PHILADELPHIA-The Philadelphia office market is continuing to strengthen, according to second quarter market reports and preliminary third quarter information. Vacancy rates have been decreasing and asking rental rates have been increasing, says Bill Hirschfeld, senior director with Cushman & Wakefield. “I would classify this market right now as one with a healthy equilibrium between landlords and tenants and looking like it is starting to become a little healthier for landlords,” he says.

Vacancy rates continue to be at the lowest in five years. The overall vacancy in the CBD was 11.9% for the second quarter of this year, according to Cushman & Wakefield research. Third quarter numbers were not released yet but Hirschfeld says vacancy decreased about another 50 basis points. Third quarter figures “are quite similar to the second quarter with just very small improvements in terms of a slightly lower vacancy rate and slightly higher net absorption numbers,” Hirschfeld says. Part of the reason for the strengthening of the office market is due to employment growth with local employers forecasting to add 27,000 jobs this year with approximately 6,300 of the positions being in office-using sectors, according to Marcus & Millichap’s second quarter report. Vacancy rates are also declining due to “organic growth,” Hirschfeld says. “We are still seeing tenants that are making decisions to either just expand a little or, when they redo a lease and relocate to another building, they are winding up taking more space than they are leaving behind,” he says. “That trend is certainly continuing into the third quarter.”

One of the major transactions for the second quarter was the move of the University of Pennsylvania Health Systems administrative staff from across the Schuylkill River in University City to the West of Broad submarket at 1500 Market St. There is a limited amount of space in University City and the university decided the “higher and better use” of its space was for medical uses, Hirschfeld says. The University of Pennsylvania Health Systems is expected to expand to a total of 263,117 sf at Centre Square during the next several years, according to Cushman & Wakefield’s report. The West of Broad submarket saw the most leasing activity, although the submarket also has about two-thirds of the office space in the Central Business District, Hirschfeld says. Comcast also is leasing 87% of the Comcast Center, under construction at 1701 John F. Kennedy Blvd., with the building 91% leased, according to information from Cushman & Wakefield and Marcus & Millichap’s reports.

The decrease in vacancy is allowing landlords to increase asking rental rates, according to the reports. The overall average rental rate in the CBD remained stable in the second quarter at $23.28 per sf and continued to remain stable in the third quarter but there were increases of approximately $1 per sf for trophy buildings in the district. In the early part of the year there was “hundreds of thousands” of space that were either leased or “close to signing” leases in trophy properties in the Central Business District, Hirschfeld says. “As those class A+ buildings have decreased their vacancy, they have ratcheted up their pricing,” he says. Estimated concessions have decreased for the Philadelphia market to about 14.4% for the second quarter from about 15% one year ago, according to Marcus & Millichap’s second quarter report.

There has been an increase in speculative office construction, particularly in the suburban market, according to Cushman & Wakefield’s second quarter report. “Given the healthy dynamics of the suburban market, a number of developers decided that it was worth the risk to do some speculative development,” Hirschfeld says. “That is a real positive sign in the market when we see these developers willing to do that and that has been happening in our suburban markets.” Thus far, deliveries have been partly offset by space being taken offline by conversions to other uses but the increase in construction could cause “pressure” for vacancy and rental rate growth, according to the report from Marcus & Millichap. Approximately 2.4 million sf of office space is scheduled to be completed this year in the Philadelphia market as opposed to nearly one million sf in 2006, according to Marcus & Millichap research.

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