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[IMGCAP(1)]PHILADELPHIA-At the midyear mark, Philadelphia’s office leasing market is faring better than the national average, and while local market experts do anticipate a slight uptick in vacancy by year’s end, they also see positive signs for the long term.

“If we see Unisys moving into Center City and if in fact the Blackstone Group does formally announce that they’re going to be occupying Cira South in a couple of years, then you’ll have some real excitement and enthusiasm over the fact that Philadelphia has been able to attract significant corporate tenants,” Robert Walters, executive managing director of the Greater Philadelphia office for CB Richard Ellis, tells GlobeSt.com. “Frankly, that’s a sign that we haven’t enjoyed for many years. Over the years, we’ve lost more corporate-leader jobs than we’ve gained.”

[IMGCAP(2)]With that said, the city’s office market has continued its rebound from the 14% to 15% vacancy rates seen earlier in the decade. Cushman & Wakefield’s midyear office report for the Philadelphia office market showing that the city’s overall vacancy for Q2 2008 reached 9.5%. It represents a slight increase from the first quarter but is well below the national average of 10.2%, according to a prepared release from C&W.

The two major submarkets of east and west of Broad Street have each seen year-over-year decreases in vacancy, according to C&W. The east of Broad vacancy rate decreased to 8.1% from 12.8%; west of Broad decreased to 10.1% from 11.5%.

“Philadelphia has just had some good velocity,” John Derham, who heads C&W’s Philadelphia office, tells GlobeSt.com. “We had a really good first quarter from the cleanup of what happened at the end of 2007.”

He notes that the opening of the Comcast Center last month has “really made a big change in the market. The big fear was that when the Comcast tower came on line, it was going to cause this great vacancy in the market. That hasn’t happened, because most of the space has been backfilled by tenants who had grown or expanded over the last 24 months.”

One reason that occurred, Derham says, is that tenants did not have all that many places to expand here. “Philadelphia historically has not had a lot of overbuilding going on,” he says. “If you make the assumption that we absorb 400,000 sf of space every year, and the Comcast tower came on with 1.2 million sf, that’s only three years of supply. Before that, the last building to be finished was the Cira Centre in 2006, and the last one prior to that came on line before 2000. We had quite a few years where we built nothing. We actually took space off the market for conversions to hotels and multifamily. That’s why our vacancy today is sitting at 10% or below.”

Derham sees great potential in Brandywine Realty Trust’s forthcoming Cira South—where Blackstone may take up residence if it relocates from Plainsboro, NJ—and is also encouraged by the Internal Revenue Service’s recent move to establish its regional headquarters here. “We’re going to be very stable for the rest of the year,” he says. “You’re seeing a little sublease space coming into the market, but nothing that’s dramatic like we’ve had in past down cycles. That sublease space is getting absorbed by firms that are expanding or growing.”

He notes that velocity has slowed down, which he attributes “more to corporations slowing their decision cycles down, watching the overall economy, as opposed to watching the Philadelphia real estate play.”

Walters concurs with Derham’s overall assessment. “It’s been a good first half of ’08 overall,” he says. “One encouraging sign is that we have seen continued rent growth during the past two years, and that has continued in the first half of this year. Going forward, we expect the rent growth increases to taper, but we still expect ’08 to show solid rent growth, in the downtown markets as well as the suburban markets.”

Referring to the Census Bureau’s recent report that showed that the city’s population declined 4.5% from 2000 to 2007, Walters notes that Philadelphia is hardly alone in this regard. Like other Northeastern cities, it has been affected by manufacturing job losses “for about 40 years now.”

However, Walters says he’s encouraged by the Nutter administration’s plans to lower the wage and business privilege taxes. “The trend line is going in the right direction. We have a new direction that has a broader perspective of business and industry in the city, and there’s no question that Mayor Michael Nutter taken a much more proactive, assertive role in welcoming business to the city.”

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