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PHILADELPHIA-The overall vacancy rate in the office sector of the Philadelphia MSA will continue its current ascent and end the year at 13%, forecasts Jeffrey R. Algatt, regional manager of the local office of San Francisco-based Marcus & Millichap. The upward trend began, he says, in the first quarter of 2001.

“Average office vacancy rose to 11.3% by the end of last year. The 2.8 million sf absorbed in 2000 were almost entirely given back in 2001, as companies that grew aggressively or were stockpiling space for future expansion saw demand . . . plummet,” Algatt says. Despite these difficulties, “the region has held up well in comparison to other major markets.”

Completions, according to Marcus & Millichap analysts, will inch up slightly from 2.9 million sf in 2001 to 3 million sf this year, “spelling the end of the recent mini-boom in office construction.” Office starts, Algatt notes, were relatively high in this market each year since 1998. Currently, however, many planned projects have been put on hold.

While vacancy rates and unemployment rise this year, “rent growth will remain stagnant over the next 12 months,” he says, adding, “asking rents are not likely to decline materially as they will in many other markets across the country.” He predicts that average asking rents for class-A office space in Philadelphia’s markets will remain at $22.46 per sf, unchanged from 2001.

“Concessions,” he acknowledges, “have become necessary to thwart (the vacancyincrease), and broker incentives are also being used.” Algatt also notes that expenses have increased, citing property insurance rates in particular, which “are rising at an alarming rate (along with) the need for greater building security.”

The market is “poised for improvement at year end,” Algatt says, citing the likelihood of “job growth, positive absorption, stabilized vacancies and flat effective rates.”

Algatt’s report echoes the sentiments expressed by R.Craig Butchenhart, president of mortgage banking and investment services for locally based-Legg Mason Real Estate Services, at a June conference. “Philadelphia is more like a bond than a high-growth stock. It’s stable and steady,” he said.

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