Suburban Office Vacancy Rate Stalls at 25%

Increased demand for the financial services, information technology and biotech industries are cited as potential areas of growth next year. Third-quarter leasing activity approached 500,000 sf, slightly ahead of the same quarter a year ago. Year-to-date leasing of just over 2.4 million sf represents an improvement over the first nine months of 2003, but is 2 million sf less than year-to-date leasing activity at the end of third quarter 2001.

Construction completions are down 50% compared with the comparable 2003 period and down 85% from the same timeframe of 2002. Construction is limited almost entirely to build-to-suits, which C&W believes should help prevent further declines in market conditions.

Meanwhile, asking rental rates at class A properties have remained stable at between $26 per sf and $27 per sf since 2002, while class B asking rates dropped from $23.79 per sf to $21.25 per sf. The gap between class A asking and effective rates, however, has widened and is expected to continue to do so in the near future as owners compete for deals by reducing rates and contributing generous TIs.

Vacancy is highest, 38.6%, in the Main Line submarket, which, at $30.19 per sf, has the second highest average asking rental rate of all the suburban submarkets. C&W suggests that Brandywine Realty Trust's acquisition of Rubenstein Co. could help bring down both of those numbers. It expects Brandywine will be "aggressive in securing tenants" for Radnor Financial Center, the former Wyeth Pharmaceuticals headquarters, which is a part of the Rubenstein portfolio and has been largely vacant since Wyeth's exit in 2002.

Bala Cynwyd commands the highest suburban office asking rate at $30.91 per sf and has a 19.1% overall vacancy. At $21.98 per sf, Horsham/Willow Grove has the lowest asking rate in the Philadelphia suburbs, which excludes Lehigh Valley, PA and the Delaware submarkets. The Horsham/Willow Grove vacancy rate is 14.7%, the lowest in the suburbs and bested throughout the MSA only by the East of Broad submarket in Center City Philadelphia, where overall vacancy is 11.8%.