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PHILADELPHIA-The educational and health care sectors along with the opening Comcast Center have helped Philadelphia’s office market stay ahead of the rest of the country, according to Marcus & Millichap’s Office Research Report for the second quarter. The report also states rents will gain slightly as will office vacancy.

Average asking rates moved up 5% to $23.90 per sf while effective rents came up 4.1% to $20.31 per sf in the past 12 months according to the report. Last year asking and effective rents increased to 3.3% and 4.1% respectively. Class A rents increased 5.3% to $26.86 per sf, which the report says occurred because of more new space coming into the market. Class B and C rents rose 2.7% to $19.23 per sf. Last year similar rents came up 2.4%.

“In spite of the economy having difficulties, the office market seems to be strong in Philadelphia,” says CB Richard Ellis senior vice president David Jarjisian. “For sure rents have raised significantly in the past 12 months. What is causing it is a lack of space in University City.

“Rents are rising across the board for office buildings. There are deals being made in trophy buildings for $35 to $45 per sf plus electric,” says Jarjisian, who mentions he’s seeing class A go for $27 to $29 per sf plus electric.

Few properties coming online and financial challenges slowed sales velocity increases to 6.4% during the past 12 months, according to the report. Assets are going for a median price of $133 per sf, which is a 6.3% increase from last year. Prices have risen 21% and the report attributes that to high-quality assets making up a greater share of closed deals.

“Buyers will remain focused on established properties near arterial roadways in submarkets with strong residential and retail bases, such as King of Prussia and Exton/Malvern,” Spencer Yablon, regional manager of the Philadelphia office of Marcus & Millichap, says in a prepared statement.

Nearly 450,000 sf of medical office space came into the market over the past 12 months compared to last year which saw only 120,000 sf added. Medical vacancy sits at 12.2% at the end of the second quarter, according to the report. Asking rents for medical office space are at $21 per sf, a 4% decline. The report attributes this fall to increased space on the market.

Developers have put about 1.9 million sf of new space out this year, compared with the one million during the past year, according to the report. The report also mentioned the Comcast Center as a boon to the enter City office market. The $500 million development put an additional 1.3 million sf to the area.

“The fact that the Comcast Center has grown from 450,000 sf to one million sf is only good for the city. It has definitely had a positive impact on the city,” says Jarjisian.

John Derham, who heads Cushman & Wakefield’s Philadelphia office, echoes Jarjisian’s and the report’s statements. Derham told GlobeSt.com late July Comcast Center’s opening 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.”

Vacancy in Philadelphia is doing better than the national average, with a 12.2% vacancy rate in offices overall. Class A buildings have a 11.7% rate while lower tiers have 12.4%. The report cites that some users are looking for cheaper space while the addition of the Comcast Center boosted class A vacancy.

“The city had 12 blocks of large space, more than 100,000 sf, 18 months ago,” says Jarjisian. “There are only three of those left today. That tells you those are moving. A number of leases will expire in the next 24 months, unless something gets build. These tenants don’t have too many options. They will probably just renew.”

Jarjisian adds two factors to Philadelphia’s success in the office market. “Philadelphia has become a good residential community that the Center City schools’ students are opting to live and work in Philadelphia. Or, if they work in the suburbs, they still want to live in Center City. That’s helped,” says Jarjisian, who offers another explanation for Philly’s luck. “Office tenants are coming in from outside of the city and they will continue to do that.”

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