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Seven Years into the Cycle, Market Signals Another Year of Growth

Philadelphia, PA (04/08/2019)

3:16 PM

Newmark Knight Frank (NKF) released its first-quarter 2019 office reports for the greater Philadelphia region today. While markets within the metro area experienced variations in demand performance this quarter, the reports indicate that strong fundamentals in the local office market and economy point to another year of overall positive growth in 2019.

Philadelphia's Central Business District (CBD) realized approximately 56,000 square feet of negative absorption in the first-quarter 2019, primarily due to Aramark relinquishing space at the Wanamaker Building following the delivery of the company's new headquarters at 2400 Market Street during the previous quarter. Overall vacancy in the CBD inched up 10 basis points quarter-over-quarter to 13.5 percent as a result. New deals signed by out-of-market tenants characterized leasing activity this quarter, the largest of which was Cranbury, NJ-based Amicus Therapeutics, which leased 75,000 square feet at 3675 Market Street. Amicus' lease underscored the dynamism in Philadelphia's life sciences industry - and the elevated demand for lab space in the CBD market. The most notable commercial real estate sale of the quarter was that of trophy-class office property 1735 Market Street to a partnership between Silverstein and Arden Group for $451.6 million.

Average asking rents hit new highs in the CBD for the past ten consecutive quarters, rising to $32.83 per square foot in 1Q19. "We find some of that increase in the city is due to office properties changing hands," said NKF executive managing director Craig Scheuerle. "The new institutional, out-of-market investors are upgrading their buildings with new and improved amenities, such as café's, training rooms, conference areas, and more, which they are using as justification for pushing rents. It's the perfect opportunity for rent growth," he added.

Southeastern Pennsylvania recorded 60,619 square feet of net absorption in 1Q19, compressing the suburban vacancy rate 10 basis points from the previous quarter to 14.0 percent. Expanding biopharmaceutical company CSL Behring was the largest new occupancy, moving into 100,820 square feet at 500 North Gulph Road, which had undergone a $30 million complete renovation. The construction pipeline expanded with the groundbreaking of AmeriSourceBergen's 400,000-square-foot headquarters in Conshohocken, joining the build-to-suit headquarters already underway for AmeriHealth Caritas in Newtown Square. NKF managing director Michael Maloney noted, "Tenants are coming out in the market earlier to make decisions on space because there just aren't a lot of existing top-quality large blocks. It's very possible that we will see another build-to-suit break ground this year, following in AmeriHealth and AmeriSource's footsteps."

Philadelphia NKF research manager Lisa DeNight noted that 2019 office occupancy will be buoyed by sustained job growth recorded in the region, especially in Philadelphia's Metro Division, inclusive of the city and Delaware County. The Philadelphia Metro Division attained 1.4 percent job growth in office-using occupations year-over-year. "Companies are becoming more efficient in their usage of space, but total employee headcounts are increasing. We've seen a lot of downsizing but are starting to see more companies in expansion mode as well," she said. Of the nation's 28 metro divisions that had year-over-year unemployment rate decreases, Philadelphia experienced the largest decline, dropping 0.9 percentage points to 4.7 percent, according to the United States Bureau of Labor Statistics.

The Southern New Jersey office market recorded a net loss of 33,593 square feet in 1Q19, pushing vacancy up 20 basis points quarter-over-quarter to 15.6 percent. Although there were numerous new occupancies and expansions, tenancy gains were offset by the retractions of Baker Tilly in Cherry Hill and American Water in its final relocation from the suburbs into its new Camden headquarters. What NKF executive managing director Anne Klein deemed the "Camden Effect," describing office market growth in the heavily incentivized Camden Waterfront at the expense of the Jersey suburban office market, is set to dissipate more over the course of the year. The tax incentive program responsible for luring companies to Camden ends next quarter, and the 375,000-square-foot Camden Tower-the eventual new home of Connor Strong and Buckelew, NFI and the Michaels Organization-is now the only major Camden office project under construction. In addition, suburban space left behind by relocating companies is slowly but surely being absorbed or repurposed. It was announced in 1Q19 that the former Subaru headquarters will be demolished. Noted Klein, "It's a relief that space is going to be razed, because otherwise, over 115,000 square feet of vacancy would have hit the market."

Northern Delaware's office market performed strongly in the first quarter of 2019 with numerous new occupancies driving net absorption; the overall market vacancy rate declined to 15.6 percent after reaching a five-year high of 17.0 percent at the end of 2018. Both the CBD and suburban markets realized healthy demand, and there were several large leasing announcements that signaled great tenant interest in the suburban development Avenue North. There, Christiana Care Services leased 386,460 square feet in a large-scale consolidation and relocation strategy, and Solenis signed for 87,640 square feet, and will relocate from 3 Beaver Valley Road. Neal Dangello, NKF senior managing director, addressed the upcoming predicament facing the market despite the positive momentum. "Wilmington's CBD will be hit with Bank of America's 500,000-square-foot-plus retraction from the Bracebridge buildings next quarter. While this is a challenge, Class A properties such as 301 W. 11th Street, are available opportunities for tenants seeking quality, well-located large blocks - which are nearly non-existent in the suburban market."

About Newmark Knight Frank
Newmark Knight Frank ("NKF"), operated by Newmark Group, Inc. ("Newmark Group") (NASDAQ: NMRK), is one of the world's leading and most trusted commercial real estate advisory firms, offering a complete suite of services and products for both owners and occupiers. Together with London-based partner Knight Frank and independently-owned offices, NKF's 16,000 professionals operate from approximately 430 offices on six continents. NKF's investor/owner services and products include investment sales, agency leasing, property management, valuation and advisory, diligence, underwriting, government-sponsored enterprise lending, loan servicing, debt and structured finance and loan sales. Occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate services consulting, project management, lease administration and facilities management. For further information, visit www.ngkf.com.

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