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PHILADELPHIA-The latest quarterly report by Grubb & Ellis for Philadelphia shows a slight increase in vacancy rates in the CBD for the Q1 but forecasts vacancy rates will decline and rents will continue to increase. “In terms of the Downtown, we are looking for another strong year,” says Matthew Wright, research services manager for Grubb & Ellis. “We are looking at appreciation in rental rates to continue. We are looking for less availability for larger and mid-size users.”

There was a negative absorption of 129,000 sf in Q1, after eight consecutive quarters of decreasing vacancy rates, Wright says. The increase was due to Grubb & Ellis taking into account approximately 176,000 sf of space of the Verizon sublet, which is expected to soon become vacant although there is about five years left on the lease, Wright says.

The suburban market, however, saw 46,195 sf of new growth in the first quarter. “The suburbs performed strongly,” he says. The most growth during Q1 was in the Horsham/Willow Grove and Radnor/Main Line submarkets, Wright says. One of the largest lease signings for the quarter was the lease for 180,000 sf signed by Lincoln Financial Management in the Brandywine Realty Trust’s Radnor Financial Center in the Radnor/Main Line submarket.

Vacancy in the Radnor/Main Line submarket had been more than 45% three years ago after Wyeth moved into its own campus, now at the end of Q1 vacancy there has dropped to 24.5%. Part of the reason for the decrease in vacancy is Brandywine spending approximately $25 million and repositioning the Radnor Financial Center Complex.

Grubb & Ellis continues to forecast an overall absorption in the CBD between 500,000 sf and 800,000 sf with a vacancy rate of between 8% and 8.5%, Wright says. At the end of Q4 2006, there was slightly more than one million sf of absorption and a vacancy rate of 10.2%.

Rents increased in the Q1 and are expected to continue to do so. The asking lease rate for class A space increased $0.50 to $26.78 per sf while the asking lease rate for class B space increased $0.45 to $22.74 per sf, according to the report. Tenants should “size opportunity now if they are out there as an erosion in their leverage is likely in the months and quarters ahead,” Wright says.

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