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PHILADELPHIA-Center City is on an upward trend across the market sectors, says a new report from the Center City District and Central Philadelphia Development Corp. although growth in office jobs remains a sticking point. According to “State of Center City 2008,” which was made public on Thursday, office jobs in Philadelphia managed just 1.7% growth between 2004 and 2007. That compares to the 10.5% growth posted by surrounding counties between 2002 and ’07.

One factor that has discouraged Center City job growth has been taxes. “The city’s tax structure–the combined impact of the wage and business privilege taxes–historically undermined this advantage, pushing growth and new firm creation beyond city boundaries and shifting jobs that had been accessible to neighborhood residents beyond the reach of regional rail lines.” However, the report saw “a strategic opportunity for office business growth and attraction” in Mayor Michael Nutter’s commitment to regulatory simplification and reductions in the BPT.

As GlobeSt.com reported earlier this month, developer Walnut Street Capital is planning a 1,500-foot mixed-use tower across the street from the Comcast Center, currently Philadelphia’s tallest tower, and other skyscrapers are planned for Center City. “The fact that other developers are proposing additional office buildings is clearly a sign of confidence and interest in the downtown,” Paul Levy, president and CEO of CCD. “The fact that they are exploring how to connect that building to the transit concourse underground shows the importance of the regional transit system that brings almost 300,000 people downtown each day. The fact that Philadelphia elected a mayor who was a strong proponent of wage tax reduction and is now proposing to cut the BPT and reduce regulatory barriers also sends a strong message that Philadelphia is business-friendly.”

Office vacancy rates continue falling, reaching 10.6% by year-end ’07 and projected to reach 9.6% by year-end ’08, according to the report. Positive absorption was 887,111 sf. “Over the last 23 years, Center City has averaged net positive absorption of 421,288 sf per year,” according to the report. “But with new local political leadership committed to more aggressive tax reduction and with a well-funded, regional business marketing campaign, downtown could be poised for more growth, so long as there is no significant economic downturn.”

An office market report from Studley released last week noted a slowdown in transaction velocity throughout the Philadelphia region, although it cited Center City as an exception to this trend. “All commercial brokerage firms have been reporting a steadily declining vacancy rate downtown and the fact that Center City has the highest office occupancy rate in the region,” says Levy. “The national market has cooled, but what that has meant for Center City is only a slowing in our rate of growth.”

Center City increased its share of the region’s office space from 27% to 28%, reversing a 15-year decline from a 41% market share in 1993. “With SEPTA now secure with dedicated funding and committed to increased frequencies and improved customer service, downtown has a significant opportunity to capitalize on its walkable, amenity-rich environment, its proximity to institutions of higher learning and its position at the center of the region’s highly skilled labor market,” the report says.

The majority of Center City residents have relatively short commutes, with many either walking to their jobs or taking public transportation. Levy notes, “63% of Center City’s residents work downtown—so there is a direct relationship between increasing office jobs and the strong growth in downtown housing. The steady expansion of health care and educational sector jobs is also a strong driver of downtown housing demand.” This couples with a “favorable” cost of living: a Center City homeowner earning $83,687, the average annual wage of professional services employees here, would have to earn 11% more in Washington, DC and 73% more in New York City to enjoy the same standard of living. These factors helped keep housing prices and rents strong, although for-sale units stayed on the market longer than in previous years, in keeping with national trends, according to the report.

However, one effect of the subprime meltdown has not affected Center City: Philadelphia’s foreclosure rate is the lowest of the 10 major metropolitan areas and has actually declined since 2006, the report says. The average condo price in ’07 was $482,596, while 115 units sold for more than $1 million, double the number that crossed this price threshold in ’06.

In retail, Center City’s occupancy rate stands at 88%, according to the report, with a net increase of 50 new premises last year. The report says that “weak blocks” on East Market and East Chestnut streets will be transformed by continued retail improvements in the coming years.

On the hospitality side, average daily room rates in Center City rose 7% in ’07 to $167.56. Occupancy rates last year were 73.6%, “their highest in more than a decade.” and “At least 15 proposed projects, totaling over 3,500 additional rooms, are in the planning or financing phase for sites north and west of City Hall in close proximity to the Pennsylvania Convention Center.” However, “A tightening credit market will probably limit the number of projects that come to completion, but Center City’s regional share will definitely grow by 2011.”

Levy cites three key factors in Center City’s continued growth: its centralized location amid the region’s transportation network, “with strong transit service, giving regional employers access to a 360-degree labor market;” its “broad array” of amenities for office workers, including restaurants, retail, arts and cultural institutions; and its density and compactness. He notes that 40% of downtown residents walk to work, “the highest percentage in the nation.”

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