One factor that has discouraged Center City job growth has beentaxes. "The city's tax structure--the combined impact of the wageand business privilege taxes--historically undermined thisadvantage, pushing growth and new firm creation beyond cityboundaries and shifting jobs that had been accessible toneighborhood residents beyond the reach of regional rail lines."However, the report saw "a strategic opportunity for officebusiness growth and attraction" in Mayor Michael Nutter'scommitment to regulatory simplification and reductions in theBPT.

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As GlobeSt.com reported earlier this month, developer WalnutStreet Capital is planning a 1,500-foot mixed-usetower across the street from the Comcast Center, currentlyPhiladelphia's tallest tower, and other skyscrapers are planned forCenter City. "The fact that other developers are proposingadditional office buildings is clearly a sign of confidence andinterest in the downtown," Paul Levy, president and CEO of CCD."The fact that they are exploring how to connect that building tothe transit concourse underground shows the importance of theregional transit system that brings almost 300,000 people downtowneach day. The fact that Philadelphia elected a mayor who was astrong proponent of wage tax reduction and is now proposing to cutthe BPT and reduce regulatory barriers also sends a strong messagethat Philadelphia is business-friendly."

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Office vacancy rates continue falling, reaching 10.6% byyear-end '07 and projected to reach 9.6% by year-end '08, accordingto the report. Positive absorption was 887,111 sf. "Over the last23 years, Center City has averaged net positive absorption of421,288 sf per year," according to the report. "But with new localpolitical leadership committed to more aggressive tax reduction andwith a well-funded, regional business marketing campaign, downtowncould be poised for more growth, so long as there is no significanteconomic downturn."

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An office market report from Studley released last week noted aslowdown in transaction velocity throughout the Philadelphiaregion, although it cited Center City as an exception to thistrend. "All commercial brokerage firms have been reporting asteadily declining vacancy rate downtown and the fact that CenterCity has the highest office occupancy rate in the region," saysLevy. "The national market has cooled, but what that has meant forCenter City is only a slowing in our rate of growth."

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Center City increased its share of the region's office spacefrom 27% to 28%, reversing a 15-year decline from a 41% marketshare in 1993. "With SEPTA now secure with dedicated funding andcommitted to increased frequencies and improved customer service,downtown has a significant opportunity to capitalize on itswalkable, amenity-rich environment, its proximity to institutionsof higher learning and its position at the center of the region'shighly skilled labor market," the report says.

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The majority of Center City residents have relatively shortcommutes, with many either walking to their jobs or taking publictransportation. Levy notes, "63% of Center City's residents workdowntown—so there is a direct relationship between increasingoffice jobs and the strong growth in downtown housing. The steadyexpansion of health care and educational sector jobs is also astrong driver of downtown housing demand." This couples with a"favorable" cost of living: a Center City homeowner earning$83,687, the average annual wage of professional services employeeshere, would have to earn 11% more in Washington, DC and 73% more inNew York City to enjoy the same standard of living. These factorshelped keep housing prices and rents strong, although for-saleunits stayed on the market longer than in previous years, inkeeping with national trends, according to the report.

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However, one effect of the subprime meltdown has not affectedCenter City: Philadelphia's foreclosure rate is the lowest of the10 major metropolitan areas and has actually declined since 2006,the report says. The average condo price in '07 was $482,596, while115 units sold for more than $1 million, double the number thatcrossed this price threshold in '06.

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In retail, Center City's occupancy rate stands at 88%, accordingto the report, with a net increase of 50 new premises last year.The report says that "weak blocks" on East Market and East Chestnutstreets will be transformed by continued retail improvements in thecoming years.

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On the hospitality side, average daily room rates in Center Cityrose 7% in '07 to $167.56. Occupancy rates last year were 73.6%,"their highest in more than a decade." and "At least 15 proposedprojects, totaling over 3,500 additional rooms, are in the planningor financing phase for sites north and west of City Hall in closeproximity to the Pennsylvania Convention Center." However, "Atightening credit market will probably limit the number of projectsthat come to completion, but Center City's regional share willdefinitely grow by 2011."

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Levy cites three key factors in Center City's continued growth:its centralized location amid the region's transportation network,"with strong transit service, giving regional employers access to a360-degree labor market;" its "broad array" of amenities for officeworkers, including restaurants, retail, arts and culturalinstitutions; and its density and compactness. He notes that 40% ofdowntown residents walk to work, "the highest percentage in thenation."

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.