Philly Office Construction Pipeline Hits Zero, Conversion Activity Slows

More than six years after the pandemic cratered demand for greater Philadelphia office space, the region’s construction pipeline has officially hit zero.

The delivery of Chubb’s long-awaited 438K SF build-to-suit space at 2000 Arch St. last quarter marked the completion of the only office project that was under construction in the region, according to JLL. The trend of converting office buildings into other uses — which has helped lower vacancy — has also tapered off. 

New office construction has stalled because starting a project today requires preleasing a big tenant that is willing to wait two to three years for it to deliver, JLL Philadelphia Research Manager Emily Friedman said.

“That’s been a really big hurdle when it comes to attracting out-of-market tenants,” she said. 

JLL's second-quarter report, released this week, found that vacancy in the central business district fell 50 basis points to 19.8%. The CBD posted 492K SF of absorption, nearly 90% of which came from the Chubb move-in.

The insurance firm’s relocation is having a major impact on the Old City office sector, where it has long occupied a significant amount of space. The company is moving out of Penn Mutual Tower at 501 Walnut St. after selling 436 Walnut St. in May, Savills Philadelphia Market Leader Greg Soffian said.

“It’s probably a prime opportunity for residential conversion,” he said of the latter building overlooking Washington Square, which was purchased by Extell Development for $30M in March.

Savills’ Q2 report found that sublease space across the region was down 1M SF year-over-year to 4.7M SF. It also tracked a 2.1M SF decline in overall office inventory to 128M SF over the same period.

The completion of projects like Alterra Property Group’s conversion of the 305K SF former Morgan Lewis Building at 1701 Market St. into 299 apartments contributed to the falling inventory in recent years.

Even more office space is set to come off the market via TF Cornerstone’s partial conversion of the Wanamaker Building, which will bring a mix of 621 apartments and new retail to the 435K SF building across from City Hall.

But no new conversion projects were announced in Center City last quarter, Friedman said. 

“I feel like there’s going to be more things in the pipeline,” she said. “They have to keep happening because we don’t have the demand to manage this level of vacancy.”

New uncertainty has emerged this week about the future of the city’s largest office building, Centre Square, which had appeared to be slated for a partial conversion earlier this year.

Dean Adler and PMC Property Group were set to buy the building out of a bankruptcy sale for $70M in February, but CSC Coliving contested the deal in May, arguing that it made an $80M bid.

CSC has backed out of the legal battle, and Adler is now reconsidering his plans for the 2.2M SF building, The Philadelphia Inquirer reported Thursday.

“I got to find out if there’s something we missed,” Adler told the outlet. “Maybe they found something that we didn’t know, so we have to go back to do more homework.”

Friedman, speaking prior to Thursday's update, said the legal battle had created a lack of clarity around the time frame for the conversion and blunted potential progress in the neighborhood, which she said is suffering due to high vacancy at Centre Square.

“Everyone was pretty excited to see that it’s movement, and it’s a little disheartening to see it stalled,” she said.

Meanwhile, office leasing volume in the Philly suburbs is slowing. JLL tracked 37 suburban deals totaling 436K SF last quarter, which was down 43% year-over-year and the lightest quarter on that front since 2021.

But absorption hit 289K SF due in large part to a series of move-ins. Those include Great Valley School District’s move into the 190K SF office building in Malvern at 41 Moores Road, which it bought for $7.5M last year.

The property is adjacent to Great Valley High School and will allow the district to manage increased enrollment and add new programs.

“That building will come out of the stock,” Friedman said of its role going forward in JLL's data. “It won’t be a continued positive thing for vacancy.”

Residential conversion projects are rare in the Philly suburbs due in part to a lack of incentives and a difficult entitlement climate on the municipal level, industry executives said during Bisnow’s Philadelphia Multifamily Summit in April.

Stundel is now looking toward the industrial sector and the booming data center industry to help take some of the outdated office space off the market.

“Right now, there is a limited amount of developable area suitable for warehouses or data centers,” she said.

“I don’t know how many [suburban office buildings] would be suitable for conversion to residential, so maybe it’s a better opportunity to look at it as a potential knockdown and rebuild,” she added.

The analyst said she has heard murmurs about projects like this, but she didn’t share any specific examples. Stundel acknowledged that the municipal-level hurdles that multifamily developers face in the suburbs would likely be in place for industrial and data center players as well.

“That definitely could be a problem, particularly for data centers, because of the tax on the electrical and water systems,” she said. “It doesn’t mean someone may not try.”