Why You Shouldn't Worry About The Rise In Office Vacancy
As several research firms released their third-quarter reports on the Philadelphia office market over the past week or so, they showed the outlook in the central business districts to be overwhelmingly positive, even though vacancy has risen.
The biggest reason for the rise in vacancy is also one of the biggest reasons for optimism—the delivery of the FMC Tower and FMC's departure from its previous home. Aramark’s pending move to 2400 Market St will add vacancy when that becomes official as well.
The latter building is being renovated to include 300k SF of available office in addition to Aramark’s usage, as well as the space that Aramark is leaving behind at 1101 Market St and 100 Penn Square East.
The average asking rent price in Philadelphia is at its highest point ever—an average of $29.87/SF, according to Cushman & Wakefield—despite the increase in vacancy. Once again, it’s the new buildings causing it.
“Really that number is being driven by the new construction,” says JLL’s Lauren Gilchrist (below). “We haven’t had any amount of spec office space deliver [in the traditional CBD] since the first Cira Centre.”
All of that construction, after such a prolonged empty period, means there may be another gap before we see another serious influx of new office space. One Franklin Tower, to be built just north of Center City, is on the way, but beyond that it’s unclear if anything will deliver ahead of the massive Schuylkill Yards project.
“There are projects in the pipeline.” Lauren says. “It’s just a matter of people pausing for a moment, giving what’s coming into the market.”
The all-time high in rent has done nothing to deter businesses from leasing in Philadelphia, as net absorption remains strong overall. Negative absorption rates in areas such as Market West can be chalked up to businesses such as Aramark moving elsewhere in Center City.
All of these trends speak to the strength of the trophy and creative office markets in Philadelphia, but the gap between those buildings and unrenovated Class-A/commodity Class-B product is increasing, for obvious reasons. If a developer sinks money into renovating a building to bring it into the 21st century, they usually increase the rent accordingly.
“When you look at what’s actually usable, modern office space,” Lauren says, “there are a lot of spaces that are functionally obsolete…It’s getting harder to find a cheap leasing deal because of all the [renovation efforts].”
There are no indicators that such bifurcation has led to any underlying problems in the overall market. Though vacancy rose, the amount of positive absorption still made for a strong third quarter overall. We may not see a huge pileup of office construction like we have in multifamily—and that may be for the best—but the Philadelphia office market is healthy indeed.