Newmark released its second-quarter 2019 office reports for the Philadelphia CBD and suburbs, Southern New Jersey, and Northern Delaware today. A dramatic increase in the supply pipeline is set to occur this year following numerous new development announcements made in the past three months.
Philadelphia’s Central Business District (CBD) is poised to kick off significant construction projects following project advancements announced in second-quarter 2019. Developer Parkway Corporation has been in active negotiations with two separate major occupiers to break ground on new build-to-suit HQs in West Market. University City will likely witness groundbreaking this year on a new office tower for Drexel University, and 3.0 University Place, the developer of which signed partnerships with Ben Franklin Technology Partners and Wistar Institute this quarter. Additional life sciences-focused developments continued to make strides in pursuit of groundbreaking, among them, a project for Philadelphia’s most notable new-to-market tenant this quarter, Iovance Biotherapeutics. The California-based life sciences company will occupy 136,000 square feet at a new build-to-suit in the Navy Yard. Speaking on the strong trend of new-to-market tenants, Newmark Senior Managing Director Jack Soloff said, “Iovance’s commitment to Philadelphia this quarter is just the latest in a swell of new companies coming to the city, which gained more than 1.0 million square feet in new-to-market tenants just since the start of 2018. We expect the surge to continue.”
New-to-market and expansionary tenant leasing activity in Philadelphia’s Central Business District (CBD) were primary drivers in the accumulation of 107,229 square feet of positive absorption in the second quarter. CHOP’s 53,000-square-foot expansion at the Wanamaker, a full-floor lease at Centre Square by the Campaign of Joe Biden (which selected Philadelphia for its HQ) and large-footprint new leases by multiple coworking operators were counted among gains that well eclipsed the EPA’s major downsize from 307,847 square feet at 1650 Arch Street to 173,007 square feet at Four Penn Center. Notable CBD office trends captured this quarter also included new-record rent growth: for the first time ever, average office asking rents surpassed the $33.00 per square foot mark landing at $33.08 per square foot.
Southeastern Pennsylvania’s rent growth was equally record-breaking this quarter, as average asking rents marched up to $27.39 per square foot - a 3.7 percent increase year over year. The supply pipeline in the suburbs, already containing two build-to-suits, is also set to increase further: Bala Cynwd-based Hamilton Lane will take approximately 130,000 square feet at the proposed Seven Tower Bridge in Conshohocken. The remainder of the building, another approximately 130,000 square feet, will be of interest to prospective tenants in the market for trophy office space, as Conshohocken remained an extremely tight submarket with vacancy at 10 percent this quarter, the second lowest measure in the suburban market after Radnor/Main Line. Overall suburban market vacancy rose 10 basis points quarter over quarter to 14.1 percent on the heels of approximately 102,000 square feet of occupancy losses. Company space reductions amid relocations, such as Ricoh moving from 110,000 square feet at 70 Valley Stream Parkway and relocating into 45,971 square feet at 300 Eagleview Boulevard, drove the negative absorption this quarter. Newmark Managing Director Patrick Nowlan noted that when considering suburban market activity, “you have to look at the market’s strength more on a submarket by submarket basis. The Radnor/Main Line, Conshohocken and King of Prussia core did well this quarter and will continue to do well because in the war for talent, you want the nicest and best-located office.” He went on to say, “there’s only so much Class A space to go around and the most prized submarkets are tight. It’s no wonder we’re finally seeing new supply breaking ground.”
The life sciences development wave continued to span from the city to the suburbs. In June, MLP Ventures revealed significant plans for a $500 million renovation project encompassing the former GlaxoSmithKline campus on Swedeland Road and a portion of the Renaissance Park office complex it acquired in 2018. Operating as a large-scale coworking complex, the rebranded “Discovery Labs” will feature 1.6 million square feet of office, lab and advanced manufacturing space. “Our region’s proliferating life sciences sector was on the international stage this quarter, when one of the largest biotech events in the world, the BIO 2019 convention, took place in Philadelphia,” Newmark Research Manager Lisa DeNight said. “We’re accelerating into a very real-life sciences boom. Venture capital funding in the sector is up 72 percent from last year regionally, industry job gains are strong, and we need new lab space to house all this growth to be competitive.”
Southern New Jersey’s construction pipeline emptied this quarter with the 394,164-square-foot Triad1828 Centre completing in Camden’s waterfront, the last office project launched with state-sponsored tax incentives under the Grow NJ program. As the largest building by rentable square feet in the city of Camden, this tower will serve as the new headquarters of the Michael’s Organization, Connor Strong & Buckelew, and NFI. NFI relocated from Voorhees and occupied its portion of the building this quarter, which propelled the Southern New Jersey office market to realize 46,220 square feet of net absorption this quarter. According to Anne Klein, Newmark executive managing director, “the ‘Camden Effect’ will linger a while longer in the market. Some of the space vacated by companies moving to Camden has been taken, but there’s still a sizeable void left in the suburban markets to be filled.” Average asking rents fluctuated by dropping to $20.63 per square foot but remain stable in larger historical context. Capital markets activity in the Southern New Jersey office sector picked up significantly after a quiet start to the year. As a key highlight of the $62.7 million in office sales volume closed in the past three months, the fully leased Lippincott Center sold to Apex Financial Advisors for $32 million.
Northern Delaware’s office market continues to face both challenges and opportunities with market-wide vacancy rising from 14.3 percent to 16.6 percent quarter over quarter. Wilmington’s CBD specifically felt the heat with Bank of America’s long-foreseen retraction at Bracebridge I and III. Despite the negative absorption in Wilmington’s CBD, the suburban market experienced over 70,000 square feet of new occupancy, largely due to the move by Connections CSP into 64,992 square feet at 590 Naamans Road. With very little available prime office space, the suburban market remained tight in the second-quarter. Wills Elliman, Newmark senior managing director, noted “despite the jump in overall market vacancy, the suburban market really continues to shine and has a great narrative developing with projects like Avenue North, for which Delle Donne secured a large loan this quarter to launch next steps in construction.” While the office market in the CBD is grappling with higher vacancy in the available office supply, one office property at 1220 North Market Street was removed from the inventory pool. It sold to a Florida-based hotelier, Driftwood Hospitality Management. Benefitting from its designation in a Qualified Opportunity Zone, the office will undergo conversion into a hotel, joining the over 500,000 square feet of new development in multifamily and hospitality underway in downtown Wilmington.
Newmark (“Newmark”), operated by Newmark Group, Inc. (“Newmark Group”) (NASDAQ: NMRK), is one of the world’s leading and most trusted commercial real estate advisory firms, offering a complete suite of services and products for both owners and occupiers. Together with London-based partner Knight Frank and independently-owned offices, Newmark’s 16,000 professionals operate from approximately 430 offices on six continents. Newmark’s investor/owner services and products include investment sales, agency leasing, property management, valuation and advisory, diligence, underwriting, government-sponsored enterprise lending, loan servicing, debt and structured finance and loan sales. Occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate services consulting, project management, lease administration and facilities management. For further information, visit www.ngkf.com. Newmark Group is a publicly traded subsidiary of BGC Partners, Inc. (“BGC”) (NASDAQ: BGCP), a leading global brokerage company servicing the financial and real estate markets.
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