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Philadelphia Office Leasing Remained Steady In Q2, And The Fundamentals Aren't Changing

Philadelphia’s office leasing activity has reached stasis, a sign that owners will need to begin making hard decisions about the future of their properties, according to a pair of second-quarter reports released late last week.

1701 Market St. in Center City, seen in October 2021.

The city saw about 1.8M SF of office leasing activity as of midyear, slightly more than the tally at the same time last year, Savills said in its Q2 findings. The firm reported a 24.8% vacancy rate for Greater Philadelphia between April and June.

CBRE's report showed about 500K SF of office leasing activity in Philadelphia in Q2, similar to the last three quarters. It reported vacancy rates of 22.7% in Q2, up slightly from 22.1% in Q2 of last year.

Coming in par for the course suggests conditions haven't worsened for the beleaguered office market, Daniela Stundel, a research manager at Savills, told Bisnow. But they aren't improving, either.

“What you’re going to see, most likely, is just everything remaining status quo, with [those] leasing focusing on optimizing space,” Stundel said, adding that firms like Dilworth Paxson and Saul Ewing are relocating to new offices that are about 30% to 40% smaller than their prior leases at the troubled Centre Square building. 

Leasing levels at offices are still well below prepandemic averages, according to CBRE's report, which says average lease sizes remain at 85% of 2019 levels.

There are still more than 23M SF of leases expiring within the decade, the bulk of them signed well before interest rates spiked. 

Return-to-work mandates haven't made much of a dent so far. Stundel said that although the city of Philadelphia has called workers back to the office five days a week by July 15, a union is suing to stop that action.

“Hybrid is not going anywhere right now,” Stundel said.

“Tenants are taking much nicer space than what they had before ... an A-minus building to a trophy property, while taking less hoteling or permanent offices than they did prior.” 

Since the pandemic, downtown has experienced a slower vacancy recovery story than top areas like University City or King of Prussia. Center City Philadelphia stood at 23.4% vacant, thanks to 330K SF of negative net absorption in Q2, CBRE reported.

There are some positive signs in the reports, including notes of hope vacancy could go down due to the redevelopment of up to four major Center City buildings. The planned redevelopment of 1701 Market St. and Three Parkway, as well as a partnership between Lubert-Adler and Keystone Development to take on potential redevelopment of 400 Market and the Bourse, could remove some space from the market in coming quarters, CBRE reported.

The metro's overall rent trajectory is also on the rise. The average office rent in Philadelphia is $32.19 per SF, up 2.9%, though rents in the CBD dropped 1%, according to Savills.

Major firms making big moves stuck to the suburbs in Q2. Lockheed Martin signed a 120K SF renewal at 3 Executive Campus in Cherry Hill, New Jersey, according to CBRE. David's Bridal has relocated from its former headquarters in Conshohocken to 59K SF in King of Prussia at 630 Allendale Road, Savills said.

The outstanding question at the end of Q2 remained the fate of older, obsolete properties that can’t be converted to apartments, Stundel said.

“We're going to have to start thinking outside the box of uses in Philadelphia and in the United States, about maybe some self-storage, retail or other options,” she said.