The Greater Philadelphia commercial real estate market was remarkably quiet in the third quarter of 2011, remaining nearly flat quarter-over-quarter. The overall market posted a modest overall positive absorption of approximately 83,000 square feet, with the bulk of this uptick in activity coming from the Suburban Philadelphia submarket. Total vacant space on the market inched lower to 24,109,200, down from 24,192,000 last quarter, while the average asking rate dipped slightly under $21 this quarter. Year-to-date the market has far exceeded its performance in 2010: the year’s absorption stands at more than 736,000 square feet, whereas at this point in 2010 the market was down almost 600,000 square feet. Thus, although vacancy rates remain similar to those seen in 2Q 2010, the large losses in absorption that were occurring this time last year are no longer happening. And although new leases were not plentiful this summer, the market saw a reasonable amount of activity as both the Philadelphia CBD and several Philadelphia Suburban markets participated in a game of musical chairs with tenants moving between buildings within the same submarket.
Philadelphia CBD
The Philadelphia CBD remained flat quarter-over-quarter, experiencing only a negligible drop in absorption of about 38,000 square feet. The vacancy rate remains virtually unchanged at 12.8% for direct space compared to 12.4% at the close of the second quarter, and year-to-date absorption hovers at approximately 178,000 square feet.
Although there was no growth in the CBD during the third quarter of 2011, there was some leasing activity, as tenants repositioned, moving to different buildings within the same submarkets, or renewing within their locations. There was a flurry of activity in Market West, with the biggest change coming as Janney Montgomery Scott LLC prepares to leave its old offices at Ten Penn Center (1801 Market Street) for its new 147,000 square foot space at Three Logan Square (1717 Arch Street). Elsewhere in Market West, sublet space reported 137,600 square feet of positive absorption due in part to sublet leasing at the Cira Centre and Two Liberty. Other notable activity includes Reliance renewing their 40,000 square feet at Three Parkway (1601 Cherry Street) and Conrad O’Brien leaving 1515 Market this fall for its new 44,000 square foot space at Centre Square (1500 Market Street). Additionally, 2000 Market experienced positive absorption this quarter as Hamburg Sud moved into its 22,000 square foot space. The Market West submarket overall experienced a positive absorption of almost 97,000 square feet and of the three Philadelphia CBD submarkets, continues to maintain the lowest vacancy rate, currently at 12.3% for direct space.
The Market East submarket was also quiet this quarter, as the only significant change in absorption was a large block of space becoming available at 801 Market Street. The direct vacancy rate for the quarter was 15% up from 13.9% last quarter and 12.2% this time last year. The Chestnut/Walnut submarket remained similarly unchanged quarter-over-quarter with only a 6,000 drop in absorption in the third quarter. Year-to-date the submarket has posted a net absorption of 55,320 square feet and the direct vacancy holds steady at 17.7%.
Suburban Philadelphia
Overall the Suburban Philadelphia market experienced about 124,000 square feet of positive absorption in Q3 2011, although absorption was mixed across the individual submarkets. Currently there is about 10.6 million square feet of direct space available for lease, at an average asking rate of about $22, down about 1% from Q2 2011. Direct vacancy hovers at 18.7% across the submarket overall, down slightly from 18.9% in the second quarter and down from 19.2% a year ago. On the positive side, year-to-date absorption is almost 487,000 square feet, whereas at this time last year absorption was down 127,000 square feet. Submarkets with the largest positive absorption numbers this quarter were Delaware County with 113,000 square feet, where Christiana Care Health System purchased 161 Wilmington West Chester Pike, accounting for 72,000 square feet of absorption, and the Conshohocken/Radnor submarket with 100,500 square feet, which saw the completion of some larger renewals and new lease transactions.
Delaware County submarket experienced more positive absorption this quarter in addition to the aforementioned Christiana Care transaction, as a subsidiary of Merck and an architectural firm took 27,000 square feet of space at One International Plaza. As such, the Class A vacancy rate for the submarket is under 8% and Class A asking rate is up to $24.53, largely due to the 72,000 square feet at the aforementioned property, which had been listed in Q2 2011 at $17 NNN, and caused a dip in the rate last quarter overall. Meanwhile, One Media Plaza at 1023 E. Baltimore Pike is transforming from Class B to Class A space as renovations by architect Thomas E. Hall & Associates, Inc. are being completed this quarter.
The Conshohocken/Radnor submarket garnered over 100,000 square feet in positive absorption this quarter and the submarket continues to have the lowest overall direct vacancy rate of all the suburban submarkets - 10.5%, or about 40% lower than the overall Suburban submarket. Academy in Manayunk entered into a long-term lease at River Park 2 for almost 64,000 square feet and Monetate moved into its new 20,000 square feet space at Quaker Park (1001 E. Hector Street). Elsewhere in Conshohocken, tenants played musical chairs this quarter, as Oliver Tyrone Pulver moved to Two Tower Bridge from Five Tower Bridge. Cushman & Wakefield also made the move to Two Tower from Eight Tower. Adding another tower to the mix, Tower Bridge Advisors left Four Tower and went into 101 West Elm. The Elm Street properties are almost entirely leased; between this and the fact that there is little space left in Class A within Radnor, the rest of the Conshohocken market is hoping to see a spill-over effect.
The Plymouth Meeting/Blue Bell submarket was also permeated with shifting space, as tenants swapped locations within the submarket. McDonald’s left Citizen’s Gateway Center (3025 Chemical Road) for its new space at Arborcrest, which is nearing construction completion and a new addition of 114,000 square feet to these statistics this quarter. Fesnak & Associates, LLP signed a new lease for almost 18,000 square feet at Dublin Hall, staying within the Sentry Parkway West campus. The submarket also experienced true new absorption this quarter with LarsonAllen LLP taking 29,000 square feet at 610 West Germantown Pike and HighPoint Solutions, LLC and Zenith Insurance Company signing for 14,000 and 11,000 square feet respectively at Bentwood Executive Campus (301 E. Germantown). Meanwhile J&B Software downsized its space at Blue Bell Plaza (510 Township Line Road). Because of the additional remaining space at Arborcrest hitting the submarket this quarter, Plymouth Meeting/Blue Bell reported negative absorption of 103,000 square feet this quarter and its direct vacancy rate now stands at 26%.
The King of Prussia submarket experienced a negative absorption of more than 132,000 square feet overall which is a sharp reversal from Q2 2011’s positive absorption of 113,000 square feet. This is due largely to the new marketing of the Valley Forge Office Center at 530 and 580 E. Swedesford Road. Blue Cross is no longer occupying its offices at 580 E. Swedesford and GE is marketing a portion of its space at 530 E. Swedesford for sublease, which collectively contributes 128,000 square feet to the direct vacancy. Other losses in Class A included Centocor’s downsizing at 955 Chesterbrook and Morgan Stanley’s space at Glenhardie Three. Additionally, Southpoint Two is now marketing Davita’s space, as the tenant prepares to move to its new location in Great Valley. Consequently, the submarket’s vacancy rate was up a percentage point to 17.8% for direct space in Q3 2011. Average asking rate was up quarter-over-quarter to $21.70, due mostly to rate tinkering in single story rates. Meanwhile, King of Prussia single story’s vacancy rate is down almost 20% quarter-over-quarter, as Delaware Valley Surgical took 36,000 square feet of space at Renaissance Park (3400 Horizon Drive).
Nearby, the Main Line submarket made some modest gains this quarter as Keller Williams moved into its new space at Two Devon Square. That smaller submarket is at a 14% direct vacancy rate, which is the second lowest in the suburbs, and average asking rate hovers steady at about $23.20 per square feet. Similarly, the Jenkintown submarket remains virtually unchanged quarter-over-quarter. Overall vacancy rate for the submarket is 15.8%, although the Class A rate is hovering at 9.0%.
The Horsham submarket posted positive absorption of about 66,500 square feet this quarter, buoyed by Comcast’s 50,000 square foot lease at 700 Dresher Road and QC Labs 25,000 square foot lease at 702 Electronic Drive. Overall vacancy rate in the submarket is hovering at 20%.
Central Bucks posted a negative absorption of approximately 60,000 square feet this quarter, as the full building sublease at 100 Brandywine is now being reported as available. Part of that vacancy was tempered as Waste Management leased the entire third floor earlier this quarter. Additionally, in single story, Performance Spine & Sports Medicine took 9,600 square feet at 826 Newtown Yardley Road. The direct vacancy rate in Central Bucks is 17.6% for the third quarter, up from 15.2% last quarter.
Lower Bucks remained flat quarter-over-quarter, as the negative absorption of 56,900 square feet in Class A and B properties negated the positive absorption of 51,400 that single story posted. Vacancy rates hover between 23-24% and the average asking rate remains unchanged at $21.41. The market experienced limited activity last quarter outside of ITT’s new 28,000 square foot lease at I-95 Technology Center (311 New Rodgers Road).
The Fort Washington submarket also remained quiet outside of the 25,000 square foot expansion of Research Pharmaceutical Services into 475 Virginia Drive. Both the direct vacancy rate and average asking rent dropped slightly quarter-over-quarter and now stand at 19.6% and $19.57 respectively.
The Bala Cynwyd submarket was also flat this quarter, with a negligible downturn in absorption. The direct vacancy rate for the quarter was 17%. Three Bala Plaza East’s new tenant, Marcum LLP is moving into its new 25,230 square foot space in November, leaving its long-time home within the submarket at 401 City Avenue. Marcum took the bulk of the old Verizon space in the building.
The North Penn submarket had a vacancy rate of almost 36% for the quarter, as almost 330,000 square feet remain on the market and Q3 2011 activity was nominal. Though it appears as if the average asking rent per square foot dropped dramatically in Q3 in the submarket, this drop is artificial, as the 132,000 square foot vacancy at CentrePointe (2060 Detwiler Road) was changed from a plus electric rate to NNN.
The Malvern/Exton/West Chester submarket saw more than 70,000 square feet in positive absorption this quarter with a small dip in vacancy to 19.5%, a vast improvement over this quarter last year wherein the submarket was down 53,500 square feet and almost 310,000 square feet for the year overall. IBM, which had been subleasing at 1 Glenloch Corporate Center (1475 Phoenixville Pike) did a direct deal, contributing to that building’s 33,500 positive absorption, while Siemens renewed for 11,600 square feet at 20 Valley Stream Parkway this quarter.
Northern Delaware
The overall Northern Delaware market also remained flat in the third quarter of 2011. The market appears to be standing by while it waits to see what impact the major changes happening in the banking industry has on Wilmington and the surrounding area. As reported in September, Bank of America will be shedding another 30,000 jobs and those layoffs could possibly include cuts in Wilmington and Newark. Other recent bank acquisitions will also impact space on the market, and it appears most tenants are consequently not making significant moves in 2011. That said, the market posted a modest gain in absorption for the quarter of about 34,000 square feet, which occurred exclusively in the New Castle County Class A submarket. Total vacancy rates remain nearly unchanged from last quarter and are still hovering around 18.5% overall. Average asking rate also remained flat quarter-over-quarter and remains at $21.96.
The Wilmington CBD experienced a slight drop in absorption this quarter, with an additional 16,000 square feet jettisoned back on the market. Total vacancy rates still hover around 20%, and average asking rent remains nearly unchanged quarter-over-quarter, holding steady at $22.37. As announced in August, Liberty Life Insurance moved its Kansas City office to Wilmington, taking 6,000 square feet at 500 Delaware Avenue. Other submarket activity included a move by HSBC from its offices at 1201 N. Market Street to 300 Delaware Avenue.
Elsewhere in Delaware, the New Castle County submarket reported modest gains in absorption, with the direct vacancy rate dropping to 15.6% from 15.9% in Q2 2011, with a negligible decrease in asking price to $21.70 overall. There was little leasing activity in North New Castle County this quarter; it continues to have the highest vacancy rate (20.5% direct, 21.1% including sublease availabilities) of the three New Castle markets. Meanwhile, West New Castle County remains the heartiest of the New Castle submarkets, posting positive absorption of almost 27,000 square feet this quarter. The direct vacancy rate therein is now just 8.5% and its asking rate remains strong at $25.88. The E.A. Delle Donne Corporate Center (1013 Centre Road) had some leasing activity with several smaller tenants this quarter, as did Linden Park (4550 New Linden Hill Road) with its new benefits administration tenant on the third floor. Finally, the South New Castle submarket netted a positive absorption of almost 9,000 square feet, mostly from small tenancy changes across A and B class buildings, including a new dialysis tenant at the Fox Run Business Center located at 2520 Wrangle Hill Road.
Southern New Jersey
Direct vacancy rates increased slightly to 20% in Southern New Jersey this quarter, as the market saw much of the gains in absorption from last quarter erased in Q3 2011. The market posted a negative absorption of about 37,000 square feet, with losses in both the Camden and 3M submarkets, while average asking rates for the market overall dropped 2.5% quarter-over-quarter ending at $14.90 at the close of Q3.
Camden County’s vacancy rate of 25.4% was consistent across Class A, B and single-story properties in Q3. Class A rates are largely being quoted as triple net whereas Class B space is typically being quoted as gross plus electric, which explains the illusory Class B premium ($18.98 average asking rate for Class B as opposed to $12.65 for Class A). A handful of small transactions were inked in a few Camden buildings this quarter, including those with Sony and Magellan Hill at Laurel Oak Corporate Center, while a law firm is reportedly leaving 10 Melrose Avenue later this fall.
The 3M submarket overall experienced approximately 24,000 square feet of negative absorption, although within the submarket, both Class A and B space posted gains of 20,000 and 10,000 square feet respectively. Asking rates in the submarket are down slightly from $14.09 last quarter to $13.67 and the direct vacancy rate is up slightly to 17.3% from 16.9% in Q2 2011. Single-story space in 3M was down almost 54,000 square feet, most of which is attributable to Panasonic’s leaving its space at 5000 Dearborn Circle. In Class A, 5 Greentree saw positive absorption of about 11,000 square feet as Resolution Management did a direct deal with the landlord after the expiration of its sublease. The building’s neighbor, 3 Greentree, was recently purchased by the Rothman Institute, which reportedly will use about half the 70,000 square feet of space for its practice and lease the remaining half. In Mt. Laurel, QAD, Inc. downsized its space at Laurel Corporate Center as did Ulticom at 1020 Briggs Road.
In summary, although genuinely new leasing activity still remains sparse across the market, there are signs of optimism. In the third quarter of 2011, it seems as though tenants were comfortable enough with the business environment to invest in making some significant moves, although largely within their current respective submarkets. We hope that in the coming quarters, comfort levels continue to improve, encouraging tenants to maintain existing space levels, or expand, and efforts to attract new users to the greater Philadelphia region gain momentum and are ultimately successful.
About Newmark Smith Mack
Newmark Smith Mack is partners with Newmark, one of the largest independent real estate service firms in the world. Our local presence in Center City Philadelphia, Suburban Philadelphia, Wilmington, Delaware and Southern New Jersey, has secured us a leading position in the Greater Philadelphia region’s commercial real estate market for over 27 years through our commitment to service excellence. With multi-disciplined competency in Tenant Brokerage, Ownership Representation, Investment Sales, Corporate Advisory Services, Property Management, Market Research and Lease Administration, Newmark Smith Mack discovers, develops, and implements full service solutions. For complete information on NewmarkSM, visit www.NewmarkKFSM.com
About Newmark
Newmark is one of the largest independent real estate service firms in the world. Headquartered in New York, Newmark and London-based partner Knight Frank operate from more than 240 offices in established and emerging property markets on five continents. With a combined staff of more than 7,000 and revenues last year exceeding $993 million, this major force in real estate is meeting the local and global needs of tenants, owners, investors and developers worldwide. For further information, visit www.newmarkkf.com.