A few years ago, a lot of people were pointing to 2017-18
as the time when the Central Business District (CBD) office market might start
to soften up, providing relief to tenants who might be looking for space. A
“perfect storm” of factors all indicated that vacancy should be picking up this
year and into 2018. That really hasn’t happened. We’ll explain why.
First let’s summarize the tenant friendly future we were
contemplating back in 2014-2015; then we’ll discuss how five unexpected things
helped change the market we were expecting.
What we were expecting and why
New Inventory. The pending development of FMC
Tower and Comcast Innovation and Technology Center, together with the
redevelopment of 2400 Market Street was scaring a lot of Center City landlords.
With approximately 2,000,000sf of new office space coming onto the market, they
understandably worried how this was all going to be absorbed. Certainly,
Comcast was going to take most (and, as it turned out, all) of the new
Innovation Center but most people expected that, in doing so, they would vacate
the approximately 600,000sf of space they were currently leasing at Two and
Three Logan and other buildings. FMC would soak up a large part of the new FMC
Tower but there was still 200,000sf of space to fill in the new building. FMC’s
departure from Mellon Bank Center would also create a 200,000sf vacancy there.
Center City landlords had already dodged (at least
temporarily) a major bullet when GlaxoSmithKline vacated approximately
800,000sf of CBD office space in 2013 to relocate to the Navy Yard. To their
relief, none of this vacated office space came back on the market as Three
Franklin Plaza was sold to a charter music school and One Franklin Plaza was
mothballed (it’s currently in redevelopment and ultimately 200,000sf of office
space will soon add to available inventory). Could they dodge another bullet of
excess inventory in 2017-18?
Significant Center City departures and downsizings.
Some major corporations and space occupiers had announced they were leaving the
City or were at least going to be downsizing significantly. Among the big users
that left the City were Sunoco and Dow. Those significantly downsizing their
Center City presence included BNY Mellon and Cigna. Landlords were justifiably
concerned that these pending vacancies would put further downward pressure on
rents.
More efficient space trends. It’s well recognized
across the industry that companies are consuming much less space per employee
as they move to new, more efficient utilization concepts such as open plan
environments, smaller offices, hoteling and telecommuting. Law firms, for
example, who used to plan for 750-850sf/attorney in the early 2000s are now
down to 600-650sf/attorney in many cases. Large corporations who used to have a
ratio of offices to open seating of 3 or 4 to 1 are now flipping the paradigm
to 1 to 3 or 4. When companies use less space, it drives down demand putting
even more downward pressure on rents. This trend is probably not going to
change any time soon and, as existing leases continue to expire, more and more
firms will be implementing these space saving programs. Landlords had more
reason to worry.
Well, they shouldn’t have worried.
What changed?
Here are five unexpected events that helped save the CBD
office market for landlords.
1. Comcast grew faster than expected. While
nothing definitive has been decided, it does NOT look like Comcast will be vacating
most of the office space it currently occupies outside of their two-building
urban campus. The 500,000-600,000sf of space that many landlords feared would
open up in Two Logan and Three Logan may only be a fraction of that now.
Comcast will not only fill up it’s beautiful new Innovation and Technology
Center, but it appears they will also still need several hundred thousands of
square feet of overflow space on top of that. Even if Comcast goes ahead with
their third tower currently on the drawing board, that will be at least four or
five years down the road and Comcast will need interim space to house their
growth while that building gets developed.
2. Aramark moved west. Facing a
500,000-square-foot office development down the street at 2400 Market, West
Market Street landlords were praying that an out of town tenant would come
along and soak that up before their own tenants defected there. They got the
next best thing. Aramark surprisingly announced that it would be relocating its
headquarters from Aramark Tower at 11th and Market into approximately 300,000
square feet at 2400. While this move was clearly a blow to the East Market
Street sub-market, it was a Godsend to the landlords on West Market Street.
Though there’s still close to 200,000 square feet of office space available at
2400 Market, this big office project won’t have the negative impact on West
Market Street that many initially feared.
3. WeWork loves Philadelphia. If corporate tenants
were taking less office space and no big, new companies were moving into town,
landlords needed some sort of miracle to absorb the pending vacancies. Enter
WeWork. They have quietly leased close to 100,000sf of space between 1900
Market Street and 1601 Market Street that won’t be occupied by their own employees.
It will ultimately be occupied by lots of entrepreneurs, small businesses and
even large companies with temporary staffing needs. In many cases, these
occupants would never have ended up in these buildings because they are too
small, don’t have the credit or wouldn’t commit to long enough lease terms. By
packaging up all of these types of users under one roof, they have increased
demand for Class A office space across the country. With WeWork, the whole is
more than the sum of it’s parts.
4. Spark Therapeutics came out of nowhere.
Remember all that new space in FMC Tower that was going to draw existing
tenants from the trophy towers along West Market Street? Well, a firm very few
people had ever heard of, Spark Therapeutics, who has been quietly knocking the
cover off the ball in University City, just leased 75,000 square feet of space
at FMC Tower and are rumored to be taking a bunch more at Schuylkill Yards.
They are a Philadelphia success story that landlords around town should be
lining up to thank.
5. Two distinguished law firms finally join their
friends along West Market. Back in the late 1980s and early 1990s, the
center of the universe for Philadelphia’s law firms moved from South Broad
Street to the shiny new, trophy towers being built along West Market Street and
north 18th Street. There had been some holdout firms in non-mainstream
locations including Montgomery McCracken at 123 South Broad Street and Berger
Montague at 1622 Locust Street. Well, they are now unexpectedly joining their
friends on West Market and soaking up another 100,000 square feet of space in
the process.
Predicting markets, or anything for that matter, is an
inexact science. We all assess the facts, weigh the probabilities and make an
educated guess about the future. Sometimes, however, unexpected variables enter
the equation and change everything. Real estate markets rise and fall as ours
has and will continue to do in the future. We’re in a tight market that will
eventually turn. Maybe just not as fast as we all thought.
Source: Philadelphia
Business Journal
No comments:
Post a Comment