Posted Jul 26, 2022, 4:39 PM
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Join Date: Oct 2011
Location: Philadelphia
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'Flight to quality': Center City and suburban office markets start to show more signs of life
Quote:
The Center City and suburban office markets are showing signs of stabilizing after a pandemic shock as more companies lease space in trophy buildings and use the opportunity to redesign their new offices to meet the moment of hybrid work.
After a lull in leasing activity for the last two years, companies are starting to make long-term decisions on their space needs and, while they are reducing the amount of space they occupy, they are creating a higher quality environment to lure employees back to the office, said Les Haggett, an office broker with CBRE Inc.
“Philadelphia is following a national trend to flight to quality,” he said. “We’re starting to see companies commit to longer term leases and a smaller footprint. Where it was short term leases in 2020 and 2021, it’s long term now which only makes sense since it’s expensive to commit to higher quality space.”
This flight to quality is manifesting itself in several ways throughout the market. It has meant a divergence between the occupancy rate among trophy and Class A buildings versus lesser quality buildings.
Throughout the metropolitan area, the vacancy of trophy and Class A is 19.4% compared with 21.7% for Class B and C, according to CBRE data. In Center City, the vacancy rate for trophy and Class A buildings is 15.8% compared with 17% for Class B and C buildings.
It’s also revealing itself in different submarkets. Radnor, Conshohocken, Bala Cynwyd and King of Prussia are experiencing more robust deal activity compared with such areas as Horsham, Blue Bell, Plymouth Meeting and Bucks County, where leasing activity remains tepid. The Horsham/Willow Grove submarket has a vacancy rate of 35.5% compared with the Main Line submarket, which stands at 7.7%, according to CBRE Inc.
While data point to an office market still influx, the deals that are getting done show some signs that it’s beginning to find its footing. Leasing activity during the first half of this year outpaced the first half of last year, according to CBRE research. The vacancy rate in Philadelphia's Central Business District nudged down a tad to 17.2% in the second quarter from 17.3% and absorption also slightly improved, according to Newmark second quarter data.
However, both the suburbs and Center City continue to see sublease space come on the market as tenants make long-range decisions to lease less but nicer space.
Jeff Mack, a broker with Newmark, believes a desire by tenants to be in trophy spaces will mean an uptick in the construction of new office buildings and predicts multiple buildings will get kicked off this year as a result. Based on his work with corporate clients, Mack is also seeing a heightened interest in biophilic design, which incorporates natural elements such as wood, water and daylight to enhance connections to nature. Such design can improve productivity and well being, which have come to the forefront during the pandemic.
Landlords who opt out to fund new amenities will begin to consider alternative uses for their buildings. In the suburbs, some office buildings are being converted to industrial or medical use. In Center City, a few landlords are evaluating whether their buildings are ripe for a multifamily or life sciences conversion.
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Article behind paywall here:
https://www.bizjournals.com/philadelphia...d-suburban-office-markets-improving.html
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