester continues in the negative net absorption arena for the seventh consecutive quarter. Q3 2010 reports a negative net absorption of 53,500 square feet compared to Q2 2010’s negative net absorption of 85,200, bringing the year-to-date negative absorption to 309,900 square feet. The Q3 2010 negative absorption is primarily 66,600 square feet in Class A buildings that resulted from several new vacancies between 15,000 and 26,000 square feet. As a result, total vacancy rates continue to rise, most of which is related to direct space (versus sublease), i.e. Q3 2010’s total vacancy rate of 21.4%, compared to Q2 2010’s 20.6%. Despite the fact that overall vacancies continue to rise, rental rates remain relatively stable at $20.22, down only $0.3 from Q2 2010.
The Horsham submarket slipped further into negative net absorption territory this quarter with an additional 50,000 square feet compared to Q2 2010’s reported negative net absorption of 10,000 square feet. Activity in Horsham this quarter was an assortment of smaller transactions in both the positive and negative in the Class A and B office market. Single Story on the other hand reported a positive absorption of 26,100 square feet primarily attributed to 137,900 square feet being purchased by Wilner Properties at 400 Horsham Road with plans of retail redevelopment and Advanta moving out of 7000 Dresher Road, leaving behind 110,000 square feet. Overall rental rates for the Horsham submarket remained flat at $18.69 at the close of this quarter.
Lower Bucks submarket is showing a positive net absorption of 48,870 square feet in Q3 2010 compared to Q2 2010’s negative net absorption of 26,500 square feet. Year-to-date absorption continues to be in negative territory at 64,200 square feet. Class A activity moved out of the negative and into a positive net absorption of 45,800 in Q3 2010, compared to the negative net absorption of 12,550 reported in Q1 2010, however no significant leasing transactions were the cause, rather a combination of smaller activity among several buildings. Asking rental rates for the Lower Bucks submarket increased to $19.18 this quarter, up from last quarter’s $18.41.
Fort Washington continues to report positive absorption for the second consecutive quarter, reporting a positive net absorption of 25,450 square feet for Q3 2010 and year-to-date absorption of 159,900 square feet. The Q3 2010 activity consists primarily of positive net absorption in the single story office market, with 23,270 square feet being leased at 185 Commerce Drive. Although the total vacancy rates in the Fort Washington submarket remain on the higher end of the Suburban Philadelphia submarkets, the positive absorption continues to reduce the total vacancy rate from 32.4% at year-end 2009 to 26.8% at the close of Q3 2010. Rental Rates are down slightly from $20.03 in second quarter 2010 to $19.77 in third quarter 2010.
Plymouth Meeting/Blue Bell reported a negative net absorption of 9,550 square feet in the third quarter, over Q2 2010’s 133,630 square feet of negative net absorption. As a result, Q3 2010 total vacancy rate of 26.9% is up from 26.8% at the close of Q2 2010. All of the leasing activity that occurred in the third quarter happened in the Class B office market. Some of the more significant blocks of space include, O’Brien and Gere, LP, moving out of 21,800 square feet at 2 Valley Square , IMS vacating 20,400 square feet at 960 Harvest Drive, Wisler Pearlstine leaving 16,000 square feet at 484 Norristown Road, along with a variety of lease transactions that helped to offset the negative absorption such as, Ceridian leasing 52,000 square feet and the American Cancer Society leasing 10,000 square feet, both at 480 Norristown Road, and Telleborg leasing 10,100 square feet at 4000 Chemical Road. Rental rates increased slightly to $22.04, up from last quarter’s reported $21.91.
The Radnor/Conshohocken submarket total vacancy remains flat quarter-to-quarter at 18.7% and there appears to be no meaningful activity in Q3 2010 with negative absorption of 1,000 square feet. When you look closer at the individual buildings however, you see there is significant activity that offsets one another. For example, a few large blocks of space came back onto the market in Conshohocken… 19,130 at One Tower Bridge, 32,300 square feet at Six Tower Bridge and 16,980 square feet at Eight Tower Bridge. There was a mixed bag of lease transactions signed this quarter under 10,000 square feet, as well as two larger blocks of space, i.e. 15,196 at 201 King of Prussia Road and 19,302 square feet at 555 E. Lancaster Avenue, both part of the Radnor Financial Center, that helped to offset the new vacancies.
Northern Delaware
The Northern Delaware office market seemed to have had its ups and downs for the past two years, however, Q3 2010 has seen strong leasing activity, rallying the Northern Delaware market back into the positive absorption arena. Q3 2010’s positive net absorption of 354,658 square feet is a giant step in the right direction, especially as it equates to Q2 2010’s negative net absorption of 163,500. The third quarter 2010 total vacancy rate of the Wilmington CBD, New Castle County North, West and South (the four submarkets tracked) reported 17.8%, compared to Q2 2010’s 19.7%. Overall rental rates appear to be in rebound mode, at $21.11 in Q3 2010, compared to Q2 2010’s rental rate of $19.97.
Wilmington CBD Class A direct vacancy rate for the Q3 2010 dropped to 17%, compared to 21.2% in Q2 2010, which is reflective of general stabilization in the market. The CBD positive absorption of 207,000 square feet is primarily due to Young Conaway Stargatt and Taylor relocating from the Brandywine Building to the former Courthouse located at 1000 N. King Street, planning to occupy 235,000 square feet. CBD Class B direct vacancy rates continues its nearly two-year trend of mid-to-high 20’s, now inching its way closer to the 30’s, with a reported direct vacancy rate of 29.2% at the close of Q3 2010. Class A rental rates increased to $22.50 in Q3 2010, with the overall CBD average asking rental rate for Q3 2010 at $21.94.
Overall New Castle County (North, West and South) reported positive absorption in Q3 2010 for all three submarkets with a cumulative positive absorption of 147,600 square feet. This compares to last quarter’s positive absorption of 97,400 square feet, which was the net effect of positive absorption in the South submarket, offset by negative absorption in the North and West submarkets.
New Castle County (NCC) North experienced an overall positive net absorption of 53,300 square feet, compared to Q2 2010’s negative net absorption of 70,500 square feet, with the Class A category making a rebound, reporting positive absorption of 40,100 square feet compared to Q2 2010’s negative net absorption of 66,850 square feet. Q3 2010 reported a total vacancy rate of 18.6% compared to 20.1% reported at the close of mid-year 2010. This is the first time that vacancies have decreased since Q1 2009 when rates were 17.5%. Q3 2010 activity for NCC North included Morgan Stanley leasing 25,000 square feet in the Delaware Corporate Center and CIGNA leasing 90,000 square feet at 300 Bellevue Parkway. The CIGNA lease however, is offset by CIGNA vacating 62,000 square feet at 590 Naamans Road and 35,000 square feet at 650 Naamans Road in NCC North. Asking rental rates have started to increase slightly to $21.78 this quarter, compared to Q2 2010’s $20.64.
New Castle County West is the only Delaware submarket that continues to report single digit total vacancy rates with Q3 2010 at 6.2%. Class A has reported a positive absorption in Q3 2010 of 21,600 square feet. Class B, however, has slipped slightly into negative net absorption territory with Q3 2010 reporting a negative 8,500 square feet. Rates also took a slight dip this quarter, dropping by $0.24 to $22.35.
New Castle County South remains stable in the third quarter 2010. Class A continues to have solid positive net absorption of 95,900 square feet for Q3 2010 following a strong Q2 2010 positive absorption of 113,700 square feet. NCC South total vacancy rate has dropped to 20.2% compared to Q2 2010’s 21.8%, with direct vacancy at 15%. Class B office space has fallen into negative net absorption, reporting negative 14,800 square feet in Q3 2010. Overall the NCC South submarket is by far the strongest within New Castle County with year-to-date positive absorption of 308,900. The NCC South activity in Q3 2010 included Barclays’ lease of 65,000 square feet at Iron Hill, Coventry’s lease of 44,000 square feet at Iron Hill (an effort to consolidate two facilities into one), First Data’s lease of 38,000 square feet at White Clay and Sallie Mae’s short term sublease for 85,000 square feet at Iron Hill Blue Wing (formerly MBNA Crozier Center). Overall rental rates are at $18.61, a drop of $0.22 since last quarter.
Southern New Jersey
The Southern New Jersey office market direct vacancy remained flat for Q3 2010 at 19.6%, with total vacancy rate increasing slightly to 20.9%, up from 20.6% last quarter, signaling that the new availabilities are in the sublease market. Absorption remains in negative absorption territory at 31,100 square feet in Q3 2010 but is significantly better than the negative net absorption of 206,473 square feet reported in Q2 2010. That said, the current quarter is the net effect of differing results in each submarket. Rental rates continue to decrease in the Southern New Jersey office market from $17.70 at the close of Q2 2010 to $16.52 in Q3 2010.
The Camden submarket experienced ongoing negative net absorption of 83,270 square feet at the close of Q3 2010, compared to the negative net absorption of 90,500 in Q2 2010. Two sizable blocks of office space, one in Class A and the other in Class B, contributed to the negative absorption…18,700 square feet at Woodland Falls Drive East and 51,500 square feet at 55 Haddonfield Road in Cherry Hill.
The 3M submarket reported a positive net absorption of 52,100 square feet at the close of Q3 2010, reversing Q2 2010’s trend of negative net absorption of 115,900 square feet. The overall positive absorption is the result of several buildings with activity that offsets one another. Some most recent and significant activity contributing to 3M’s absorption in the third quarter includes, East Gate Center in Moorestown leasing 18,500 square feet, 11000-13000 Midatlantic Drive leasing 47,392 square feet in Mt. Laurel, and 11,000 square feet leased at 6000 Midlantic Drive in Mt. Laurel, offset by 17,450 square feet becoming available at Lake Center Executive Parkway in Marlton, and 27,914 square feet coming back on the market at 8000 Sagemore Drive in Marlton. Rental rates decreased to $15.86 at the close of the third quarter, compared to second quarter 2010’s $17.51.
Q3 2010 is ending with mixed results and solid trends continue to be difficult to rely on. While some submarkets seem to be making steady improvements, there are others that are still clearly faced with challenges. We look optimistically to the next few quarter’s as we continue to monitor the Greater Philadelphia region’s office 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.