Savills Studley Report Philadelphia office sector Q2 2018

Savills Studley Research Philadelphia

SUMMARYMarket Highlights

LEASING DECLINES

Deal volume in the second quarter totaled 1.5 million square feet (msf), falling from 2.0 msf transacted in the first quarter. Tenants have leased 8.1 msf in the last four quarters, 0.3% above the long-term annual average.

AVAILABILITY FLAT

The market’s overall availability rate was unchanged, remaining at 19.3%. The Class A availability rate rose by 40 basis points to 17.4%, but this was offset by a 50 basis point decline to 22.6% in Class B and C properties.

STABLE RENT

Overall asking rent in the region inched lower by 0.2%, falling from $28.46 to $28.39. Average Class A asking rent rose by 0.2% to $30.48 and has jumped by 2.3% year-on-year.

SALES DOWNInvestors have acquired $968 million inoffice properties through May of 2018. Thisrepresents a 24% decrease from the $1.3billion transacted in the previous six months.

“A group of tenants seeking between

50,000-125,000 sf has caused the market

to evaluate and pause, to see where the

chips will fall, as these tenants patiently

select locations."

Greg Soffian, Corporate Managing Director

02

Savills Studley Report | Philadelphia

Slow but Steady Path

Philadelphia's office market was once again characterized by stability in the second quarter. The overall availability rate was unchanged, remaining at 19.3%. New office construction has been kept in check, helping keep the lid on availability rates. The region only has 3.8 msf underway, and slightly more than 90% is pre-leased. The University Science Center is the only building currently underway with a contiguous block of 100,000 sf or more for lease at this time. In turn, even with leasing activity that has lagged prior cycles, availability has been steady.

Office-using employment in the Philadelphia market has consistently lagged in this cycle. In the last 12 months, office-using employment slipped into negative territory with a 0.3% decrease from May of 2018 to May 2017. At the national level, office-using employment rose by 1.9% nationally during the same period. Healthcare has been a key stabilizing force, keeping overall employment in the positive direction. Cooper Health was one of the latest healthcare firms to take space, leasing 73,044 sf at 1000 Voorhees Drive in South Jersey.

Construction Costs Remain a Concern

Asking rent was stable across the region during the quarter. Rent is rising a bit more sharply in prime locations such as West Market and Main Line/Conshohocken, but is up only moderately in most other markets. Tenants are hit with additional costs, particularly if they need to relocate and build out their space. Landlords have pushed concessions higher in the last two years, often granting more generous improvement allowances, in exchange for longer lease terms, but they continue to fall short of rising construction costs.

Labor shortages and soaring costs for skilled tradesmen have been an issue for quite a while. More recently, rising material and commodity costs have been adding to construction costs. Vendors have started to add clauses in contracts saying they will not assume extra costs due to higher commodity prices. Cost overruns at the $1.5 billion 60-story Comcast tower, for example, continue to mount. Structure Tone, the general contractor, said for example, it anticipates $67 million in additional cost overruns (not counting tenant-funded interior buildouts)

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0.15

0.16

0.17

0.18

0.19

0.20

0.21Millions

PHI. Office Emp. PHI.(% Annual Change) U.S. (% Annual Change)

Office-Using Employment Trends

$28.39

$24.22

$30.48

$25.86

$25.73

$21.60

$10

$15

$20

$25

$30

$35

Q2 '18 Q2 '17 Q2 '16 Q2 '15 Q2 '14 Q2 '13

Rental Rate Trends

Total Class A Class B

Asking Rent Trends ($/sf)

19.3%17.8%

17.4%16.7%

22.6%

19.9%

10%

15%

20%

25%

Q2 '18 Q2 '17 Q2 '16 Q2 '15 Q2 '14 Q2 '13

Availability Rate Trends

Total Class A Class B

Availability Rate Trends

savills-studley.com/research 03

Q2 2018

Tenant Sq Feet Address Market AreaMacquarie 128,000 100 S Independence Mall W East MarketDepartment of Labor 104,265 1835 Market St West MarketCSL Behring 100,820 500 N Gulph Rd Route 202/422/King of PrussiaWillis Tower Watson 98,000 1735 Market St West MarketCooper Health 73,044 1000 Voorhees Dr South JerseyState of New Jersey 61,694 55 Haddonfield Rd South JerseyPost & Schell 60,000 1600 John F Kennedy Blvd West MarketMarcum 51,222 1601 Market St West MarketPMHCC 37,792 1601 Market St West MarketClark Hill 33,715 2001 Market St West MarketSum of Leases 748,552 Sum of 2nd Quarter Leasing Activity 1.6 MSF

West Market Remains Active

The steady leasing activity established in the first quarter carried into the second quarter – tenants have leased 3.6 msf year to date as of mid-year, nearly on par with the 3.7 msf leased in the first half of 2017. Tenants leased nearly 600,000 sf of Class A space in West Market in the second quarter. The US Department of Labor took 104,625 sf at 1835 Market Street. Also in West Market, Willis Tower Watson inked a 98,000-sf lease at 1735 Market Street, downsizing from 200,000 sf. Accounting firm Marcum signed a 51,222-sf lease at 1601 Market and health-services nonprofit PMHCC inked a 37,792 sf deal at the same building. Law firm Clark Hill signed a 33,715-sf lease at 2001 Market Street. In East Market, financial services firm Macquarie, which had been in the market looking for space, leased 128,000 sf at 100 S Independence Mall West.

Slower Quarter in Suburban Philly

Activity was more subdued in Suburban Philadelphia. South Jersey notched a couple of notable transactions. In addition to the aforementioned lease by Cooper Health, the State of New Jersey took 61,694 sf at 55 Haddonfield Road. CSL Behring’s 100,820-sf lease at 500 N Gulph Road was the biggest deal of the quarter in Suburban Philadelphia.

Renovations and New Construction

Although new construction has been limited, the region is seeing extensive renovations at many of its buildings, including some that have not had any vacancy in years.

Divided ownership is often an impediment to much-needed renovations. The Wells Fargo building at 123 S. Broad Street is now under the full control of Quilvest Group after it paid $60 million for the note at 123 S Broad Street. The New York City-based investor also acquired the 155,000-sf Witherspoon separately and may convert this building to apartments. A move-out by law firm Montgomery McCracken, from its 110,000-sf space, created the first major vacancy at 123 S Broad in the last 20 years. Wells Fargo, which had leased 600,000 sf at the building, now leases 222,000 sf in 123 S Broad and its lease expires in 2020. This will eventually create a much-needed big block in East Market. Center City only has six contiguous blocks over 100,000 sf in existing buildings and only five in Class A properties.

Patience is a virtue in real estate. Some

projects take a long time to become reality. Developer Scott Mazo began assembling land around 40th and Market in West Philadelphia more than 15 years ago. The developer said it will start work on 3.0 University Place this December. The $80 million, 180,000-sf office building at 41st and Market Street is precertified LEED Platinum. Mazo has already signed local incubator 1776 to take a full 35,000-sf floor. Any tenants signing a lease in 3.0 University will get access to 1776 facilities — both at University 3.0 and at other 1776 locations. Coworking in Philadelphia has taken off.

Steady Demand from Investors

The strong appeal of Navy Yard was underscored by the sale of GlaxoSmithKline's Navy Yard building for $130.5 million ($628/sf). Liberty Property Trust sold the 207,779-sf building, completed in 2012, to an affiliate of Korea Investment Management Co. GSK is

committed to the building until 2028. Korea Investment also owns Cira Square which it acquired for $354 million in 2016

Looking Forward

There is little to indicate a dramatic change in market conditions during the next few quarters. The delivery of 3675 Market and 2400 Market in the CBD should provide an uptick in leasing assuming the flight to quality continues. Several significant lease rollovers are on the horizon.

Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$35.27

$34.06

$33.92

$33.31

$32.59

$30.52

$28.51

$28.39

$27.54

$27.10

$26.50

$26.42

$25.66

$24.89

$24.26

$24.18

$23.60

$23.40

$22.35

$0 $5 $10 $15 $20 $25 $30 $35 $40

Main Line/Conshohocken

US Index

West Market

Bala Cynwyd

CBD

East Market

Blue Bell/Plymouth

Philadelphia (Region)

Rte. 202/422/King of Prussia

Delaware County

Wilmington

Suburban Philadelphia

Delaware

Horsham/Willow Grove

New Castle County

South Jersey

Exton/West Chester

Bucks County

Fort Washington

9.5%

14.0%

15.5%

16.6%

16.9%

17.7%

17.9%

18.2%

19.1%

19.3%

20.0%

21.7%

23.0%

23.4%

27.4%

29.2%

29.6%

30.1%

30.2%

0% 5% 10% 15% 20% 25% 30% 35%

Bala Cynwyd

West Market

CBD

Rte 202/422/King of Prussia

Exton/West Chester

Main Line/Conshohocken

US Index

Wilmington

East Market

Philadelphia (Region)

South Jersey

Suburban Philadelphia

Horsham/Willow Grove

Delaware

Blue Bell/Plymouth

Delaware County

Bucks County

New Castle County

Fort Washington

Savills Studley Report | Philadelphia

04

Map Submarket Total

SF(1000's)

Last12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

West Market 33,300 2,398 4,665 -0.4% 4,092 14.0% -0.1% 12.3% $33.92 1.4% $31.40West Market - Class A 24,285 1,991 3,580 5.9% 3,034 14.7% 0.8% 12.5% $35.55 3.7% $32.24East Market 13,025 893 2,493 4.3% 2,685 19.1% 0.8% 20.6% $30.52 0.7% $30.62East Market - Class A 5,535 476 1,059 6.2% 1,256 19.1% 1.1% 22.7% $32.58 1.3% $32.58Bala Cynwyd 2,831 468 269 3.9% 388 9.5% 0.4% 13.7% $33.31 0.9% $31.32Bala Cynwyd - Class A 2,255 389 244 4.9% 293 10.8% 0.5% 13.0% $33.63 0.8% $32.62Blue Bell/Plymouth Meeting 5,437 229 1,492 11.3% 1,272 27.4% 1.6% 23.8% $28.51 0.0% $27.68Blue Bell/Plymouth Meeting - Class A 2,657 182 528 40.8% 473 19.9% -2.0% 17.5% $28.10 0.0% $27.46Fort Washington 3,658 150 1,106 -9.0% 1,417 30.2% -3.0% 38.7% $22.35 -8.4% $25.61Fort Washington - Class A 1,668 86 384 -0.3% 416 23.0% -0.1% 24.9% $23.77 -10.0% $26.54Horsham/Willow Grove 4,596 222 1,058 -8.5% 1,358 23.0% -2.1% 29.6% $24.89 -5.1% $25.62Horsham/Willow Grove - Class A 2,786 61 367 -15.7% 488 13.2% -2.5% 17.5% $26.97 -7.8% $26.42Route 202/422/King of Prussia 12,812 1,260 2,124 -1.6% 2,723 16.6% -0.3% 21.3% $27.54 -0.1% $27.20Route 202/422/King of Prussia - Class A 8,324 568 1,060 10.7% 1,327 12.7% 1.2% 15.9% $30.90 -2.0% $28.87Exton/West Chester 3,834 144 649 -0.3% 571 16.9% 0.0% 14.9% $23.60 3.0% $23.18Exton/West Chester - Class A 2,567 134 424 0.7% 332 16.5% 0.1% 12.9% $25.68 3.5% $25.67Main Line/Conshohocken 5,543 378 980 33.2% 732 17.7% 4.4% 13.2% $35.27 3.5% $32.48Main Line/Conshohocken - Class A 4,421 249 609 4.0% 529 13.8% 0.5% 12.0% $37.79 4.6% $35.22Delaware County 4,626 155 1,352 21.0% 818 29.2% 5.1% 17.7% $27.10 6.6% $26.24Delaware County - Class A 3,564 140 871 0.3% 570 24.4% 0.1% 16.0% $26.08 2.0% $26.87Bucks County 4,958 266 1,469 -11.7% 1,585 29.6% -3.9% 32.0% $23.40 1.3% $24.42Bucks County - Class A 3,317 199 1,008 -10.3% 981 30.4% -3.5% 29.6% $24.02 1.8% $25.31Wilmington 7,310 596 1,328 0.0% 1,405 18.2% 0.0% 19.2% $26.50 -0.4% $27.28Wilmington - Class A 5,611 225 1,125 0.7% 1,053 20.0% 0.1% 18.8% $27.38 -1.0% $28.83New Castle County 5,795 290 1,742 1.3% 1,217 30.1% 0.4% 21.0% $24.26 -0.5% $23.91New Castle County - Class A 3,044 68 749 -3.6% 557 24.6% -0.9% 18.3% $24.95 1.2% $22.85South Jersey 12,290 691 2,460 -9.9% 2,649 20.0% -2.2% 21.6% $24.18 1.1% $23.74South Jersey - Class A 5,452 255 1,110 -6.4% 1,220 20.4% -1.4% 22.4% $26.89 5.3% $25.48Philadelphia CBD Total 46,325 3,292 7,158 1.2% 6,777 15.5% 0.2% 14.6% $32.59 0.7% $31.21Philadelphia CBD Total - Class A 29,820 2,467 4,639 5.9% 4,290 15.6% 0.9% 14.4% $34.74 2.8% $32.28Suburban Philadelphia Total 48,295 3,272 10,499 2.0% 11,038 21.7% 0.4% 22.9% $26.42 -0.6% $26.89Suburban Philadelphia Total - Class A 31,559 2,007 5,496 2.1% 5,400 17.4% 0.4% 17.1% $28.42 -0.5% $28.09Delaware Total 13,105 1,297 3,070 0.7% 2,247 23.4% 0.2% 17.1% $25.66 -0.9% $26.27Delaware Total - Class A 8,655 159 1,873 -1.1% 1,503 21.6% -0.2% 17.4% $26.64 -1.1% $27.98Philadelphia Region Total 120,015 8,140 23,186 0.2% 23,085 19.3% 0.0% 19.2% $28.39 -0.2% $28.15Philadelphia Region Total - Class A 75,486 5,021 13,118 2.1% 12,520 17.4% 0.4% 16.6% $30.48 0.2% $29.80

LeasingActivity

AvailableSF

AvailabilityRate

Asking Rents Per SF

1

13

2

3

4

5

6

7

8

9

10

11

12

14

1-2

3-11

12-13

1-14

@SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2018 Savills Studley

Savills Studley50 South 16th StreetSuite 3400Philadelphia, PA 19102

Branch ManagerH. Hetherington Smith,Senior Vice Presidenthsmith@savills-studley.com(215) 563-4000

202

252

30

1

30

676

295

276

476

476

422

202

8

10

4

9

11

3

Montgomery County

Chester County

Delaware County

Blue Bell

Gloucester County

Camden County

Burlington County

Philadelphia

Philadelphia Airport

Bucks County

Wilmington

New Castle

12

131 3

76

611

70

95

95

5

6

7Branch ManagerGreg Soffian,Executive Vice Presidentgsoffian@savills-studley.com(215) 563-4000