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PHILADELPHIA-Office lease negotiations continue to favor tenants as an unusual number of Center City’s class A office buildings have an extraordinary amount of available space, according to Hether Smith, SVP of the local office of Studley. Availability actually slipped from 18.4% in second quarter to 17.7% in third-quarter. Nevertheless, relocations, corporate downsizing, the completion of Cira Centre and the possible addition of One Pennsylvania Plaza, could add to the surplus.

At the end of the third quarter, Studley reported that close to one million sf, or approximately 40%, of One and Two Liberty Place is available; Bell Atlantic has almost 600,000 sf, or about 60% of its space available; more than half, or about 300,000 sf lay vacant at Three Parkway, and 500,000 sf, or approximately 25% of Centre Square is on the market. Sunoco’s pending relocation from Ten Penn Center will put that building in the same boat.

In spite of this, the overall Downtown asking rental rate slipped just a nickel, down to $22.02 per sf, from the second quarter, according to Studley data. Class A rents dropped 34 cents to $23.34 per sf, but the desirable West Market Street submarket took a bigger hit, with a 42-cent decline to $23.57 per sf.

Marcus & Millichap also puts the overall drop in the average asking rate at five cents this quarter, but Jeffrey Algatt, regional manager of the local office, forecasts a 1.2% drop to $18.41 per sf in effective rates. This follows a 3.4% drop in effective rates in 2003, he points out. “Tenants will be able to demand reduced rent or concessions through year-end.”

The high availability is not expected to deter investor interest in Philadelphia office buildings, according to Algatt. “Investors who are expecting an office market recovery in 2005 are likely to search the region for properties with upside potential.”

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