Newmark Knight Frank (NKF) has released its first quarter 2020 office reports for the Philadelphia CBD, suburbs, Southern New Jersey and Northern Delaware. The global COVID-19 pandemic did not begin to cause significant economic disruption in the region until mid-March; therefore, first quarter statistics will not be fully reflective of the current moment in the commercial real estate sector. Yet, first quarter activity reinforced a market-wide position of strength, on which the region will stand to weather the stall in business.
Philadelphia’s Central Business District (CBD) continued its strong late-cycle performance with 137,000 square feet of positive absorption tallied in the first quarter, trimming vacancy down to 12.4 percent. Maintaining a prevalent trend over the past few years, the CBD welcomed over 100,000 square feet of new-to-market companies, including Mindspace, a coworking operator which signed for 42,000 square feet at The Wanamaker. NKF Managing Director Matt Guerrieri noted, “When the economy re-opens, firms in expensive gateway markets may look closer at Philadelphia as a talent-rich, affordable office market option for operational diversification or relocation.”
A new office development, One Ucity Square, officially broke ground in January, with preleasing commitments from two life sciences firms (Century Therapeutics and Integral Molecular). Life sciences and healthcare companies are ever more essential in this moment of pandemic-induced economic crisis, and the CBD’s concentration of firms in these sectors, both in terms of employment and office occupancy, may mitigate disruptive effects to the office market.
In the suburban Philadelphia office market, 395,000 square feet of negative absorption accumulated in the first quarter due to multiple significant retractions and limited new occupancies of space. This activity pushed vacancy up 70 basis points year-over-year to 14.7 percent, the highest measure recorded for the suburban market since year-end 2017. Among the largest retractions were Teva’s vacancy of the 120,290-square-foot building at 425 Privet Lane in Horsham, Hibu/Yellow Book’s 60,000-square-foot downsizing at 2201 Renaissance Boulevard in King of Prussia, and SEI and Main Line Health’s vacancy of a combined 90,000 square feet at 52 East Swedesford Road in Malvern. 52 East Swedesford Road also traded hands in the first quarter; Brandywine Realty Trust sold the property for $18 million or $137/SF to Tripoint Properties. This was one of the only notable capital markets sales to close in the suburban region in the first three months of the year; overall sales volume was nearly half the amount tallied in the fourth quarter of 2019. According to Mike Margolis, NKF Senior Managing Director, the current economic situation will inevitably exacerbate the slowdown of local transaction volume, but there may be some real avenues for opportunity in the future. “When capital markets activity resumes in full, single-tenant, net-lease office buildings in our region are likely to attract even stronger investor interest due to the stability of the asset type,” he said. Margolis also noted that he expects to see increases in sale-leasebacks in the future as owner-occupiers look for ways to generate cash flow.
The Southern New Jersey office market registered positive net absorption totaling 51,859 square feet in the first quarter, driven primarily by Camden County and Jefferson Health occupying a combined 92,443 square feet of the space formerly occupied by American Water at 101 Woodcrest Drive. Overall rents continued to push upward to $20.85/SF, the highest rents achieved since the second quarter of 2018. While demand for office space was healthy before the effects of the global pandemic began to be felt, not just in Southern New Jersey but market-wide, overall asking rents have likely peaked and are expected to gradually decrease in the upcoming quarters.
For the Wilmington, Delaware office market, absorption in the first quarter measured the largest quarterly gain in more than a decade, over 400,000 square feet. Christiana Care Health System and Solenis’ significant occupancies at Avenue North, a redevelopment of AstraZeneca’s former campus in the Wilmington suburbs, primarily drove the growth. Suburban development and redevelopment announcements made in the first quarter included Marlette Funding signing a lease for a 60,000-square-foot build-to-suit at The Concord, BPG Group’s mixed-use reimagining of the former Concord Plaza. Delle Donne & Associates, the developer behind Avenue North, announced it would purchase a portion of DuPont’s Chestnut Run Labs campus and work with DuPont to redevelop and transform the space into a mixed-use environment. In the short-term, developers may pause on projects to see if office occupiers start to shed large amounts of space due to the ongoing economic disruption, but in the longer term, demonstrated tenant interest in these types of projects will lead developers to continue the established trend of repositioning assets through enhancement of further aesthetic appeal.
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 18,000 professionals operate from approximately 480 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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