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PHILADELPHIA-Although the MSA’s overall office market will be challenged by rising vacancies and falling rents for the remainder of this year, fundamentals will remain intact, according to mid-year research by the local office of Marcus & Millichap Real Estate Investment Brokerage Co. “Economic growth in the second half of the year will boost the market and allow for healthier conditions in 2004,” predicts Jeffrey R. Algatt, regional manager of M&M.

Despite a loss of 2,500 jobs in this market in the opening quarter of this year, the report projects a net gain of 25,000 jobs by the end of this year. Meanwhile, the sagging economy forced developers throughout the MSA to hold back new construction. Just 1.5 million sf are expected to be delivered during 2003.

The MSA’s vacancy rate has risen steadily for the past two years and will peak at 13.4% late in 2003, up from 12.5% in 2002, the report suggests. “Though improving employment is forecast for the second half of 2003,” Algatt says, “the increase in jobs will not translate into demand for additional office space until companies absorb any excess space they already have on hand.

“Effective rents crested at $20.14 per sf in 2001, but have been sliding since then, declining 2.8% in 2002 to $19.28 per sf,” he said. “In the first quarter of 2003, they continued to decline, but not as steeply, settling at $19.22 per sf.” While Algatt believes effective rates will continue to decline as owners use concessions to combat rising vacancies, “the steepest declines appear to have passed.” He predicts that effective rents will decrease by just 0.7% this year.

Meanwhile, the price per sf for investors is reportedly rising. The overall median price of office buildings in the MSA dropped from $88.46 per sf in 2001 to $84.25 per sf last year. First-quarter 2003 estimates, according to M&M, show an increase to $95 per sf.

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