The Greater Philadelphia region’s midyear 2011 commercial office market reported an overall quarterly positive net absorption of 129,400 square feet and a year-to-date positive absorption of 657,000 indicating the trend of a gradually improving market still rings true. The most significant comparison is when we look at the state of the market a year ago when year-to-date net absorption was a negative 780,850 square feet; this gives us a better snapshot of the improvement the Greater Philadelphia market is experiencing. This upward absorption trend is spread fairly evenly among the major submarkets with the first quarter contributing sixty percent (60%) of the positive 2011 leasing activity and second quarter contributing forty percent (40%). In addition, a closer look at the individual submarkets described below demonstrates inconsistent performance within submarkets. That said, the positive leasing activity in 2011 thus far has outperformed the negative absorption thereby creating an optimistic outlook that the overall positive trend will be sustainable in the second half of the year.
Total vacancies for the Greater Philadelphia region, including sublet space, decreased to 24.2 million square feet, or 18.6% at midyear 2011 compared to Q2 2010’s 24.6 million square feet or 19.1%. Average asking rental rates remained relatively flat year-to-year reporting $21.05 at midyear 2010 to $21.00 at the close of midyear 2011.
The Philadelphia Central Business District’s (CBD) positive absorption trend that started last quarter after two years of negative absorption continues into midyear 2011, reporting a year-to-date positive absorption of 216,200 square feet compared to Q2 2010’s year-to-date negative net absorption of 170,670 square feet. The positive absorption trend continues due to strong leasing activity in the trophy class and class A office space primarily in the Market Street West submarket where positive net absorption was 98,000 square feet and 146,500 square feet, respectively. The Philadelphia CBD vacancy rates decreased slightly from 14.9% at the close of the first quarter 2011 to 14.7% at midyear showing a gradual, but steady improvement quarter to quarter. Average asking rental rates have decreased slightly from $24.78 at midyear 2010 to $24.54 at the close of midyear 2011.
Market Street West reported a year-to-date positive net absorption of 243,800 square feet, a favorable improvement over midyear year-to-date 2010’s negative net absorption of 95,750 square feet. Similar to the first quarter 2011, Market Street West was the force behind the Philadelphia CBD’s positive absorption, with the majority of the activity occurring in trophy class properties, which reports a positive year-to-date net absorption of 98,000 square feet. Contrary to last quarter when Class A was leading the charge with 162,100 square feet, this quarter Class A is reporting a negative net absorption of 15,666 square feet.
Recent Market Street West activity in all classes include: First American taking a 9,500 square foot sublease at Two Penn Center, Catalyst taking 14,740 square feet at 1650 Arch Street, First Investors taking 8,000 square feet and Welcome Center of Philadelphia taking 9,000 square feet at One Penn Center, and a handful of small transactions occurring at 2000 Market Street. The total vacancy rate for Market Street West is up slightly to 14.7% in midyear 2011 from Q2 2010’s 14.5%, however a slight decrease is visible when compared to last quarter’s 14.9%. Asking rental rates remain relatively flat at $24.54 when compared to Q1 2011’s $24.56, with minor changes even when compared to midyear’s rate of $24.78 from a year ago.
Both Market Street East and the Chestnut/Walnut submarkets reported minimal activity this quarter. Market Street East remained in negative territory with a Q2 2011 negative net absorption of 8,160 square feet and a year-to-date negative absorption of 88,900 square feet, compared to a year ago when 2010 reported a year-to-date negative absorption of 40,900 square feet. The Chestnut/Walnut submarket reported 2011 year-to-date positive absorption of 61,350 square feet, compared to midyear 2010’s year-to-date negative net absorption of 34,000 square feet. Market Street East rental rates declined substantially in Q2 2011 reporting $21.10 compared to a year ago when rates were $24.67. The Chestnut /Walnut submarket on the other hand increased with reported rental rates at $21.39 at the close of midyear 2011 compared to Q2 2010’s asking rate of $20.44.
Recent activity in Market Street East includes Janney Montgomery Scott taking 26,200 square feet for a data center at 833 Chestnut Street, along with Razorfish LLC leasing 23,600 and LevLane Advertising leasing 12,500 at The Wanamaker Building located at 100 Penn Square East, offset by The U.S. General Services Administration vacating 74,800 square feet at the Bourse Building at 111 S. Independence Mall.
Leasing activity in the Chestnut/Walnut Street submarket included the U.S. Marshalls taking 14,000 square feet at 2401 Walnut Street and Levy, Beldante, Finney, Rubenstein, Cohen and Chizmar vacating 28,300 square feet at 1616 Walnut Street and signing a lease for approximately 10,000 square feet at 1845 Walnut Street.
The Philadelphia Suburban office market ends the midyear reporting an overall positive net absorption of 28,760 square feet for the quarter, which was the net effect of both positive and negative absorption throughout the suburban submarkets. The year-to-date number is more encouraging, reporting a positive net absorption of 363,380; however, eighty-four percent (84%) of this positive absorption came from a single submarket, i.e. King of Prussia. This indicates the current recovery is still isolated to only a few submarkets as further explained below. When you compare this positive 2011 year-to-date absorption to 2010’s year-to-date net absorption of negative 255,460 square feet there are encouraging signs of a stronger, although cautious market. Year-to-year vacancy rates are at 20.9% for 2011 with slight improvement from Q2 2010’s vacancy rate of 21.6%…another indicator that activity throughout the market is experiencing movement, regardless of how slight, in the right direction. An overall increase in rental rates is also indicative of improvement, with this quarter reporting increased rental rates of $22.24 compared to $21.75 at the close of both Q1 2011 and Q2 2010.
Submarkets with the strongest quarterly positive net absorption were King of Prussia/Wayne with 120,140 square feet, Malvern/Exton/West Chester with 53,150 square feet, and Radnor/Conshohocken with 39,230 square feet. Radnor/Conshohocken also reported the lowest vacancy rate of 14.4%, followed closely by Jenkintown/Huntington Valley at 15.3% and the Main Line at 15.4%. The highest vacancy percentages this quarter continued to be North Penn at 38.4%, Fort Washington at 28.1%, Plymouth Meeting/Blue Bell at 26.3% and Lower Buck County reporting 24.0%.
As we take a closer look at the above mentioned suburban submarkets individually, the King of Prussia/Wayne submarket reported the largest positive net absorption this quarter of 120,140 with a year-to-date positive absorption of 305,540 square feet, compared to Q2 2010’s quarterly negative net absorption of 10,270 square feet and year-to-date negative net absorption of 17,420. Second quarter leasing activity contributed forty percent (40%) to the year-to-date positive absorption, with several large moves impacting the overall absorption rate… 2750 Monroe Boulevard reported 52,930 square feet of leasing, 1170 Devon Park Drive reported 29,500, The Atrium reporting 24,000 square feet, and 2701 Renaissance Boulevard leased 23,600 square feet to MedRisk. Total vacancy continues its decline from Q2 2010’s 21.8%, to Q1 2011’s 19.4% and now reporting 18.5% at midyear 2011. Unfortunately, rental rates continued their decline from Q2 2010’s $21.99, to Q1 2011’s $21.08 and closing out midyear 2011 at $20.84, which may be attributed to the stronger leasing activity.
Malvern/Exton/West Chester moved into the positive arena for the first time in two and a half years, reporting a positive net absorption of 53,150 square feet bringing the year-to-date to a positive 4,580 square feet, with Class A reporting the lion’s share of positive net absorption of 58,275 square feet. Overall vacancy rates have declined slightly to 22.7% this quarter compared to last quarter when vacancy was reported at 23.3%. Rental rates continue to zig-zag from Q2 2010 when rates were reported at $20.25 and then down to $19.78 in Q1 2011 and now back up to $20.33 in Q2 2011.
The Radnor/Conshohocken submarket continues to report positive leasing activity at the midyear mark of 2011 with 39,200 square feet and a year-to-date positive net absorption of 75,550 square feet, the second largest year-to-date positive absorption in the suburban submarkets. This compares to a year ago when the Radnor/Conshohocken submarket was reporting quarterly negative net absorption of 41,480 and a year-to-date negative net absorption of 23,280 square feet. Total vacancy continues to improve when compared to a year ago when vacancy rates were reported at 18.7%, and last quarter reported 15.2% with midyear 2011 even lower at 14.4%. Some of the more notable leasing activity in the Radnor/Conshohocken market included: 1100 E. Hector Street leased 21,100 square feet to a few small tenants offset by Brandywine putting 11,200 square feet of their office space back into the market at 150 Radnor Chester Road. Rental rates increased to $27.90 compared to a year ago when rates were $27.55 and last quarter when rates were reported at $27.49.
The Main Line (excluding Radnor) shifted from negative net absorption in Q1 2011 (39,990) to positive territory at the midyear mark of 2011 reporting 19,000 square feet, with all of the positive absorption occurring in the Class A category with 21,600 square feet. Contributing to the positive absorption is 40 Morris Avenue reporting 20,100 square feet due to an expansion by Wells Fargo. The overall vacancy rate for the Main Line is one of the lowest in the region, reporting 15.4%. Vacancy rates for Q2 2010 were reported at 15.1% and last quarter reported a vacancy rate of 18.3% demonstrating that although the market is showing signs of improvement, instability is still evident. The same holds true for asking rents… Q2 2011 reported an asking rate of $21.04, Q1 2011 was $18.45, and midyear 2011 reports an asking rate of $23.57. We will continue to monitor the movement of the vacancy and rates over the next several quarters for developing trends.
The four submarkets that reported the largest 2Q 2011 negative net absorption were Plymouth Meeting/Blue Bell with negative 78,300 square feet (64,300 square feet at 480 Norristown Road), Bala Cynwyd with negative 43,700 square feet (43,300 square feet at the GSB building at One Belmont Avenue), and Horsham with negative 40,300 square feet (which was a combination of multiple buildings primarily in Single Story and Class A).
The Northern Delaware office market closes midyear 2011 with a quarterly positive net absorption of 4,800 square feet, which was the least across all of the Greater Philadelphia submarkets, and a year-to-date negative absorption of 60,200 square feet. This follows Q1 2011’s negative net absorption of 65,000 square feet and Q2 2010’s year-to-date negative net absorption of 154,900 square feet. Total vacancy rates closed out midyear 2011 18.6% compared to Q1 2011’s 18.7% and Q2 2010’s 19.7%. Rental rates appear to be on the road to recovery with Q2 2011’s rental rate at $21.97 compared to Q1 2011’s $20.59 and Q2 2010’s $19.97.
Wilmington’s CBD faces two major challenges… First, M&T Bank’s acquisition of Wilmington Trust could lead to the potential disposition of over 100,000 square feet of class A office space as it displaces over 700 people by 2012. Second, Capital One announced its acquisition of ING DIRECT in mid-June and while press releases have indicated that ING DIRECT will use the ING DIRECT trademark for a transitional year, there is no clarity surrounding the fate of Wilmington’s 1,200 employees. ING DIRECT has close to 400,000 square feet of office space in 5 different Wilmington CBD buildings.
Fortunately Wilmington’s CBD experienced solid leasing activity during 2Q 2011 when Grant & Eisenhofer decided to stay in the CBD by leasing 35,000 square feet at the Star Building located at 123 S. Justison Street, Richards Layton & Finger renewing at One Rodney Square for 6 floors and Morris Nichols renewing for 80,000 square feet at 1201 N. Market Street. Citi is rumored to be leasing two floors of the Brandywine Building in the fourth quarter 2011.
New Castle County (NCC) North, West and South has reported varying statistical data over the past year in both positive and negative territory. NCC North, which reported 2010 midyear negative net absorption of 124,700 square feet, reported a positive 5,700 square feet for the quarter, NCC South experienced a 2010 year-to-date positive net absorption of 227,800 square feet, which has declined to negative net absorption of 7,900 square feet at the close of Q1 2011 and continued to decline bringing Q2 2011 year to date negative net absorption to be 18,400 square feet. NCC West did not experience similar swings in trends, rather demonstrated a consistent negative net absorption in year-over-year and last quarter. Q2 2010 year-to-date absorption for NCC West was reported at a negative net absorption of 42,500 square feet, Q1 2011 was a negative 29,300 and year-to-date Q2 2011 reported a negative net absorption of 114,800 square feet, bringing the 2011 year-to-date negative net absorption to 144,100 square feet.
New Castle County North is currently the most active submarket in Delaware’s suburbs. CIGNA will consolidate out of 100,000 square feet in two buildings at the Brandywine Corporate Center into one 90,000 square foot building at Bellevue Park Corporate Center by summer’s end. It appears that WSFS is poised to take up some of the slack by moving its operations center from Philadelphia Pike to the Brandywine Corporate Center. Citi’s move into the CBD noted above will result in Citi vacating 80,000 square feet at 4500 New Linden Hill Road in New Castle County West.
Southern New Jersey
The Southern New Jersey office market reported a 2Q 2011 positive quarterly net absorption of 55,700 square feet, with a year-to-date positive net absorption of 137,700, all of which occurred in the 3M Submarket. This is a significant increase from midyear 2010’s year-to-date negative absorption of 199,800 square feet. Midyear 2011’s overall vacancy decreased to 20.9% a full percentage point less than Q1 2011, and a mere 0.3% higher than the 20.6% reported midyear 2010. Rental rates in the Southern New Jersey commercial office market at midyear 2011 took a slight turn for the better increasing to $15.27, up from $15.16 in Q1 2011, however more than $2.00 less than the rental rate of $17.70 that was quoted midyear 2010. An interesting trend that we’ve been monitoring over the past few quarters, and continues to be more prevalent in Southern New Jersey more than any other market in the Greater Philadelphia region, is that Class A rental rates are being reported lower than Class B, which is something that is rarely seen. The reason for this anomaly is that more landlords are quoting triple-net rates rather than full-service rates whereby skewing the numbers and making the rental rates in Southern New Jersey appear lower than the rest of the Greater Philadelphia region.
Notable Southern New Jersey movement includes: Lockheed Martin leaving 52,785 square feet at 232 Strawbridge Drive and moving into 66,870 square feet at 11000-13000 Midlantic Drive; PHH signing a lease for 36,750 square feet at 2000 Midlandic Drive, and Allstate vacating 25,660 square feet at 224 Strawbridge Drive.
In closing, although signs of a weak economy are still apparent in many submarkets throughout the region, there are submarkets that have begun to rebound. With every passing quarter transactions that have been in the pipeline for extended periods of time are getting closer to completion, blend and extend transactions continue to occur, and lease renewals are executed, which are all signs that the commercial real estate market is in modest rebound mode…A trend that we expect to continue in the upcoming quarters.
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