Office Leasing Drops In Center City Despite Job Growth

Office owners in Philadelphia's central business district signed a few notable deals last quarter, but they weren't enough to stave off an overall drop in leasing activity or bring down the market's vacancy rate. 

Leasing activity in the Center City office sector slowed last quarter as the volume and size of the deals in the neighborhood tapered off.

There were a few notable deals, like the Securities and Exchange Commission’s renewal at One Penn Center and Stateside Brands’ upcoming move into 1100 Ludlow St., according to JLL’s Q3 office report.

But leasing volumes in the CBD totaled roughly 111K SF in Q3, down from more than 350K SF the quarter prior and about 140K SF in Q3 2024, according to data the brokerage provided to Bisnow.

The CBD's vacancy rate remained steady quarter-over-quarter at 20.4%. It recorded negative net absorption through the first nine months of this year of 580K SF. 

Of the leases inked in the third quarter, 61% were for 10K SF or less, below the three-year average of about 71%, according to JLL's report. It also says there has been a decline in 50K SF-plus deals in the market. 

This is evidence that the rightsizing trend is still impacting the neighborhood, JLL Managing Director Alex Breitmayer said.

“It’s a lot more cautious now because of the ability to work from home,” he said. “We’re seeing that reflected in some requirements in the market.”

But more than five years since the onset of the pandemic, Breitmayer said increased certainty is leading tenants to sign longer leases. 

He was also optimistic about nationwide JLL research, which found that Fortune 100 workers were spending 3.9 days per week in the office on average in Q2, up from 2.6 days two years earlier.

The muted Q3 stats came despite a relatively strong citywide jobs report released by Center City District last month. The organization found that Philadelphia experienced 13.6% employment growth between 2020 and 2024, which was slightly above the average of 11.7% calculated for the 25 largest counties in the U.S.

This wasn’t a huge boon for the Center City office market because most of that growth was concentrated in sectors like healthcare, food service, and arts and entertainment, the report found.

Office-to-residential conversions have been another saving grace for Center City. Almost 708K SF has been taken off the office market for that purpose in the neighborhood so far this year, according to JLL data.

One of the newest prospects on that front is Centre Square, a 2.2M SF building with 36% occupancy across from City Hall.

While the office building, the largest in Center City, takes up an entire block, the dual-tower design means the upper floors have footprints more suitable for apartments than a standard bulky office building. That is why CBRE is marketing it as a conversion play.

“The east tower could be a candidate for conversion, but we’ll see who ends up buying it,” Breitmayer said.