'Wait-And-See Mode' Persists In Philly's Slow And Steady Office Market
The office market in Greater Philadelphia still has yet to thaw, but the city's slow-and-steady economics have once again insulated it from catastrophe.
Asking rents were virtually flat from the fourth quarter of 2020 to the first quarter this year as sublease availability continued to tick up, but not nearly to the extent that it is in New York or San Francisco, according to quarterly reports from Savills and JLL.
Overall vacancy also increased, but most of the direct vacancies were planned before the coronavirus pandemic hit.
Negative absorption and sublease availability were both greater in Philly's suburbs than its central business district, with 1M SF of sublease vacancy having been added to the suburban markets since the start of last year, JLL reports. As much discussion as the potential shift to a hub-and-spoke model with suburban outposts has drawn since the pandemic began, it remains pure speculation.
"There’s no data to suggest that there’s been a massive shift," JLL Senior Vice President and Research Director Lauren Gilchrist said. "Either it’s too early to tell or it’s not going to happen.”
Perhaps the most symbolically significant leasing deal in Greater Philadelphia's first quarter came in Center City, rather than the suburbs. SSH Real Estate had already secured commitments for some of the 155K SF that Wells Fargo officially vacated at 123 South Broad St. in Q1, but in March it announced the signing of New York-based Corporate Suites to a 15-year, 24K SF lease, bringing its occupancy up to 70%, the Philadelphia Business Journal reports.
The larger companies that were expected to adopt the hub-and-spoke model have not made any major leasing decisions to speak of in Greater Philadelphia, as the vast majority of both new vacancies and new leases came from smaller tenants.
Big decisions still look a year away from being made, Savills Research Manager Daniela Stundel said.
"Wait-and-see mode continues to drag on," Savills Vice Chairman and Philadelphia Branch Manager Greg Soffian told Bisnow. "For the most part, companies that I’m talking to generally have an open mind in terms of their office occupancy and what the future holds, except in the cases where they have lease expirations coming up.”
When office workers return in greater numbers, which is possibly still months away, there might indeed be demand for sublease space, since jobs paying more than $32 per hour didn't experience the same plunge as those with lower hourly wages generally associated with service or industrial jobs, JLL reports.
Smaller companies in "high-growth mode" and without heavy requirements for client meetings are the most likely candidates to sublease space, Gilchrist said.
With direct availability, some Philly landlords have decided not to wait for the office leasing market to restart. Instead, they have pivoted floors of office buildings to lab and manufacturing space for life sciences tenants who have grown impatient with the slow progress that University City and the Navy Yard's new construction is making.
Brandywine Realty Trust expects to deliver a life sciences incubator carved out of the Cira Centre office tower by the end of the year, Soffian said. Keystone Property Group has already converted part of the Curtis building to life sciences usage, both lab space and small-scale manufacturing, for immunotherapy company Imvax, and data center operator Netrality announced on April 1 that it will convert the fourth floor of 401 North Broad St. to life sciences usage for PCR testing company Biomeme.
The other space that Wells Fargo vacated in Q1, a five-floor block totaling 108K SF at One South Broad, is heading in the life sciences direction as well. Owner Aion Partners announced its intent to market the space as a lab conversion in late March.
All of the above buildings have floor plates of above-average size and have other structural elements necessary for life sciences usage, but there may not be enough of such buildings left for the trend to have real legs. Further complicating the issue is that the type of asset with the most unmet demand is biomanufacturing built to current Good Manufacturing Practices standard, which has requirements too onerous for office conversion and too specific for speculative development.
Still, it would be hard to blame any office landlord for trying to shoehorn lab space into whatever square footage they have at hand; life sciences demand is every bit as vibrant as office demand is dormant.
“We have lost tenants that were looking at the Philly market because there just wasn’t available lab space,” Gilchrist said. "For us to fully come into our own as a life sciences market, it will be very telling to see who we’re able to attract in the next two to three years."