Newmark Knight Frank Smith Mack Releases Third Quarter 2012 Office Market Trend Report
Posted : 10/02/2012

As has become summertime tradition in the commercial real estate business, the Greater Philadelphia market was quiet in Q3 2012, remaining virtually unchanged quarter-over-quarter. Although leasing activity was seen across Philadelphia, its suburbs, Northern Delaware and Southern New Jersey, new availabilities counteracted positive absorption, resulting in basically the same net vacancy rate – 19.1% - as seen in Q2. Average asking rate also remained unchanged quarter-over-quarter at $21.93. 

Philadelphia

The Philadelphia market remained largely flat quarter-over-quarter, posting a negligible increase in vacancy of about 46,500 total square feet across all submarkets. The total vacancy rate rose slightly from 14.3% in Q2 to 14.4% this quarter and asking rate remained nearly unchanged, closing the quarter at $24.52 per square foot. These results are consistent with last year’s third quarter, when the market closed with a negligible negative absorption of about 37,800 square feet, and further reinforces the axiom that the commercial real estate market is generally quiet during the summer months.

Despite the lull in the overall market activity, some transactions were still completed. In Market Street West, Cozen O’Connor announced it would be moving from its current space at the Philadelphia Stock Exchange building (1900 Market Street) – which was also listed as available for sale in August - for One Liberty Place (1650 Market Street) in 2014. Commercial real estate brokerage firm Cushman & Wakefield is also moving to One Liberty, taking approximately 24,000 square feet. The Neat Company, headquartered at 1601 Market, expanded its Philadelphia presence this quarter with a 26,500 square foot expansion into nearby Ten Penn Center (1801 Market Street). Sb1 Federal Credit Union took approximately 22,600 square feet at 1500 Spring Garden Street and Ballard Spahr LLP renewed in 189,500 square feet at 1735 Market. Meanwhile, approximately 56,000 square feet opened up at One Commerce Square (2005 Market Street) as The Pew Charitable Trusts downsized from three floors to one, the Family Planning Council’s 30,000 square foot 18th floor space at 1700 Market Street became available for sublease and PRWT companies gave back space on the 11th floor at Eleven Penn Center (1835 Market Street). Because the leasing and vacancy activity noted above remained within the submarket, the vacancy rate remains virtually unchanged at 15.3%. Also in the news in Market West is Liberty Property Trust’s announcement that it plans to build a 400,000 square foot office building on the current parking lot situated at 19th and Arch Streets and the announcement that 2000 Market Street is now also available for purchase. 

The Market Street East submarket was down 43,760 square feet in absorption and closed the quarter with a 15.5% overall vacancy rate. Activity this quarter included Penn Medicine’s space at the Curtis Center (601 Walnut Street) hitting the market, DMi Partners leaving the North American Building (121 S. Broad Street) for a larger space at One South Broad and an additional 15,565 square feet becoming available at Penn Mutual Towers (510-530 Walnut Street). Chestnut/Walnut was also quiet this quarter, although E&A Therapy reportedly leased 8,700 square feet at 1608 Walnut Street. The submarket ended the third quarter with a 17.2% vacancy rate. 

In the Non-CBD submarket, Tasty Baking Company listed 23,815 square feet of its space at Three Crescent Drive as available for sublease while 3401 Market, 3701 Market and 3624 Market all reported reductions in available space this quarter, resulting in net positive absorption across the submarket of approximately 26,700 square feet. Non-CBD ends the quarter with an overall vacancy rate of just 5.5%.
Philadelphia SuburbsThe Philadelphia Suburban market saw a slight uptick in availabilities this quarter, driving the vacancy rate up to 22.8% from 22.7% in Q2. Surveying the market, we surmise that some of the increase in mid-size availabilities this quarter is due to pre-emptive marketing by owners as tenants explore market alternatives before deciding to renew.

Already the best performing suburban submarket, Radnor/Conshohocken’s total vacancy rate dropped to 9.4% in Q3 and average asking rate climbed from $29.70 in Q2 to $29.85 this quarter. Offices in Radnor are nearly 100% occupied, which in turn bolsters activity for around-the-corner Conshohocken, and the submarket is consistently outperforming all of its suburban competition. The submarket garnered 111,000 square feet of positive absorption overall in Q3 across buildings that Newmark Knight Frank Smith Mack tracks. Notable deals included NextDocs leasing 30,000 square feet at Six Tower Bridge, Nationwide’s renewal at Quaker Park (1001 E. Hector Street) and Essent Guaranty, Inc.’s expansion within Radnor Corporate Center. 

Gains seen in Conshohocken/Radnor were offset entirely by new availabilities hitting the market in the Horsham submarket, which closed Q3 with an overall vacancy rate of 21.8%, up from 18.6% in Q2. A handful of Horsham tenants are reportedly shopping the market right now, likely accounting for the negative absorption of 133,400 square feet seen these past three months. Expectations lean toward seeing the majority of these tenants renewing and we anticipate some positive absorption in the coming quarters. Also of note in Horsham is 1 Walnut Grove Drive, which has been for sale and is now reportedly under contract. 

We suspect Plymouth Meeting/Blue Bell faces a similar situation as Horsham - pre-emptive marketing of several potentially available spaces - as the submarket closed the quarter with approximately 43,800 square feet of negative absorption. 7002 Butler Pike was sold to Liberty Lutheran Services this quarter; also of note is a new 10,000 square foot sublease availability at Bentwood Executive Campus. Although there was no significant office leasing activity in the submarket in Q3, Brandywine Realty Trust announced it would be partnering with Toll Brothers to build a multi-family project in Plymouth Meeting, indicating confidence in the submarket overall.

The big story in the King of Prussia/Wayne submarket in Q3 was Auxilium Pharmaceutical’s 70,000+ square foot lease at Chesterbrook Corporate Center (640 Lee Road), slated to commence in 2013. Additionally, two new leases were signed at 1000 Continental. King of Prussia’s Class B space also experienced some leasing activity this quarter, particularly at the Woodlands (900 E. 8th Avenue) where ImageFirst Uniform Rental took 8,300 square feet and The Bancorp took 2,700 square feet. King of Prussia Business Center also saw some leasing activity with a small lease for a consulting firm and a 6,100 square foot renewal with a wireless service provider. However, these gains were offset by new availabilities to the market, particularly at the Triad Building (2200 Renaissance Boulevard) which is now being marketed as 100% available for lease. The submarket closed the quarter negative absorption of 26,800 square feet and with a 24.6% vacancy rate and average asking price of $22.61.  

Elsewhere, Delaware County netted positive absorption this quarter due largely to Keystone Mercy Health Plan’s lease of about 85,000 square feet at International Plaza, as well as two new leases at Ellis Preserve (West Chester Pike). The submarket closes with a 23.1% total vacancy rate, down from 23.9% in Q2. In neighboring Chester County Titanium Metals Corporation renewed approximately 23,600 square feet at Valley Creek Corporate Center (224 Valley Creek Boulevard). That submarket remained nearly flat, however, as a handful of mid-size new availabilities offset the absorption gains seen at Valley Creek, and the total vacancy rate at the end of Q3 was 27%. Also of note in the Malvern/Exton/West Chester submarket was Hayden Real Estate Investments purchase of 11 buildings within the Oaklands Corporate Center from Brandywine Realty Trust in July.

The North Penn submarket saw some leasing activity in Q3 as Global DMS took about 14,000 square feet at Towamencin I (1555 Bustard Road), and Towamencin III (1690 Sumneytown Pike) also netted about 5,250 square feet of positive absorption with two new leases. Consequently, the submarket’s total vacancy rate dropped from 32.5% in Q2 to 31.8% this quarter, although North Penn continues to have the highest vacancy rate across the Suburban market. In Lower Bucks, the submarket also saw an increase in availability across the properties NKFSM tracks due to new availabilities posted at One Oxford Valley (2300 E. Lincoln Highway) and Bucks Town Corporate Center (Town Center Drive). Most noteworthy in Lower Bucks, however, is the auction of 900 Northbrook Drive and 1210 Northbrook Drive which is slated to close in mid-October. Meanwhile, the Bala Cynwyd submarket also experienced net positive absorption with a renewal and expansion for tenant Osage Industries, Inc. at 50 Monument Road and a renewal of United National Group at Three Bala Plaza.

New Jersey

The Southern New Jersey market posted an overall positive absorption of 92,120 square feet this quarter across the buildings NKFSM tracks, concentrated entirely in the 3M submarket. Overall total vacancy for Southern New Jersey dropped from 21.3% in Q2 to 20.6% this quarter and average asking rate nudged upwards to $14.92 per square foot. 

The big news in the Camden submarket this quarter was Subaru’s announcement that it is looking for 250,000 square feet of space to replace the two buildings it currently owns in the submarket. There was some leasing activity, however, as Commerce Center (Chapel Avenue) recently leased 6,500 square feet to Kremer Eye Center and another 3,100 square feet to Actelion Clinical Research, Inc. and both tenants moved in this quarter. However, due to additional space being marketed as available, the quarter resulted in negative absorption of approximately 9,000 square feet across the Camden submarket for Q3.

The 3M submarket, on the other hand, garnered 101,100 square feet of positive absorption this quarter, primarily due to a 53,600 square foot lease for Admiral Insurance Company on two floors at Mount Laurel Corporate Park (1000 Howard Boulevard). Additional leasing activity included another insurance firm reportedly leasing 10,000 square feet at 309 Fellowship Road and two small leases at 10000-11000 Lincoln Drive. A new lease was reportedly signed at 1020 Briggs Road and a title company reportedly took new space at neighboring 1015 Briggs Road. Meanwhile, a new, 23,400 square foot sublease space hit the market at 501 Fellowship Road, which was the largest new vacancy in the submarket this quarter.  
Year-over-year in the Southern New Jersey market, Camden remains nearly unchanged with a total vacancy rate of 25.7%, although the 3M submarket has shown some improvement, closing Q3 with a 17.3% vacancy rate, down from 18.6% at this time last year.

Delaware

The Northern Delaware market saw approximately 69,000 square feet of positive absorption this quarter across the buildings NKFSM tracks. Both the Wilmington CBD and New Castle County submarkets experienced positive absorption and saw their overall vacancy rates fall from 21.6% to 21.3% and 17.5% to 17.1% respectively. The average asking rate for the quarter was $21.46 across the entire Northern Delaware market, up slightly from $21.22 in Q2.

The Wilmington CBD closed Q3 with approximately 20,400 square feet of positive absorption, as leasing activity outweighed a handful of new, mid-size space availabilities. The IM Pei Building at 1105 N. Market Street leased almost 6,000 square feet to Stewarts Law and another 2,700 square feet to The Darby Law Firm. The Citizens Bank building at 919 N. Market Street leased over 8,000 square feet to NHB Advisors, Inc. The Wilmington Institute reportedly leased approximately 14,500 square feet at First Federal Plaza (704 N. King Street) and the law firm of Connolly & Gallagher reportedly leased an entire floor at the Brandywine Building (1000 N. West Street). New availabilities in Wilmington this quarter included the entire 23rd floor at Chase Manhattan Centre (1201 N. Market Street), now earmarked as available for sublease, and Zutz Insurance Group’s former 16th floor 17,000 square foot space at 300 Delaware Avenue. 

Meanwhile, all three New Castle County submarkets netted positive absorption in Q3 as well, with a handful of small leases inked across the county. Swift Financial reportedly filled about 10,000 square feet of Accenture’s sublease space at Rockwood Office Park (501 Carr Road) in North New Castle County. In South New Castle County, Lloyd Consulting reportedly took 7,200 square feet of office space at the New Castle Corporate Commons (2 Penns Way) and in West New Castle County, RFH Development took 4,500 square feet of space at Limestone Professional Center (2055 Limestone Road). New mid-size availabilities hitting the market this quarter included approximately 4,600 square feet of space in North New Castle County at Bellevue Park Corporate Center (200 Bellevue) and 7,500 square feet of space in South New Castle County at University Plaza I (248 Chapman Road). Also of note is the WSFS Building (2400 Philadelphia Pike) in North New Castle County was listed for sale in early August.
Year-to-date the Northern Delaware submarket is nearly flat, registering only a slight increase in overall vacancy from 18.5% in Q3 2011 to 18.8% in Q3 2012. This is reflective of the wait-and-see attitude Delaware’s business economy has adopted and will likely continue as the end game of the financial sector’s mergers and acquisitions play out.  

 It was a relatively slow summer, but history shows that this is not unusual.  Deal activity traditionally picks up during the 4th quarter, and while we anticipate more leasing deals being completed, the upcoming election will continue to affect some decision makers’ willingness to make major real estate decisions as they wait and see where the chips fall.