The Greater Philadelphia commercial real estate market continues to register mixed results. Although leases are being signed throughout the region, submarkets are still plagued by large blocks of space becoming available, counteracting any gains made. It’s as though the region’s office market has become a reflection of the collective national mood and economy at large. Ultimately, the total vacancy rate across Philadelphia, its suburbs, Northern Delaware and Southern New Jersey is a collective 19.2%, up from 18.7% in Q1. All four markets experienced negative absorption this quarter, about 638,800 square feet in total, across the buildings Newmark Smith Mack (NewmarkSM) is tracking, primarily due to a handful of new, large availabilities hitting the market in Q2.
Although the Philadelphia market shows 139,100 square feet of negative absorption this quarter, the reality is that the market was largely flat. The large negative absorption seen in Market West is the upcoming GlaxoSmithKline (GSK) vacancy at Three Franklin Plaza, as the pharmaceutical giant moves its headquarters to its new build-to-suit location outside of the CBD at the Navy Yard. Adjusting for that large block of newly available space, the market actually sustained some mild positive absorption, although the quarter was noticeably quiet. The Philadelphia market overall closed Q2 with a vacancy rate of 14.3%, up slightly from the 14.0% seen in Q1.
Outside of the GSK move, the Market West submarket sustained some gains this quarter with positive absorption at Three Logan Square, which includes the consolidation of Marsh USA offices, 20,000 square feet of positive absorption at 1700 Market Street including an expansion by an existing tenant and approximately 15,000 square feet of space resulting from a combination of subleases at Two Liberty Place. In addition, Three Parkway reported significant leasing activity including a new downtown lease signed by Bentley Systems. Bentley has their North American headquarters in Exton, PA so we view this as particularly noteworthy because it represents a significant Philadelphia suburban business who has committed to having a CBD office as part of their overall business strategy.
Both the Market East and Chestnut/Walnut submarkets remain nearly unchanged quarter over quarter, with vacancy rates of 15.1% and 17% respectively. The non-CBD submarket, which includes University City and the Navy Yard, also reported nominal activity.
The Philadelphia Suburban market was a mixed bag this quarter and while several submarkets saw positive absorption, it was not enough to offset some large blocks of space being newly marketed as available. Delaware County and King of Prussia/Wayne sustained triple digit negative absorption, accounting for the bulk of the 344,500 square feet of negative absorption the market experienced as a whole this quarter across all the suburban office buildings currently tracked by NewmarkSM. The quarter closes with a 22.7% total vacancy rate this quarter, up from 22.1% in Q1.
The Conshohocken/Radnor area continues to buoy the suburban market and was one of the submarkets to post a positive net absorption of 36,500 square feet in Q2. Class A and Class B vacancy rates are 11.5% and 11.9%, respectively, and average asking rates are up to $29.70 from $29.31 in Q1. The positive absorption is comprised of a smattering of small lease transactions across several properties including Spring Mill Corporate Center (1100 E. Hector Street) and 300 Four Falls.
The Plymouth Meeting/Blue Bell submarket showed the strongest improvement this quarter, posting positive absorption across Class A, Class B and Single Story markets with 74,400, 45,290 and 23,190 square feet of absorption, respectively. Overall vacancy rate dropped to 26.1% down from 28.5% in Q1 and a slight uptick in average asking rates resulted with the submarket closing the quarter at an asking rate of $22.67. Leasing activity was experienced across the Plymouth Meeting Executive Campus buildings on West Germantown Pike as well as at Arborcrest Corporate Campus (Hillcrest I).
The Horsham submarket also posted positive absorption this quarter, where the significant leasing activity reported at 100 Tournament Drive offset some smaller new vacancies across Class A space. Horsham’s total vacancy rate at the end of Q2 was 18.6%, down from 18.9% in Q1.
Delaware County experienced a healthy dose of leasing activity this month, but gains were offset entirely by two large spaces newly marketed as available. The 2nd, 3rd and 4th floors at 2 Braxton Way, totaling 90,000 square feet, were earmarked as available in April and the Franklin Mint complex on Route 1 is now being marketed with 285,000 square feet as available for lease. Asking rents hovered at $21.63 this quarter and the submarket closed Q2 with an overall vacancy rate of 23.9%.
A similar story played out in the Malvern, Exton & West Chester submarkets, which reported a 27.2% overall vacancy rate this quarter, up from 25.8% in Q1. A 23,600 square foot space at 224 Valley Creek Boulevard was listed as being available in June 2013 and a 58,838 square foot space at the former Acme headquarters (75 Valley Stream Parkway) came online as available this month. Together these new Class A availabilities accounted for the majority of the submarket’s net loss of 91,100 square feet in absorption this quarter.
The Lower Bucks submarket posted a negative absorption of 39,360 square feet this quarter and consequently experienced an uptick in overall vacancy from 24.3% in Q1 to 25.3% at the close of Q2. A handful of newly available blocks of space came online this month, including approximately 19,000 square feet at 444 Oxford Plaza and 18,000 square feet at 95 James Way. Neighboring Central Bucks remained flat quarter over quarter, with the new availability at 770 Township Line Road, where the entire building is now being marketed as available effectively wiping out the leasing activity reported at 2500 York Road and other properties. The quarter closes with a 20.5% vacancy rate and an asking rate of $24.40.
Vacancy rates in the King of Prussia/Wayne submarket continue to climb quarter over quarter. In Q2 2012, the submarket saw an additional 173,600 square feet of space being marketed as available, bringing the vacancy rate to 24.4% and year-to-date absorption to a negative 415,900 square feet. The quarter’s losses were primarily the result of several large blocks of spaces coming online as available for lease, particularly a 36,400 square foot space at 1500-1550 Liberty Ridge, a 12,500 square foot space at 480 E. Swedesford and a 29,500 square foot space at 1170 Devon Park Drive. Additionally, 530 and 580 E. Swedesford Road are now being marketed as 100% available as the new ownership begins its reengineering of the two properties into one large complex, rechristened CrossPoint at Valley Forge and slated to start construction this fall. There was also some positive leasing activity in the submarket this quarter, with a 15,040 square foot lease at 1000 Continental and a 13,185 square foot lease at 1205 Westlakes.
Vacancy rates are up slightly quarter-over-quarter in the Northern Delaware market. Both the Wilmington and New Castle County submarkets saw increases in space being marketed as available, resulting in a net loss of 112,100 square feet of absorption. The quarter closed with an overall vacancy rate of 19.1% and an asking rate of $21.22.
In Wilmington, a new 29,800 square foot sublease at the Nemours Building (1007 Orange Street) and the 2nd floor space at 1105 N. Market became available this quarter, contributing to the submarket’s increase in vacancy rate to 21.6%. Positive leasing activity was seen at the Renaissance Center (405 N. King Street) where the Delaware State Bar Association took approximately 9,300, and several other transactions were inked at the PNC Bank Center (222 Delaware Avenue) and 1201 N. Market Street.
New Castle County North saw some positive activity this quarter, with a new 8,000 square foot lease for Synchrogenix Information Strategies Inc. at Two Righter Parkway and several new leases at Bellevue Park Corporate Center. The submarket closed the quarter with approximately 23,700 square feet of positive absorption, and was the only Northern Delaware submarket to make gains this quarter. Neighboring New Castle County South closed the quarter with an overall vacancy rate of 21.4%, the highest vacancy of the three New Castle County submarkets.
In New Castle County West, new sublease space became available at 1013 Centre Road and several new direct spaces came online at 4550 New Linden Hill Road, offsetting leases at 2751 Centerville Road and 4001 Kennett Pike, and contributing to the submarket’s net loss of 23,700 square feet of absorption in Q2. The vacancy rate in New Castle County West is just 9.6% overall and the submarket continues to command the highest asking rents in the Northern Delaware market, $24.13.
Southern New Jersey
The Southern New Jersey market saw a narrow increase in vacancy rate this quarter and a slight decrease in overall average asking rates. Total vacancy for the market is 21.3%, up from 21.0% in Q1 2012.
Camden saw a negligible increase in availability this quarter, with a new 13,500 square foot sublease space coming online at 210 Lake Drive East and a handful of other small newly marketed spaces across the submarket. As such, Camden’s asking rates remain nearly unchanged from the $16.19 seen in Q1 and the current quarter closes with an average asking rate of $16.22.
The story is much the same in the neighboring 3M submarket, where 2Q vacancy clocked in at 18.7%, a negligible increase over the 18.5% vacancy rate seen in Q1. The submarket’s negative absorption this quarter is largely due to new 16,670, 13,630 and 13,740 square foot spaces being marketed at 303 Lippincott, 3000 Atrium Way and 307 Fellowship Road, respectively, which offset Weber Gallagher Simpson Stapleton Fires & Newby LLP’s 6,600 square foot lease at 305 Fellowship Road and the quarter’s other small lease transactions at Four and Five Greentree. Corporate Synergies left its space at 200 E. Park Drive but stayed in the 3M submarket, taking comparably sized new space at 5000 Dearborn Circle.
Building ownership changed hands at several Southern New Jersey buildings this quarter. Time Equities, Inc. bought Colwick Business Center Building 51 (51 Haddonfield Road) in Cherry Hill for $3.4 million at the tail end of March. Liberty Property Trust sold four South Jersey buildings - two in Marlton and two in Mt. Laurel - as part of its 49 property disposition signed in April. Finally, Campbell Soup Company purchased 1300 Admiral Wilson Boulevard in Camden for $3.5 million in June as part of its Gateway Redevelopment Plan.
In summary, the region’s commercial office market looks a lot like the US economy - for every step it takes forward, it takes another two back. The good news is that there are deals being done and the market is active. This year’s election is perched to influence business decisions, which in turn impacts real estate decisions. The market has adopted a wait-and-see attitude.
About Newmark Smith Mack
Newmark Smith Mack has an expansive reach as part of one of the largest commercial real estate service firms in the U.S. Our local presence in Center City Philadelphia, Suburban Philadelphia, Wilmington, Delaware and Southern New Jersey, has secured our leading position in the Greater Philadelphia region’s commercial real estate market for over 27 years. 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, visit www.NewmarkKFSM.com
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A part of BGC Partners, Inc. (NASDAQ:BGCP), Newmark Grubb Knight Frank is one of the largest commercial real estate service firms in the U.S. It brings together the strategic consultative approach to creating value for clients and leading position in the New York market that are hallmarks of Newmark; the complementary strengths of Grubb & Ellis in leasing and management, investment sales, valuation and capital markets services; and BGC’s financial strength, proprietary technology, expertise in global capital markets and deep relationships with many of the world’s leading financial institutions.
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