We are pleased to announce that Newmark Smith Mack has expanded our market research platform in 2012 to provide more comprehensive reporting to our clients and the real estate community overall. Historically, our statistics included only office space that would be available for lease within 90 days of the quarter’s end. In order to more accurately reflect the current state of the commercial real estate market, and the fact that the length of time it takes to realistically lease space in this economy has grown substantially, we now include all space that is or will be available within a year of the current quarter’s close.
Furthermore, we took this opportunity to also expand our research footprint, with a reevaluation of buildings included in our statistics. This broader market added approximately 6 million square feet of additional buildings we are tracking, much of which is related to the addition of a new Philadelphia Non-CBD submarket covering Class A and B office space within the Navy Yard and University City.
Thus, while reviewing our statistics for this quarter, you will see inflated fluctuations in absorption when compared to year end 2011, most of it negative; however, it is important to understand that this is a function of our methodology change. At the end of the first quarter of 2011, for example, we were only reporting on space available or becoming available through June 30, 2011. We are now, a year later, in the first quarter of 2012, effectively reporting all space which is now or will become available through March 31, 2013 as available. Therefore, absorption that would have previously been spread across 12 months of the year is now appearing in our statistics in one quarter.
In response to this anomaly in our quarterly reporting, this edition of our newsletter is focused on a discussion of these large scheduled availabilities and a more holistic overview of the year ahead, as we currently understand it. We anticipate returning to our more detailed discussion of quarter-over-quarter analysis in the second quarter, as an apples-to-apples comparison will again be possible.
Although a glance at our numbers indicates there is an overall negative absorption of about 440,000 square feet of space across the region this quarter, it is largely due to the change in our methodology and it was not enough to significantly impact the overall vacancy rate from last quarter. The negative absorption included here for the next 12 months was tempered by the leasing activity going on in the marketplace in the first quarter of 2012.
Philadelphia
Under our new rules for tracking available space, the buildings Newmark Smith Mack collectively tracks for its quarterly statistics posted a negative absorption of almost 316,000 square feet. However, based on our change in methodology, this number is artificially high, as it includes space becoming available throughout the next year in a single quarter, i.e. Q1 2012. Consequently, it’s important to look at some of the larger upcoming availabilities individually.
There was significant positive leasing activity in the Market West submarket this quarter across several buildings in Class AA and A, which was nearly enough to counteract the negative absorption at Two Logan Square. Two Logan is currently marketing approximately 151,000 square feet as available, comprised mostly of the insurance firm Marsh, Inc. who is moving to Three Logan. The bulk of this space is available in the summer, and counts as available under our aforementioned revised rules. On the plus side, Two Liberty Place (1601 Chestnut Street) inked a 5,500 square foot lease and FMC Corporation took another floor of Sunoco’s sublet space at the Mellon Bank Center (1735 Market Street). United Plaza (30 South 17th Street) also had gains this quarter, as the MS Society took approximately 12,000 square feet and the building saw two other expansions, which was enough to counteract the listing of Resolute Management, Inc.’s 7th floor space as available. Three Parkway (1601 Cherry Street) also experienced positive absorption this quarter as Legion Insurance took AIG’s old space on the 4th floor. A real estate firm took the 15,000 square foot sublet space that was available in Ten Penn Center (1801 Market Street), while Two Penn Center (1500 JFK Boulevard) leased approximately 9,500 square feet to Leonard, Sciolla, Hutchison, Leonard & Tinari, LLP. Meanwhile at 100 North 20th Street, approximately 24,000 square feet of direct space hit the market as available in October 2012 and Fernley and Fernley, Inc. is trying to sublet their 20,700 square feet on the 4th floor, accounting for approximately 45,000 square feet of negative absorption in Market West Class B.
The Market East submarket also sustained overall negative absorption this quarter of approximately 180,000 square feet, due largely to three pockets of space becoming available. A business school in the Bourse Building(111 S. Independence Mall) is closing, and 801 Market Street added the 2nd floor as available office space, which was previously marketed as retail, contributing to that building’s negative absorption, and there was also new availability at One South Broad, with new Wells Fargo sublet space coming online.
The Chestnut/Walnut submarket also posted a net loss of approximately 120,000 square feet this quarter; however, this is due almost entirely to the fact that under our new rules, the almost five full floors of space being marketed at 1845 Walnut Street, including Marshall, Dennehey, Warner, Coleman & Goggin’s space available in September 2012 is now included in our reporting.
New this quarter is our inclusion of a Philadelphia Non-CBD submarket, which is comprised of Class A and B buildings in University City and the Navy Yard. This first quarter’s vacancy numbers will act as a baseline and was used as the same vacancy in our Q4 2011 comparison to avoid an erroneous inflated negative absorption. Note that the negative 2,409 square feet of space reflects new availability at the Cira Center, which we reassigned from Market West to our new Non-CBD submarket.
Suburban Philadelphia
The aforementioned changes in the definition of available space for our quarterly statistics analysis had a significant effect on vacancy rates in the Philadelphia Suburban market. We remind you that this is due to a year’s worth of known availabilities being included as currently available within the first quarter of 2012.
The highest profile Q1 2012 transaction in the Philadelphia Suburban market was in Class A space, as healthcare management firm Accolade LLC’s expansion from approximately 23,000 square feet at 600 West Germantown Pike to almost 90,000 square feet at its neighbor 660 West Germantown in the Plymouth Meeting/Blue Bell submarket. This 67,000 square feet in true positive absorption was enough to bump that submarket into positive territory, with an overall positive absorption of about 48,500 square feet. Also of note in this submarket was Skanska’s right-sizing move within Blue Bell Plaza (516 and 518 Township Line Road) to approximately 18,000 square feet in 518 Township Line Road, leaving the entire 30,000 square foot 516 Township Line building available for lease this summer. Additionally, the former HealthAxis building (2500 DeKalb Pike) became available this quarter for both lease and sale, accounting for 40,000 square feet of negative absorption, which was the main culprit behind Class B’s 29,000 square feet of net loss.
Hit particularly hard this quarter was the King of Prussia submarket, which posted a net loss of approximately 242,000 square feet across the buildings Newmark Smith Mack tracks. Negative absorption occurred in many buildings, with several large pockets of space opening up, including 36,000 square feet of sublease space at Corsair I (2701 Renaissance Boulevard) and almost 60,000 square feet available this summer at Valley Forge Square I (475 Allendale Road) which Newmark Smith Mack is now recognizing under the new availability definition. A similar situation exists at 555 Croton Road, where almost 26,000 square feet is being marketed with a September 2012 availability. VHA, Inc. and Wendy’s International, Inc. are leaving a combined 21,000 square feet at Berwyn Park Two (200 Berwyn Park Road) and when AT&T renewed approximately 45,000 square feet at Oak Hill Plaza (200 North Warner Drive), it significantly downsized, accounting for the lion’s share of the new availability in Class B space.
Performance in Delaware County and the Malvern/Exton/West Chester submarkets is strongly linked this quarter, as Endo Pharmaceutical’s planned move by end of 2012 to a new 300,000 square foot space in Malvern, along with the resultant approximate 114,000 square feet of its existing Delaware County space in several buildings that is now appearing in our quarterly statistics under the aforementioned new methodology. Although the Malvern/Exton West Chester submarket saw this enormous Class A positive absorption with Endo Pharmaceuticals, the quarter’s overall net absorption was only about 10,000 square feet, as West Pharmaceuticals’ planned move from Lionville Corporate Center (101 Gordon Drive) for a 171,000 square foot build-to-suit property with a 15 year lease added nearly 263,000 square feet of single story available space on the market.
Elsewhere in the market, a McNeil Pharmaceuticals company took approximately 45,000 square feet of space at the Fort Washington Office Park (601 Office Center Drive) in Fort Washington, the Hartford moved into its new 34,000 square feet at 5 Radnor Corporate Center, Quinnova Pharmaceuticals took approximately 10,000 square feet at 2500 York Road in Central Bucks, and in the most notable sale of the quarter, KBS Realty Advisors sold Five Tower Bridge in the Conshohocken/Radnor submarket to MIM-Hayden Real Estate Funds in January.
Reid Blynn, Partner of Newmark Smith Mack stated that “while vacancy rates are firming up due to the improving economy, they don’t tell the whole story. Landlords are competing vigorously on rents, particularly in certain suburban submarkets such as Blue Bell. While rental rates remain on the lower end of the range, landlords as a group are pushing lease terms longer. Whereas a 3-5 year term was normal in the suburbs, now it is 5-7 years, with 10 years commonplace for larger leases. This benefits operating companies as they can lock in lower rates for longer.”
Northern Delaware
The leasing landscape remained largely unchanged in Northern Delaware in Q1 2012 and the 26,500 square feet of positive absorption was not quite enough to significantly budge the 18.7% overall vacancy rate seen at the end of 2011.
Within the market, the Wilmington CBD posted a small positive absorption of approximately 28,000 square feet in the first quarter. WSFS Plaza (500 Delaware Avenue) experienced positive absorption as it signed a new lease with an insurance company, as did its neighbor 300 Delaware Avenue, who inked a deal with Shaw Keller LLP in January. Also making headlines this quarter was Bank of America’s announcement that it would donate Bracebridge IV (1200 N. French Street) to the Longwood Foundation. The submarket closes the quarter with a direct vacancy rate of 20.7% and an average asking rate of $22.63.
Elsewhere in Northern Delaware, the New Castle County North submarket experienced positive absorption as well, posting gains of approximately 10,700 square feet for the quarter. Leasing was bolstered by a new lease for regulatory writing company Synchrogenix Information Strategies, who leased almost 8,000 square feet at Two Righter Parkway.
The New Castle County South submarket experienced negative absorption overall, although gains were made in Class A absorption. Several leases were executed at the Christiana Executive Campus (Continental Drive) including new deals with Caliber Funding LLC, I-Scope Technologies, Inc. and State Farm, as well as a handful of renewals. The Iron Hill Corporate Center also netted positive absorption with a new lease with United Healthcare. Additionally, Modern Water, Inc. took 9,500 square feet at New Castle Corporate Commons (15 Reads Way) and Pencader Corporate Center (211 Lake Drive) leased 30,100 to UPS at the end of January, the latter of which helped to offset the negative absorption in Class B, which stemmed almost entirely from HSBC’s downsizing at Churchman’s Corporate Park (Route 273).
Rounding out the county, the New Castle County West submarket also saw some leasing activity, closing out the quarter with approximately 16,000 square feet of positive absorption. Small leases were inked at the Limestone Professional Building (2055 Limestone Road) and Newmark Smith Mack filled the sublease space down the street at Stoney Batter Office Center (5301 Limestone Road). Additionally, Synergy Medical Associates, Inc. announced that it would be building a new 75,000 square foot medical complex in the Commons at Little Falls this summer. Also of note was the purchase of Little Falls Center III (2801 Centerville Road) by its former tenant, fiber production company INVISTA, who settled on the building in late February.
Southern New Jersey
The Southern New Jersey market showed signs of life this quarter, with approximately 121,000 square feet of positive absorption across the buildings Newmark Smith Mack collectively tracks. This absorption drove overall vacancy down from 21.8% at the end of 2011 to 21.0% at this quarter’s close.
The 3M submarket also posted gains this quarter with approximately 92,600 square feet of positive absorption across Class A, B and Single Story office. The Horizon Corporate Center (1000 Atrium Way) inked new leases this winter and 701 East Gate Drive saw an expansion and a renewal. Lourdes Health System reportedly took 15,000 square feet at 728 Marne Highway and clinical research firm CRI leased approximately 21,000 square feet at Lake Center II (30 Lake Center Executive Parkway) in January. Finally, Hill Properties, LLC bought 304 Harper Drive from Brandywine Realty Trust in January.
Elsewhere in New Jersey, the Camden submarket saw a handful of new deals this quarter, netting almost 29,000 square feet of positive absorption overall. A law firm new to the market took space at the LibertyView Building (457 Haddonfield Road). Brandywine’s Main Street in Voorhees posted approximately 24,000 square feet of positive absorption this quarter, and an insurance group signed an expansion at Rutgers Casualty Building (2250 Chapel Avenue).
When tackling our quarterly statistical review, we anticipated the numbers would show large increases in vacancy this quarter due to our methodology change, and though we do see some, they are mostly limited to a handful of known upcoming vacancies in Philadelphia and the Suburbs. Excepting these known vacancies, there was a lot of positive leasing activity across the region this quarter and we are cautiously optimistic in anticipating quarter-over-quarter improvement as the year progresses.
About Newmark Smith Mack
Newmark Smith Mack (NewmarkSM) is partners with Newmark, one of the largest real estate service firms in the world. Our local presence in Center City Philadelphia, Suburban Philadelphia, Wilmington, Delaware and Southern New Jersey, has secured us a leading position in the Greater Philadelphia region’s commercial real estate market for over 28 years through our commitment to service excellence. With multi-disciplined competency in Tenant Brokerage, Ownership Representation, Investment Sales, Corporate Advisory Services, Property Management, Market Research and Lease Administration, Newmark Smith Mack discovers, develops, and implements full service solutions. For complete information on NewmarkSM, visit www.NewmarkKFSM.com
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