Newmark Knight Frank (NKF) released its third-quarter 2018 office reports for the greater Philadelphia region. The reports show that the market continued to be very active during the quarter, with all four markets experiencing positive occupancy gains. The Philadelphia CBD led the way with the largest absorption for the second straight quarter, experiencing a noteworthy reduction in vacancy. The Southeastern Pennsylvania submarkets remained healthy and active, with vacancy continuing to decrease over the past six quarters. Vacancy in the Southern New Jersey market decreased, while the Delaware market stayed flat despite some small occupancy gains.
The Philadelphia CBD posted 416,354 square feet of positive absorption based on a mix of medium to large tenant moves. Several existing CBD users announced decisions to relocate within the market. Macquarie Group will move from 150,000 square feet at One Commerce Square to 140,000 square feet at One Hundred Independence, while Reliance Standard Insurance Company will relocate from 140,000 square feet at Two Commerce Square to 152,000 square feet at 1700 Market Street. Entercom Communications committed to move its headquarter from the suburbs to Philadelphia. Sid Smith, NKF executive managing director, had this to say about the market activity, “Demand remained strong despite near-record high asking rates for Class A spaces, underscoring the CBD’s growth into a preferred destination for office tenants.”
Quarter-over-quarter, the overall average direct asking rental rate in the CBD increased by $0.61 to $32.73 per square foot. Class A average asking rents grew by $0.90 to $35.64 per square foot. Rising costs for construction and space fit-out have continued to push rents higher, as the standard tenant improvement allowance offered by landlords is no longer sufficient to cover all the fit-out costs. While well-funded tenants can pay the different out-of-pocket, these higher construction costs have forced other tenants to ask the landlord to absorb the expense in return for higher rent or make use of the previous occupants’ existing space conditions.
Southeastern Pennsylvania recorded 97,619 square feet of positive absorption for the third quarter of 2018, driving the year-to-date total to 678,943 square feet. Overall vacancy decreased 20 basis points quarter-over-quarter to 13.9 percent. After selling their former 238,000 square foot headquarters at 1 Crown Way in 2017, Crown Holdings relocated from Philadelphia to 50,000 square feet at 770 Township Line Road in Bucks County, while Versalus occupied 25,287 square feet at Newtown Square Corporate Campus in the Central/South Delaware County submarket. In Blue Bell/Plymouth Meeting, Avenue 365 Lender Services occupied 12,770 square feet at 401 Plymouth Road after expanding within the building. In King of Prussia, American Baptist Home Mission Societies occupied 34,933 square feet at 1075 First Avenue.
On the construction front, AmerisourceBergen received board approval to move forward with leasing the 400,000-square-foot tower at the future SORA West Campus in Conshohocken. Keystone Crossing Centers I and II (a total of 80,000 square feet) will be demolished to make way for the new campus.
Demand for more amenities and higher quality properties have led Class A average direct asking rental rates to reach $30.00/SF in the third quarter. In addition, strong activity among Class B assets caused its average to climb $0.54 over the past 12 months to $24.92 per square foot. Said Jeff Mack, NKF executive managing director, “Premier office space with amenities is desirable to tenants hoping to attract younger working professionals. With little new space under construction, demand and the price for premium facilities will only continue to increase.”
Leasing velocity in the Southern New Jersey market remained steady over the summer, and office vacancy for the region declined 20 basis points to 15.2 percent. Occupancy losses of 29,183 square feet in Mount Laurel and 15,439 square feet in Moorestown were more than balanced out by occupancy gains in Marlton, Cherry Hill and Pennsauken/Camden, which posted a combined positive absorption of 86,305 square feet. In Camden, the absorption came from GoEmerchant occupying 8,234 square feet at 800 Cooper Street. Noted Anne Klein, NKF executive managing director, “The positive absorption in the market should prove helpful in advance of the substantial upcoming vacancies expected over the next 18 months as several companies relocate to Camden.”
Two major investment sales transpired during the third quarter of 2018. The 88,785-square-foot 50 Lake Center Executive Park in Marlton sold for $5.95 million, or $67 per square foot, with Auction Properties, LLC purchasing it from 50 Lake Center Executive Park Holdings. Laurel Oak Holdings purchased a 50,896-square-foot building at 400 Laurel Oak Road in the Voorhees Corporate Center for $5.53 million from LSREF4 Rebound, LLC. Newmark Knight Frank represented both sellers.
The office market in Delaware is in an interesting position. The overall vacancy rate in the market remained flat at 14.3 percent, with the Wilmington CBD staying at 15.8 percent. However, the long-anticipated sale of Bracebridge I and Bracebridge III took place, and the buildings are poised to add 450,624 square feet of vacancy once Bank of America leaves their space. With Capital One’s upcoming departure from their 145,080-square-foot space of its 291,645 SF at M&T’s Wilmington Plaza, these two vacancies will cause the Class A vacancy in the CBD to spike to more than 27.0 percent. NKF Senior Managing Director, Wills Elliman, acknowledged that the vacancy would be difficult for the market, but that “with the relatively low purchase price of $13.5 million ($29.96 per square foot), the new Bracebridge owner will be well positioned to be aggressive with rental rates to attract new tenants to the CBD.”
With the CBD struggling, most of the market activity was concentrated in the suburbs — in Wilmington South, the Okonite Company and Delivery Circle occupied sublease space totaling 3,622 square feet and 3,082 square feet, respectively, at 111 Continental Drive. In Wilmington West, Cover & Rossiter occupied 10,348 square feet at 2711 Centerville Road.
The Delaware market’s average direct asking rental rate increased by $0.06 per square foot quarter-over-quarter, to $24.95 per square foot, sustaining a run of high market rates. Rents over the past year have been the highest in over10 years, with $25.17 per square foot in the first quarter of 2018 as the high-water mark.
About Newmark Knight Frank
Newmark Knight Frank, operated by Newmark Group, Inc. (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. Newmark Group is a publicly traded subsidiary of BGC Partners, Inc. (NASDAQ: BGCP), a leading global brokerage company servicing the financial and real estate markets.
