Posted Jul 19, 2023, 6:51 PM
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Join Date: Oct 2011
Location: Philadelphia
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Philadelphia office vacancy is at a record high. Experts say 'it will get worse before it gets better.'
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It's a scene playing out both locally and nationally: With companies settling into hybrid and remote work, the need for large chunks of office space is declining.
In Philadelphia alone, law firm Fox Rothschild is cutting 40% of its office space with a new 79,337-square-foot lease, health care advertising agency Digitas is downsizing from 108,619 square feet to about 55,000 and Independence Health Group is looking to sublease 224,000 square feet.
The three examples are indicative of trends seen across Center City. According to a second quarter report from real estate brokerage Savills, some 11.3 million square feet, or 22.9%, of office space is on the market between Philadelphia’s major office hubs: Center City, University City and the Navy Yard. The 22.9% is a record high and combines both space vacant and available for sublease.
“I think it will get worse before it gets better in the statistics that we see,” Juliano said.
In the next year or two, long-term leases signed before the pandemic and short-term deals signed after 2020 will both be expiring. How companies choose to handle their office space could shift the market dramatically.
JLL Senior Managing Director Mitch Marcus believes it’ll take 18 to 24 months for the office market to stabilize. More companies establishing long-term plans will help.
“In the game of musical chairs, I believe there’s enough mid- and large-size tenants in the market today and entering the market in the next six months that will take a number of the better spaces in the market offline, which will start to cause some stability in the higher end of the market," Marcus said.
Ultimately, clarity on office space will be forced to happen, JLL Research Director Clint Randall said. Lease expirations and loan maturities for certain buildings will set the stage for the office market’s future. Three prominent Center City office buildings — Centre Square, the Wanamaker Building and One South Broad — are already facing possible default as tenants move out. More buildings could end up in similar situations. Ownership turning over to banks would likely result in buildings with a major loss in value.
“There’s always a sense the new normal is next quarter or next year,” Randall said. “There’s been a lot of hurry up and wait. I do think the next 18 to 24 months, we will see a clearer picture emerge.”
What's been playing out is a flight to quality as employers try to lure workers to the office with more attractive workplaces. Higher-quality buildings haven't struggled as much while lower-quality buildings face more challenges. On a square footage basis, 25% of office building inventory in the Philadelphia market is responsible for half the vacancy, according to Randall. Class B and Class C office buildings are the ones most at risk of losing tenants and dealing with vacancy.
Those problems are compounded when considering Philadelphia’s average office lease is between 5,000 and 8,000 square feet, Randall said. Fox Rothschild, for example, is shedding 54,200 square feet. That means it could take up to nearly a dozen new tenants to replace that space. Without a big expansion of an existing tenant, that could be difficult to accomplish.
“I think people think of vacancy in the aggregate as this big universal problem, but it’s actually not a universal problem,” Randall said. “The trophy class still has a vacancy rate half of what you see in Class A or Class B. This vacancy challenge is not affecting all buildings equally.”
There's also a possibility of office buildings being converted to residential, but that process is often costly and complicated. From 1998 to 2021, 180 buildings or 9 million square feet of office and industrial space was converted into residential in Philadelphia, according to the Center City District. That means many of the buildings that would be the best candidates to be converted already have been and the remaining office buildings would likely be more challenging — partially due to rising interest rates.
Morgan Lewis & Bockius' longtime headquarters at 1701 Market St. will become vacant when the law firm moves to its new office at 2222 Market St. The soon-to-be vacant building was under contract to sell to Alterra Property Group but the deal fell through due to rising costs. MM Partners bought an eight-story office building at 2100 Arch St. from the Jewish Federation of Greater Philadelphia for $12 million and plans to convert it into apartments. That building was mostly vacant when the Jewish Federation decided to sell it.
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Article behind paywall here:
https://www.bizjournals.com/philadelphia...adelphia-office-vacancy-record-high.html
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