Newmark Grubb Knight Frank (NGKF) released its second quarter 2015 office reports for the greater Philadelphia region today. According to the reports, development activity is increasing to levels that will appreciably transform the regional office supply through both new construction and redevelopment activity.
“The trend of suburban companies looking for high quality space in the central business district certainly continues,” commented Wayne Fisher, LEED AP, executive managing director. “Independence Blue Cross recently announced it would be consolidating its operations in Horsham and Fort Washington into a building across the street from its headquarters at 1900 Market Street, joining companies such as Hill International and EisnerAmpner, who both recently moved major operations downtown.”
A number of other innovative projects were unveiled in Philadelphia this quarter. Wexford Science + Technology announced that they will be partnering with the Science Center and Drexel University for two exciting new developments in University City. “Developers are taking a keenly creative eye to existing buildings within the city and producing unique projects that will attract the well-educated, engaged millennial workforce streaming into Philadelphia,” said Executive Managing Director Sid Smith. Alliance Partners HSP has also joined the roster of reuse project developers with its plans to convert a vacant warehouse in Northern Liberties, which formerly housed Destination Maternity’s headquarters, into a hip, inventive office space.
From an investment perspective, “Volume on a price basis grew during the past three months, underscoring investors’ confidence in Philadelphia’s office assets”, according to Mike Margolis, senior managing director of NGKF Capital Markets. $535 million worth of sales closed this quarter alone, the largest of which on a single building price scale was Shorenstein Properties’ acquisition of 1818 Market Street for $184.75 million or $188/SF.
In suburban Philadelphia, the Class A office market continues to tighten. The University of Pennsylvania Health System purchased an 18.2 acre site in Radnor, where it plans to create a healthcare campus adjacent to its existing facility at 250 King of Prussia Road. In the suburbs overall, total asking rents reduced minimally by $0.03/SF. Class B rents fell, however Class A rents grew, creating a 22.0% premium for Class A space, up from 20.3% during the first quarter.
“The University of Pennsylvania Health System’s development at 250 King of Prussia Road essentially leaves Radnor with no land to develop more office supply,” continues Executive Managing Director Jeff Mack. “The result will be even higher rents in this submarket, and the adjacent submarkets of Conshohocken and King of Prussia.”
In Wilmington, Delaware, although rents grew, the market’s third consecutive quarter of demand retraction offset most of the occupancy gains made in 2014. Developers and owners are assessing the market’s current inventory and planning mixed-use developments of older office campuses, as in the case of Buccini/Pollin Group’s decision to remove more than 130,000 square feet of office space at Concord Plaza for upgrading and additions of retail and residential product. In terms of job growth for the area, while the traditional office-occupying sectors of information and business services posted mixed results, the robust growth in the financial and healthcare sectors this quarter might point to office demand growth in the near future.
Lastly, in Southern New Jersey, demand essentially moved sideways after falling appreciably during the prior three quarters. Several major tenant relocations into Camden and its waterfront occurred or are slated to happen, a result of New Jersey’s aggressive tax incentives. Recently, the state approved a $164 million 10-year tax incentive to draw American Water out of Voorhees, New Jersey, and into a new 250,000-square-foot built-to-suit headquarters facility located in Camden on the same campus that Subaru of America’s new headquarters is being built. In keeping with the greater trend across the entire region, landlords and developers are considering adaptive reuse of existing space, demonstrated in instances such as Clinical Health Care Associates of NJ’s 150,000-square-foot lease of the vacant former Syms department store on Marlton Pike. Together with the landlord, Finmarc Management, Inc. the health care concern plans to spend upwards of $50 million to convert the space into medical offices. Furthermore, the state’s efforts to revitalize Camden might entice out of state companies to consider the region as well. But, of late, these incentives primarily moved jobs from Burlington County into Camden County.
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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.
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