Office Oversupply To Take CBD Vacancy Rate Above 17%

Due to corporate downsizing, the Center City vacancy rate rose to 16% last year, compared with 12.6% at the end of 2003. That puts it just a point below the US average. Vice president Steve Gendler set the stage for marketing office space here by showing how class A rates here compare with rates in other cities. At approximately $25 per sf, class A space here is about half the average rate in New York and Washington DC and approximately $15-per-sf less than Boston. Expanding to a global comparison, Gendler noted that average rates in London are $137.53 per sf and invited companies to take a look at Philadelphia's "high quality inventory…a bargain for international companies."

Class A buildings, which experienced 1.5-million-sf of negative absorption last year, are suffering the most. By submarket, the priciest, West Market, took the biggest hit. Of five CBD submarkets, only Independence Mall had positive absorption in 2004, due to a move by Ace American Insurance, which now represents about 10% of that area's total office inventory, said VP Jim Egan.

The vacancies in top-tier properties makes this down cycle different from previous ones, according to Jack Soloff, VP, who also pointed to a stunning imbalance. "Six of the 41 buildings within the West Market St. submarket contain 67% of the submarket's total vacancy of 4.4 million sf."

The impact on rental rates, particularly the compression of rates between trophy properties and other classes of buildings, is equally stunning, according to SVP Craig Scheuerle. In 2001, the rate for trophies averaged $38 per sf. That has dropped to between $26 and $29 per sf, while rates at class A buildings dropped from $26 per sf to between $19 and $22 per sf during the same timeframe. "The once $10-per-sf spread has narrowed to about $6 per sf."

Furthermore, those West Market trophies, which include One and Two Liberty Place and Bell Atlantic Tower, are experiencing or will soon face huge vacancies. Ace's departure and Cigna's downsizing, for instance, open up the top 40 floors, aggregating about 800,000 sf in Two Liberty Place. On the plus side, "downsizing appears to be coming to an end," Soloff said, and Scheuerle added, "there are no more shoes to drop."

Wayne Fisher, director and SVP, concluded with a series of 2005 scenarios from best to worst. With zero growth, the vacancy could rise to 20% in 2007 and stay there through 2009, "which would be a 20-year historical high. A repeat of a robust expansion cycle," he said, would bring vacancy to about 11% by 2009. The more likely scenario, according to Fisher's projections, would have vacancy peak at above 18% in 2007, then gradually drop to just over its current 16% by the end of the decade.