"If we see Unisys moving into Center City and if in fact theBlackstone Group does formally announce that they're going to beoccupying Cira South in a couple of years, then you'll have somereal excitement and enthusiasm over the fact that Philadelphia hasbeen able to attract significant corporate tenants," RobertWalters, executive managing director of the Greater Philadelphiaoffice for CB Richard Ellis, tells GlobeSt.com. "Frankly, that's asign that we haven't enjoyed for many years. Over the years, we'velost more corporate-leader jobs than we've gained."

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[IMGCAP(2)]With that said, the city's office market hascontinued its rebound from the 14% to 15% vacancy rates seenearlier in the decade. Cushman & Wakefield's midyear officereport for the Philadelphia office market showing that the city'soverall vacancy for Q2 2008 reached 9.5%. It represents a slightincrease from the first quarter but is well below the nationalaverage of 10.2%, according to a prepared release from C&W.

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The two major submarkets of east and west of Broad Street haveeach seen year-over-year decreases in vacancy, according toC&W. The east of Broad vacancy rate decreased to 8.1% from12.8%; west of Broad decreased to 10.1% from 11.5%.

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"Philadelphia has just had some good velocity," John Derham, whoheads C&W's Philadelphia office, tells GlobeSt.com. "We had areally good first quarter from the cleanup of what happened at theend of 2007."

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He notes that the opening of the Comcast Center last month has"really made a big change in the market. The big fear was that whenthe Comcast tower came on line, it was going to cause this greatvacancy in the market. That hasn't happened, because most of thespace has been backfilled by tenants who had grown or expanded overthe last 24 months."

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One reason that occurred, Derham says, is that tenants did nothave all that many places to expand here. "Philadelphiahistorically has not had a lot of overbuilding going on," he says."If you make the assumption that we absorb 400,000 sf of spaceevery year, and the Comcast tower came on with 1.2 million sf,that's only three years of supply. Before that, the last buildingto be finished was the Cira Centre in 2006, and the last one priorto that came on line before 2000. We had quite a few years where webuilt nothing. We actually took space off the market forconversions to hotels and multifamily. That's why our vacancy todayis sitting at 10% or below."

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Derham sees great potential in Brandywine Realty Trust'sforthcoming Cira South—where Blackstone may take up residence if itrelocates from Plainsboro, NJ—and is also encouraged by theInternal Revenue Service's recent move to establish its regionalheadquarters here. "We're going to be very stable for the rest ofthe year," he says. "You're seeing a little sublease space cominginto the market, but nothing that's dramatic like we've had in pastdown cycles. That sublease space is getting absorbed by firms thatare expanding or growing."

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He notes that velocity has slowed down, which he attributes"more to corporations slowing their decision cycles down, watchingthe overall economy, as opposed to watching the Philadelphia realestate play."

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Walters concurs with Derham's overall assessment. "It's been agood first half of '08 overall," he says. "One encouraging sign isthat we have seen continued rent growth during the past two years,and that has continued in the first half of this year. Goingforward, we expect the rent growth increases to taper, but we stillexpect '08 to show solid rent growth, in the downtown markets aswell as the suburban markets."

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Referring to the Census Bureau's recent report that showed thatthe city's population declined 4.5% from 2000 to 2007, Waltersnotes that Philadelphia is hardly alone in this regard. Like otherNortheastern cities, it has been affected by manufacturing joblosses "for about 40 years now."

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However, Walters says he's encouraged by the Nutteradministration's plans to lower the wage and business privilegetaxes. "The trend line is going in the right direction. We have anew direction that has a broader perspective of business andindustry in the city, and there's no question that Mayor MichaelNutter taken a much more proactive, assertive role in welcomingbusiness to the city."

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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.