'Static Is Positive': Center City Office Sector Stays Flat After Pandemic-Era Swings
Five years after the pandemic hollowed out Center City’s commuter population nearly overnight, the neighborhood’s office market has settled into a new normal.
Last quarter, direct asking rents in the central business district increased 0.9% from the prior quarter to $36.17, and the vacancy rate fell 30 basis points to 20.4%, according to JLL’s Q2 report for the neighborhood’s office market.
“It was just a pretty status quo quarter,” JLL Philadelphia Research Manager Emily Friedman said. “Static is positive in the face of a lot of larger negative swings. … No news is good news.”
The CBD experienced positive net absorption of 16K SF last quarter, after recording negative net absorption of roughly 900K SF in the first quarter, according to JLL.
Major transactions included full-floor renewals from Hogan Lovells and Stantec and new deals inked by Kirkland & Ellis at One Commerce Square and Bentley Systems at The Curtis. Market West accounted for nearly 87% of all leasing volume in the CBD.
Asking rents in Philly never fell drastically, even during the height of the pandemic, but last quarter's modest growth pales in comparison to the spread between Q4 2015 and Q1 2016, when JLL found that asking rents in the CBD increased by 5.5%.
Rising asking rents aren't a pure windfall for landlords, Friedman said.
As downsizing and the flight to quality contribute to reshuffling in a competitive Philly office market, owners have expanded tenant improvement budgets to reel in companies.
For five-year-plus leases of 10K SF or more, TI budgets were 4.7% higher between 2021 and the present than they were between 2018 and 2020, according to JLL.
More than 1M SF of Center City office space has been removed from the market to date this year, JLL found, a trend that is having a big impact on the sector.
“It’s a huge part of the reason vacancy rates have been stable,” Friedman said. “If we were looking at vacancy as it applies only to leasing, we would be struggling a lot more.”
Philadelphia was an early adopter of the residential conversion trend, which means many of the easiest candidates have already been renovated. But developers aren't shying away from challenging projects.
“There’s sort of a renewed creativity,” Friedman said. “These buildings were not first picks to become residential, because they have difficult floor plates.”
She highlighted Alterra Property Group's redevelopment of the hulking office building at 1701 Market St. into a 299-unit apartment complex.
The firm is now collaborating with TF Cornerstone on its plans for the Wanamaker Building, slated to bring 621 new units to Market East.
That project and PMC Group's Three Parkway have a strategy that is rare among repurposed office buildings.
“They’re purposefully converting the floors that are vacant but are keeping the office that’s occupied,” Friedman said.
Preserving the occupied office space leads to less of a drag on the neighborhood's vacancy rate.
Friedman said she believes more large-floor-plate buildings could be converted to residential as sale prices for Class-B and C assets continue to fall amid disproportionately high vacancy in that sector.
CORRECTION, OCT. 6, 4:54 P.M. ET: A previous version of this story included incorrect context about the office space taken off the market in Philadelphia. It has since been updated.
