Newmark Grubb Knight Frank (NGKF) released its first quarter 2016 office reports for the greater Philadelphia region this week. While the metro area witnessed variations in demand performance this quarter, the reports indicate that strong fundamentals in the local office market and economy point to another year of positive growth in 2016.
Philadelphia’s Central Business District (CBD) and suburban submarkets witnessed an increase in overall vacancy by 10 basis points quarter-over-quarter, to 14.3 percent. The suburban submarkets tallied a fourth consecutive quarter of six-digit positive absorption, which lessened the impact of downsizing by tenants such as Cigna and Wells Fargo in the CBD. Overall rents in the downtown submarkets increased $0.60/SF this quarter to $28.07, largely in response to the surge in demand growth charted in 2015. Pricing will likely continue to grow over the next quarters, especially with the construction completion of the FMC Tower/Cira Centre South set for later this year. Nearly 60 percent pre-leased, the tower will command rents of over $50.00/SF for elite office space. Wayne Fisher, NGKF executive managing director, noted, “Over half of all new tenancy in Center City Philadelphia last year occurred in West Market’s Class A sector alone, which has led to a justified average rental rate above $30.00/SF for Class A space in that submarket for the second quarter in a row.”
In the Suburban Philadelphia submarkets, vacancy was trimmed to 16.1 percent, due to the strong performance of King of Prussia and Exton/Malvern. Rumors of new office construction kicking off in the King of Prussia and Conshohocken submarkets will likely prove true this year, as vacancy for quality space continues to decline and available blocks become scarce. “2015 was an exceptional and eventful year for the suburban Philadelphia submarkets, and the current tenor of the market indicates that the region will enjoy another year of flourishing activity in 2016,” stated Jeff Mack, NGKF executive managing director. “The Radnor/Main Line submarket saw vacancy squeeze to 1.8% this quarter. Adjacent submarkets with the advantage of developable land would be well-served at this moment in the real estate cycle to break ground on new, trophy-quality product.”
From an investment perspective, between the CBD and suburban Philadelphia markets, nearly a billion dollars in office investment sales closed in the first quarter, approximately half of which came from two foreign capital investments in the region. In the CBD, a Korean investment management firm purchased Cira Square for $354.0 million and in the Exton/Malvern submarket, Saint Gobain’s new headquarters sold to a partnership of European and Middle Eastern entities for $123.0 million. Commenting on these sales, Senior Managing Director Michael Margolis said, “the Philadelphia region hasn’t yet seen the deluge of foreign capital that other markets have, but strategic acquisitions like these will command more and more international attention to the region. Foreign investors like long-term, credit, single-tenant properties, especially for their first acquisition in a market area.” Across the Greater Philadelphia metro region, a number of significant properties were put up for sale this quarter, so investment activity is expected to sustain momentum in the quarters to come.
In Wilmington, Delaware, vacancy dwindled to a three-year low of 17.0 percent as the office market gained over 67,000 square feet in new occupancy, growth which mitigated the effect of DuPont’s first notable retraction from the state in the wake of the Dow merger announcement. There was a slight slow-down in leasing volume over the past three months, but measured optimism prevails. “Although there was a lull in new transactions signing this quarter, we anticipate leasing activity will grow in the quarters to come, based on the number of requirements we’re seeing out there, looking for office space in the market,” stated Neal Dangello, senior managing director. This quarter also witnessed the announcement of additional transit routes between Wilmington and Downtown Philadelphia. According to Wills Elliman, senior managing director, “this promising transit development will hopefully render Wilmington employment options more attractive to the skilled workforce living in Center City, Philadelphia.”
Southern New Jersey’s gains in occupancy made last quarter were usurped by negative absorption in first-quarter 2016, largely driven by tenant downsizing and consolidation. Overall vacancy climbed 40 basis points quarter-over-quarter to 17.9 percent. Cherry Hill was the only submarket to post tenancy gains over the past 90 days, due to Comcast’s occupancy of 29,368 square feet at 101 Woodcrest Road. Due to promising leasing activity as of late, the next quarters are primed to see positive growth. Although, according to NGKF Executive Managing Director Anne Klein, “Southern New Jersey’s submarkets are waiting expectantly for further Camden office-oriented announcements in 2016. Only time will tell whether the concentrated focus on the city further hinders the rest of the submarkets with large swaths of vacancy, or whether it will attract employers from outside of the region.”
About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NGKF’s 12,800 professionals operate from more than 370 offices in established and emerging property markets on six continents.
With roots dating back to 1929, NGKF’s strong foundation makes it one of the most trusted names in commercial real estate. NGKF’s full-service platform comprises BGC’s real estate services segment, offering commercial real estate tenants, landlords, investors and developers a wide range of services including leasing; capital markets services, including investment sales, debt placement, appraisal, and valuation services; commercial mortgage brokerage services; as well as corporate advisory services, consulting, project and development management, and property and corporate facilities management services. For further information, visit www.ngkf.com.
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