Q1 brought 100,000 SF of negative absorption with the CBD’s vacancy rate rising to 16.4% with 7.3 M square feet available.
Fire Sale in Philadelphia
Let’s stake a look at how the landscape of the Philadelphia office market is changing
- One South Broad St- being marketed for sale as possible residential conversion.
- 2000 Market Steet- being marketed for sale and remain as an office use.
- 1801 Market Street- being marketed for sale as possible residential conversion.
- 400 Market Street- has been sold and being converted to residential use.
- The Bourse Building- has been sold and being converted to a hotel and partial office use.
- Three Parkway- has been sold and being converted to a hotel and partial office use.
- Public Ledger- Sold and being converted to a residential use.
- The Bellevue- sold and being converted to a residential, and hotel use while maintaining a very limited number of tenants occupying office space.
- Centre Square: In receivership.
- 1601 Market St. Receivership is inevitable in my opinion.
- 1700 Market St- In receivership
- 1818 Market St- In receivership
What will Philadelphia’s CBD office market look like in 5-10 years is anybody’s guess. Philadelphia, like others, but not all office markets are forever changed. What the future holds is anybody guess, but I can assure you it will never be what it was prior to the pandemic, how could it be?
Remember the “the haves & The have Nots”. There is a very large difference in performance between the city’s trophy and non-trophy assets. Trophy assets continue to be attractive and outperform the market. I do anticipate the variation in economics between trophy assets such as One & Two Liberty Place, Mellon Bank Center, One, Two, and Three Logan Sq, and both One and Two Commerce Square to increase over the rest of the market through the balance of 2025 and beyond. Why, simple, strong ownership, and access to capital.
Landlords are expected to maintain high gross rental rates to preserve property values and meet cash flow projections. Reducing base rents diminishes property valuations but also establishes a lower benchmark for future lease negotiations. Instead of lowering base rents, landlords are offering concessions such as longer abated rent periods and tenant improvement contributions. This approach to leasing helps sustain a higher face rent on paper, even though it does not accurately reflect the lease’s true economic value.
Current Quoted Rental Rates
Quite evident is the increase in asking rates exclusive to Trophy space… and the decrease in asking rates that are exclusively observed in Class A space.
- Trophy Class space is priced at $46.50/SF
- Class A space is priced at $33.00/SF
- Class B space is priced at $28.00/SF
- Class C space is priced at $23.50/SF
Sublease availability in the CBD has decreased significantly from its peak in 2022, Q 1 represents its lowest level in many in recent memory.
Looking ahead:
I see a much smaller office market, and limited choices for tenants to competitively evaluate relocation options.
Now more than ever it is essential for tenants to be well represented to help navigate the murky waters of Philadelphia’s office market. For example, access to capital, funding sources, debt service, conversions, to name a few.
Tenants, remember, simply raising your hand and asking for the best deal is not the answer, it is necessary to leverage all viable and healthy options to produce the most advantageous economic results.
I repeat, the typical timeline to address a lease is 12-15 months in advance of lease expiration. Today, however, and considering everything that must be navigated in this process, it would be most prudent to begin the process 18-24 months in advance of lease expiration. If you are a tenant seeking greater than 30,000/RSF the timeline should be 24-36 months in advance of lease expiration.
If you have further questions or inquiries, I welcome the opportunity to help you. Reach out at your convenience. It would be my pleasure to have a conversation.
Ken
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