Greater Philadelphia Office, Q4 2014 2014 Office demand ... · MARKETVIEW OFFICE Q4 2014 CBRE Research MARKETVIEW Greater Philadelphia Office, Q4 2014 2014 Office demand finishes

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Q4 2014 CBRE Research © 2015, CBRE, Inc.| 1

MARKETVIEW

Greater Philadelphia Office, Q4 2014

2014 Office demand finishes strong; 2015 looks better

HIGHLIGHTS

• Center City remains the regional submarket experiencing the strongest demand. Among major leases signed, Stradley Ronon renewed 92,000 sq. ft. at Two Commerce Square.

• The Pennsylvania and New Jersey suburbs, as well as the Lehigh Valley continue to improve at a slower pace, though the demand for top-tier space is strong. This quarter, Subaru selected the Gateway campus in Camden, NJ for its corporate headquarters.

• Northern Delaware office conditions are slowly improving as well. J.P. Morgan expanded to 190,000 SF at the White Clay Center in Newark, DE.

• The sales transaction market for office buildings remained concentrated in Center City Philadelphia with 1835 Market Street in Philadelphia, PA selling for $100 million and 1515 Market Street in Philadelphia, PA trading for $85 million.

We can thank the 23,200 office-using jobs created in the metropolitan area between January and November, according to the U.S. Bureau of Labor Statistics, for helping improve office market conditions in the Philadelphia region. Professional and business services (19,800 jobs) continue to be a strong demand driver, in contrast to financial activities, which only added 3,900 jobs. The immense health and education services presence can’t be overlooked either, creating nearly 14,300 jobs this year in the region.

Over the next year, over 20,000 office-using jobs are forecast to be created in the Philadelphia metro area. However, the forecasts have communicated this rosy picture before. Our view is these forecasts may be on the optimistic side, but nevertheless, 2015 is set to be a good year for office demand.

Asking Lease Rates$24.08 FSG

Development2.1 Million sq. ft.

Net Absorption148,348 sq. ft.

Vacancy Rate17.8%

625,000

650,000

675,000

700,000

725,000

750,000

Forecast

Forecast calls for metro Philadelphia to reach its pre-recession employment peak by the end of 2015

Q4 2007 Q4 2015 8 years!

Q1 2010

Figure 1: Philadelphia MSA Office-using Employment

Source: Moody’s Analytics

*Arrows indicate change from previous quarter.

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Q4 2014 CBRE Research © 2015, CBRE, Inc. | 2

SUBMARKET#

BUILDINGSINVENTORY

TOTAL VACANCY

RATE

TOTAL AVAILABILITY

RATE

UNDER CONSTRUCTION

2014 YTD TOTAL NET

ABSORPTION(SF)

AVG. ASKING

LEASE RATE($FSG/PSF/

YR)

AVG. CLASS A ASKING


YR)

Market West 52 26,897,266 13.9% 18.0% 1,285,000 648,902 $28.33 $29.62

Market East 19 6,789,819 11.6% 14.6% 0 -2,156 $23.34 $24.15

Independence Hall

16 5,969,454 18.3% 18.6% 0 -132,887 $25.03 $27.11

University City 23 3,975,620 5.5% 6.1% 625,000 378,367 $34.56 $42.27

Downtown Philadelphia Subtotal

110 43,632,159 13.4% 16.5% 1,910,000 892,226 $27.18 $28.89

Bala Cynwyd 28 2,859,714 14.7% 14.8% 0 7,278 $29.19 $30.66

Conshohocken 25 3,365,469 13.8% 17.1% 0 161,868 $31.18 $32.40

Delaware County

85 5,186,750 16.4% 18.1% 0 86,873 $24.55 $26.39

Exton/West Chester

89 3,811,618 23.5% 26.8% 0 -7,974 $22.52 $22.64

Fort Wash-ington

44 3,384,132 23.0% 25.1% 0 9,696 $22.25 $25.99

Horsham/Willow Grove

89 5,358,371 20.2% 21.7% 0 53,434 $22.18 $23.53

Jenkintown 21 1,352,695 11.8% 12.1% 0 61,469 $22.90 $23.81

King of Prussia/Valley Forge

207 15,941,714 19.1% 21.7% 0 511,320 $25.29 $26.30

Landsale/Mont-gomeryville

70 2,664,186 23.6% 25.0% 0 22,802 $21.10 $21.40

Lower Bucks County

113 5,311,427 26.1% 26.9% 0 -96,981 $25.47 $26.63

Main Line 43 2,796,474 4.5% 5.2% 0 35,510 $33.46 $35.05

Plymouth Meet-ing/Blue Bell

116 6,014,691 27.9% 28.9% 0 -69,844 $23.15 $24.54

Upper Main Line

42 1,263,153 18.6% 18.6% 0 60,879 $24.70 $26.48

Suburban Philadelphia Subtotal

972 59,310,394 19.8% 21.6% 0 836,330 $24.56 $26.06

Figure 1: Philadelphia Metro Office Market Statistics

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SUBMARKET#

BUILDINGSINVENTORY

TOTAL VACANCY

RATE

TOTAL AVAILABILITY

RATE

UNDER CONSTRUCTION

2014 YTD TOTAL NET

ABSORPTION(SF)

AVG. ASKING


YR)

AVG. CLASS A ASKING


YR)

Burlington County

190 9,763,417 15.8% 16.5% 0 137,134 $18.97 $21.42

Camden County 118 7,421,290 26.8% 26.8% 0 11,822 $20.49 $21.78

Gloucester County

26 519,492 20.4% 24.8% 0 -4,780 $22.29 $24.38

Southern New Jersey Subtotal

334 17,704,199 20.5% 21.0% 0 144,176 $19.96 $21.80

Wilmington CBD

39 6,942,824 21.4% 21.4% 0 -43,783 $23.40 $26.43

New Castle Co. Suburbs

176 9,233,700 19.2% 19.2% 0 -108,595 $21.81 $22.69

Northern Dela-ware Subtotal

215 16,176,524 20.1% 20.1% 0 -152,378 $22.61 $24.67

Lehigh Valley East

53 2,581,449 15.5% 16.2% 0 48,559 $18.85 $20.94

Lehigh Valley West

100 6,061,814 17.4% 17.4% 150,000 -61,979 $18.15 $19.95

Lehigh Valley Subtotal

153 8,643,263 16.8% 17.0% 150,000 -13,420 $18.36 $20.25

TOTAL 1,784 145,466,539 17.8% 19.5% 2,060,000 1,706,934 $24.08 $26.29

Figure 2 (cont.)

-4%

-2%

0%

2%

4%

6%

8%

10%

Source: CBRE Research

Figure 3: Percentage of Total Submarket Inventory Absorbed in 2014 (select submarkets displayed)


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OFFICE ABSORPTION

The region experienced a relatively quiet Q4 2014 with 148,348 sq. ft. of positive net absorption, compared to last quarter’s surge of 1.1 million sq. ft. of positive absorption. Nonetheless, ongoing job growth continues to occupy more office space throughout the region. In Q4 2014, King of Prussia led the Philadelphia region with 143,124 sq. ft. of positive absorption, while Market West led Center City Philadelphia with 86,112 sq. ft. Demand was very strong again in University City with just under 43,000 sq. ft. absorbed. Fifteen of the 24 submarkets experienced positive absorption, closing the year on a

positive note.

OFFICE VACANCY

The total vacancy rate across the region decreased 20 basis points (bps) from Q3 2014 to 17.8% in Q4 2014. Notable improvement occurred in University City as the total vacancy rate decreased 110 basis points in Q4 2014 to 5.5%. Throughout the rest of the region, submarket vacancy rates generally remained stable. We continue to witness the divergence between strong demand for top-quality, well-located Class A space, and lackluster demand otherwise. This divergence is illustrated in the stronger performance of submarkets such as the Main Line and Conshohocken, on one hand, and Horsham and Lower Bucks, on the other. The tightest submarkets for space continue to be University City (5.5% vacancy rate) and the Main Line

(5.2% vacancy rate).

OFFICE DEVELOPMENT PIPELINE

The office development pipeline subsided to 2.1 million sq. ft. in Q4 2014 after space was delivered at One and Two City Center in Allentown. The major projects in the pipeline in the region continue to be located in Center City Philadelphia: the Comcast Innovation and Technology Center and FMC Tower at Cira South. Three City Center in Allentown, PA is nearing completion. Besides the potential repositioning of several buildings in the region, there

is little filling the development pipeline.

-1,000

-500

0

500

1,000

1,500

2,000

Squa

re Fe

et (0

00s)

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

0

500

1,000

1,500

2,000

2,500

Squa

re Fe

et (0

00s)

Figure 4: Net Absorption

Figure 5: Vacancy Rate

Figure 6: Development Pipeline




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OFFICE LEASE RATES

The overall average asking lease rate for the region increased $0.15 from $23.93 per sq. ft. in Q3 2014 to $24.08 per sq. ft. in Q4 2014. Two of the larger jumps in average rents occurred in the stronger submarkets downtown. In University City, rents rose to the highest in the region at $34.56 per sq. ft., while in Market West the average rent increased by $0.48 to $28.33 per sq. ft. Rents in the Philadelphia suburbs were generally flat compared to last quarter, but Northern Delaware and the Lehigh Valley experienced

rent increases in all of their submarkets.

OFFICE CAPITAL MARKETS

Center City office sales continue to attract the attention, but activity in the suburbs this past quarter was strong. Nonetheless, the major trades occurred in Center City, most recently including 1835 Market Street for $100 million and 1515 Market Street for $85 million. In addition, the agreement of sale earlier in the quarter of 1818 Market Street, Seven Penn Center, and other smaller trades, Q4 2014 Center City building sales totaled $464 million. However, strong activity transpired in the suburbs of Philadelphia as well. The largest sales were Radnor Court in Radnor, PA ($43.7 million), and Valleybrooke Office Park in Malvern, PA ($37.9 million). Total sales of significant suburban office properties in Q4 2014 throughout the

region totaled $197 million.

OFFICE EMPLOYMENT GROWTH

The outlook for office job growth remains positive, despite some signs of a moderating pace in growth over the last year. The main driver continues to be the professional and business services sector, which includes law firms, accountants, management, advertising, consulting, and administration and clerical positions, among others. This employment sector is expected to lead the economy over the next year, outpacing education and health services, as it adds over 15,000 jobs through the end of 2015. Financial activities continues to grow, but at a reduced pace, while information services (publishing, broadcasting, telecommunications) should begin expanding again in 2015.

$23.70

$23.80

$23.90

$24.00

$24.10

$24.20

Per S

quare

Foot

Per Y

ear (

FSG)

$0

$100

$200

$300

$400

$500

$600

$700

$800

Millio

ns

0.90

0.95

1.00

1.05

1.10

Q4 20

12 Em

ploym

ent L

evel

= 1.

00

Prof'l & Bus Svcs Educ & Health Fin Activities Gov't Information

Forecast

Figure 7: Office Lease Rates

Figure 8: Office Sales Transactions

Figure 9: Office Employment Growth


Source: Real Capital Analytics (4-qtr. average)

Source: Moody’s Analytics

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Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

Figure 10: Greater Philadelphia Office Submarkets

CONTACTS

Ian AndersonDirector of Research and Analysis+1 215 561 [email protected]

Lauren KoshgarianSenior Research Analyst+1 215 561 [email protected]

Allen OdeniyiResearch Coordinator+1 215 561 [email protected]

Andrew FriedmanResearcher+1 610 727 [email protected]

Allentown, PA+1 610 398 6900

Harrisburg, PA+1 717 540 2700

Mt. Laurel, NJ+1 856 359 9500

Wilmington, DE+1 302 661 6700

LOCAL OFFICES

Center City PhiladelphiaTwo Liberty Place+1 215 561 8900

Cira Center+1 215 921 7400

Wayne, PA+1 610 251 0820

Conshohocken, PA+1 610 834 8000

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Greater Philadelphia Office, Q4 2014 2014 Office demand ... · MARKETVIEW OFFICE Q4 2014 CBRE Research MARKETVIEW Greater Philadelphia Office, Q4 2014 2014 Office demand finishes