CBD Office Sector Recovery ‘Unmistakable'

PHILADELPHIA-Worries over the addition of approximately 1.9 million sf of new office construction in the CBD now seem unfounded. Since the office market recovery began in early 2005, vacancy has decreased more than 3% to its lowest level in more than four years, according to a third-quarter 2006 report from the local office of Grubb & Ellis.

Grubb puts the current vacancy at 11.3%. A report from the local office of GVA Smith Mack confirms that a CBD office recovery is underway. It puts direct vacancy at 10.9% and the total, including sublet space, at 12.5%.

“We projected the recovery of the CBD office market to have some legs and extend into 2006, continuing the positive momentum in 2005 where we saw tenants expanding, on average, by around 20%,” Matthew Wright, Grubb’s research services manager, tells GlobeSt.com. “Downtown, we expect further reductions in vacancy, a result of continued strong tenant demand, and, in part, due to the pending residential conversion of the upper portion of Two Liberty Place, which will remove a large block of vacant space from the competitive inventory.” He declares the recovery is “unmistakable.”

Of the new construction, the GVA Smith Mack report notes that Cira Centre, Brandywine Realty Trust’s recently completed 727,725-sf tower, is just 2% vacant. “Speculation persists as to the viability/possibility of a second Cira office tower west of the (Schuylkill) river,” the report says. As GlobeSt.com previously reported, Liberty Property Trust’s 1.2-million-sf Comcast Center, now underway, is approximately 80% pre-leased.

The priciest Market West submarket is leading the recovery, according to both reports. “During 3Q, tenants once again showed their favor for class A space, soaking up 515,000 sf of premium product, which brought the overall class A sector’s share of total 2006 to-date absorption to over 75%,” Grubb reports. Its research puts class A Market West rents at $26.77 per sf, relatively unchanged from the previous quarter, while class B rents edged up about 10 cents a sf to an average of $22.14 per sf, full service.

Smith Mack data says rates for class AA space in Market West average $28.31 per sf, and the average among all classes in that submarket is $24.49 per sf. This compares with the overall CBD average of $22.84 per sf, according to Smith Mack. Grubb data shows the average rent rate among all class A space in the CBD at $25.80 per sf, and the average among all class B office space at $21.20 per sf.