The average office rents that landlords are asking for Class A space in the Philadelphia area, lately around $26.29 a sq. ft., "have largely remained flat since the beginning of the recession, only increasing 1.5% year after year" in the recovery years, national tenant rep Savills Studley says in its forthcoming fall report on the local market. Rents remain below their nominal second-quarter 2008 peak of $27.03; they're down even more when you count the impact of inflation.
What this shows: area ofice employment still hasn't fully recovered. What it obscures: A growing split between rising Center City/Main Line demand, on the one hand, vs. continued weak leasing at aging suburban office centers elsewhere.
"Current Suburban Class A asking rents ($25.76) still remain well below their pre-recession peak of $28.06 and have not witnessed any significant growth since their low of $25.09 in the fourth quarter of 2011." By contrast, Center City "has witnessed record high asking rents in all building classes in the third quarter of 2014," with average asking rates marching toward $30/sq ft, though these are still only modest percentage increases since the recession -- and that's not counting inflation.
Not coincidental: Both Center City and Radnor-area office space is dominated by one landlord, Brandywine Realty Trust. "Brandywine has done a really good job in leasing up their space," says Greg Soffian, senior vice president and co-branch manager for Savills Studley in Philadelphia. "Brandywine, Arborcrest, and some other landlords who offer amenities such as a gym, food service, and public transportation in or near their buildings, are the driving factors causing those markets to face a lot lower vacancy."
Philadelphia is the center of the regional transit network; Conshohocken "has three train stops," Radnor is on the busy Septa Paoli line, and all are convenient to Main Line executives, Soffian added. Add the lack of new rental office construction in Philadelphia and you end up with tenants like the company that called Soffian this morning complaining it can't find city space under $20/sq. ft. anymore. "We're seeing Class B buildings at higher rates, too," he added. The next step is for tenants to take less space and cram it fuller, Manhattan-style.
But overall, "available space in the region has barely budged, particularly in Suburban Philadelphia," according to the firm's preliminary report, as office closings and consolidations barely keep pace with new leases. "Suburban Class A available space (vacancies) actually increased slightly during the last four quarters. In contrast, Class A available space in Center City has decreased by 6.7% from 4.1 million square feet to 3.8 million square feet in the same period," with tighter supply encouraging office landlords at a time when many developers have shifted to apartments.
Paul Garberson, director of research for Savills Studley's local office, warned against treating the suburbs as a single market. "Each is its own little area" with local cycles, he said. But the outline is clear: vacancies are around 13% in Center City (and similar in higher-end markets such as eastern Burlington County), but 20% or more in the northern suburbs and Camden County. "The high quality buildings in any market are well leased," Garberson added. "Places like Radnor and Conshohocken have a high density of high quality buildings.Center City, Main Line rents rise, other suburban offices go vacant (Update)
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