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Philadelphia Metro’s Office Market is Enjoying a Period of Healthy Balance

Philadelphia, PA (10/03/2016)

3:22 PM

Newmark Grubb Knight Frank (NGKF) released its third quarter 2016 office reports for the greater Philadelphia region this week. The reports detail a positive quarter for the entire metro area. Due to sustained occupancy growth, vacancy declined and average asking rents increased in Philadelphia, Northern Delaware and Southern New Jersey.

Nowhere in greater Philadelphia was occupancy growth more pronounced than in the Philadelphia Central Business District (CBD) this quarter. 230,010 square feet of new tenancy was recorded, cutting the vacancy rate by 60 basis points quarter-over-quarter to 11.9 percent. The CBD also experienced the greatest quarterly rental rate growth in the region. Overall pricing in the CBD grew 2.6 percent quarter over quarter, with trophy space driving the momentum. Commenting on the robust rent increases, Executive Managing Director Sid Smith said, "Rent growth in the CBD has been driven by demand and the addition of new supply. The downtown trophy class, including the recently delivered FMC Tower, has witnessed over 300,000 square feet of absorption year-to-date, and rents are currently at a 40 percent premium over the rest of the city's Class A stock. Tenants are clearly willing to pay top-dollar for superlative space with quality amenities."

As it has throughout the year, Suburban Philadelphia demonstrated a strong performance in the third quarter, accumulating 201,566 square feet in positive absorption. As such, the vacancy rate decreased 30 basis points from the second quarter to 15.9 percent. According to Executive Managing Director Jeff Mack, the story of the suburbs continues to be a flight to quality. "Vacancy for Class A space is now at a 16-year low of 11.6 percent. With ever-dwindling availability, there's been an increase in investors acquiring second or third-tier properties with value-add or opportunistic plans in mind." Speaking on the subject of new development, Mack went on to say, "The current market conditions and number of sizeable tenants looking for space in the market make a compelling case for adding a speculative Class A project in a core submarket such as Conshohocken, Bala Cynwyd or King of Prussia/Wayne."

Evincing tenant need for fresh, Class A space, two build-to-suits broke ground this quarter: One of these commenced in the Southern 202 submarket for The Franklin Mint; the other was in the King of Prussia submarket for Highway to Health.

Southern New Jersey and Northern Delaware also made strong showings this quarter. Southern New Jersey's submarkets all gained new tenancy, totaling approximately 51,000 square feet for the region, which pushed overall vacancy down 30 basis points to 17.0 percent. Northern Delaware experienced a fifth straight quarter of demand growth, tallying nearly 88,000 square feet in absorption. Vacancy was slashed 190 basis points from third-quarter 2015 to 16.6 percent this quarter, and rents rose $0.12 per square foot quarter-over-quarter to $24.64 per square foot. This quarter also witnessed notable property trades in New Castle County, adding to the year-to-date sales volume of $163 million. Senior Managing Director Neal Dangello noted, "Sales like the 144,000-square-foot, two-building Chapman Road portfolio, which sold for $15.55 million, indicate that investor interest in strong, well-tenanted office assets in the region is alive and well."

Anticipation for decisions regarding the headquarters location of a handful of major tenants in the region was sated this quarter when Five Below and Aramark announced they would relocate within the Philadelphia CBD. Also, American Water, with office locations throughout the Southern New Jersey market, announced their decision to relocate within the same region. Five Below will expand in its relocation, moving from 60,000 square feet at 1818 Market Street to 180,000 square feet of office space (and 15,000 square feet of retail) at 701 Market Street. Aramark signed a long-term lease as the anchor tenant at 2400 Market Street, soon to undergo complete renovation. Aramark will move out of 350,000 square feet at its eponymous tower, and into 300,000 square feet at its new location. American Water formally announced its move to Camden, where the utility company will build a new headquarters in Liberty Property Trust's $1 billion planned waterfront mixed-use campus. Upon its completion, American Water will vacate offices spanning the Mount Laurel, Voorhees/Gibbsboro and Cherry Hill submarkets. According to Anne Klein, executive managing director, "American Water joined Subaru as another major local office tenant to benefit from Grow New Jersey's tax incentives for official Camden commitments, but the relocations to new waterfront headquarters will put strain on the office market elsewhere as vacancy grows. While the region takes time to recover, softened conditions will tip the scales to a tenant-favorable market."

About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank is one of the world's leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NGKF's 14,100 professionals operate from more than 400 offices in established and emerging property markets on six continents.

With roots dating back to 1929, NGKF's strong foundation makes it one of the most trusted names in commercial real estate. NGKF's full-service platform comprises BGC's real estate services segment, offering commercial real estate tenants, landlords, investors and developers a wide range of services including leasing; capital markets services, including investment sales, debt placement, appraisal, and valuation services; commercial mortgage brokerage services; as well as corporate advisory services, consulting, project and development management, and property and corporate facilities management services. For further information, visit www.ngkf.com.

NGKF is a part of BGC Partners, Inc., a leading global brokerage company servicing the financial and real estate markets. BGC's common stock trades on the NASDAQ Global Select Market under the ticker symbol (NASDAQ: BGCP). BGC also has an outstanding bond issuance of Senior Notes due June 15, 2042, which trade on the New York Stock Exchange under the symbol (NYSE: BGCA). BGC Partners is led by Chairman and Chief Executive Officer Howard W. Lutnick. For more information, please visit www.bgcpartners.com.