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Confirming what most already knew, office rents rose in Philadelphia in 2016, but with a surprising twist.
Concessions in office rose by 6%, despite total rent increasing by 3.4% and net rent (total rent minus operating expenses) increasing by 4.2%, according to a study by Savills Studley. The concessions increase may seem contradictory at first glance, but nearly all of the bump came from an increase in tenant improvement allowances.
Though rents continue to rise in the short term, the dual trends of office tenants shrinking their footprints and the incoming delivery of more product mean that there very well could be a downturn on the horizon. Adding concessions before rents flatten is a defense against such a future, according to Savills Studley executive vice president and Philly manager Greg Soffian.
"These landlords may have included more concessions (tenant improvement allowance and free rent) in their pro forma when they purchased their buildings, and offering these concessions can make tenants more willing to sign longer-term leases," Soffian said. "With higher rents on the books, landlords can make a larger return when they refinance, recapitalize or sell their properties down the road.”
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