CBD Office Vacancy Nears Single-Digit Level

PHILADELPHIA-Contrary to dire predictions of two years ago, a buoyant Center City office market has tilted in owners’ favor. Despite the addition of the 1.2-million-sf Comcast Center, which had real estate brokers predicting a vacancy rate of as much as 17%, the CBD is now hovering near the single-digit level–and the Comcast headquarters building will open later this year more than 96% preleased.

A second-quarter report from the local office of Grubb & Ellis Co. puts the CBD office vacancy at 10.2% in the 38.6-million-sf inventory. H. Hetherington Smith, senior vice president and branch manager of Studley’s local office, says the overall availability rate in the CBD, which includes space available for sublease, posted at 11.2% at the end of the second quarter, down 1.5% in comparison to the previous quarter.

“Sublease space is steadily becoming absorbed or running out of term,” Studley researchers say in the report. Smith tells GlobeSt.com that “large contiguous blocks of space,” which are classified at 50,000 sf or larger, “continued to trend downward for the fifth consecutive quarter.” There were 13 such blocks available at the end of first quarter, she says, and 11 at the end of the second quarter.

Putting the current market conditions into historical perspective, Matthew Wright, Grubb’s research services manager, says “the last time vacancy was nearing single digits was in 1989. Rent rates are also approaching a historically significant threshold.” He adds “class A rents at $27.19 per sf are approaching the high-water mark established in 2002.” That mark, according to published data, neared an average of $30 per sf.

Studley’s second-quarter data puts the average overall rental rate in the CBD at $23.95 per sf, up 4% from the previous quarter. Average class A rent in Center City is $26.36 per sf, according to Smith, which is a 4.1% increase over this year’s first quarter and a 7.4%-rise compared to yearend 2006. Both reports acknowledge that about 262,000 sf came off the market when Two Liberty Place’s 20 top floors were converted into residential condos.

Nevertheless, both Wright and Smith attribute much of the vacancy drop to the expansion of existing Downtown office tenants and significant relocations to the CBD by tenants formerly located outside its boundaries. Most notable are moves by Children’s Hospital of Philadelphia and the University of Pennsylvania Health System from University City into an aggregate of about 333,500 sf in Center City.

“Overall and class A rent increased in Philadelphia’s CBD, where the market is tilted in favor of landlords who have held the line on tenant-improvement packages,” Smith says. “With market forecasts calling for rent increases, a drop in inventory and a decrease in the value of concession packages by the end of 2007, many tenants renewed early during the second quarter to accommodate future growth and control future costs.

“We may look to a fall-off in rental rates in the next quarter as the credit crunch trickles down, tenants delay decisions and landlords drop rates to get deals done,” Smith continues. Yet, she delivers a healthy prognosis, concluding “new development is under control and the market is expected to enjoy moderate job growth in 2007 and into 2008.”