(And How They Will Impact Tenants in the Region)
With 2013 now behind us, we thought it would be fun to make some predictions for 2014. If we are right, you can marvel at our omniscience; if we are wrong, what do you expect, we’re only human. With that in mind, here are our predictions for 2014:
- Comcast will finally announce the development of new office towers. Most likely, these towers will change our skyline in 2017. While there had originally been hopes and aspirations that Matt Lauer, Saturday Night Live crew and the rest of the NBC celebrities would move down from NYC, that won’t happen. However, Comcast will consolidate its holdings in the region and create effectively an urban corporate campus.
What will this mean for tenants? Most of the towers will be filled by Comcast operations that are currently housed in other buildings in Center City (currently about 400,000sf) besides Comcast Center and the surrounding suburbs. Thus, come 2017, the consolidation of Comcast out of existing buildings like Centre Square and Three Logan will create well over 500,000sf of vacancy in high end buildings. This will create softness in the market and opportunities for tenants.
2. Large law firms will continue to contract and consume less space. Firms like Ballard Spahr, Drinker Biddle, and Reed Smith are giving back tens of thousands of square feet of space as they adapt their environment to the new law firm paradigm. Others will follow as their leases come up for expiration.
What will this mean for tenants? Smaller law firms and professional service firms may benefit from the high end space relinquished by these firms. This space will afford finishes that smaller or less profitable firms may not have been able to afford as well as considerable re-use on construction which will minimize or even eliminate capital costs typically associated with a move.
3. One Franklin Plaza will play a key role in where the market goes. The relocation of Glaxo Smith Kline to the Navy Yard has not had the major negative impact on the CBD office market that many feared when they vacated over 800,000sf here last spring. Why? Because to date, none of that space has come back on the market. Three Franklin Plaza, a 226,000sf office building (one of the newest buildings in the CBD) was surprisingly sold by Liberty Property Trust to a Philadelphia Performing Arts charter school for $29 Million, and One Franklin Plaza (over 600,000sf) is still in a state of flux. While there had initially been rumors of a sale to Drexel University for their medical school and maybe even a repositioning of the asset into Class A office space, nothing definitive has happened. A likely scenario is that it will become a mixed use project with retail, hotel and/or multi-family and maybe some office.
What will this mean for tenants? That will depend on whether any of One Franklin Plaza re-enters the office inventory. With few large blocks of contiguous space available in the CBD, One Franklin Plaza could become an interesting play.
4. Mellon Bank Center will become the “Dos Equis” building in Center City (i.e., the “most interesting building in the CBD”). With FMC announcing its move to FMC Tower in 2016, Sunoco announcing that it will depart for Ellis Preserve in the suburbs (a major blow to the City as it loses another major corporate headquarters), Mellon Bank reportedly downsizing its presence in a major way, and Ballard Spahr giving back two floors, Mellon Bank Center will be getting a lot of attention from tenants looking to upgrade their homes. As the owner of Mellon Bank Center, Commonwealth Realty Trust, also owns One Franklin Plaza, it will be a busy year for them.
What will this mean for tenants? Philadelphia has been a “flat” rental market over the past 20 years or more. Because supply still outstrips demand, there is always vacancy. Ultimately, when there are chunks of vacancy in the high end of the market, there is a flight to quality. In 2003-2005 after Cira and Comcast Center were first constructed, there was over 4,000,000sf of vacancy in the trophy towers alone (credit mcfadden). Over several years, that vacancy almost disappeared as the owners became aggressive in their economics to entice tenants to move up in asset class. When the dust settled, the lesser quality assets ended up with the vacancy and several of them decided it was more profitable to repurpose their buildings into condos and residential apartments. The same flight to quality will happen here. Tenants will fill up MBC ,but in doing so, they will vacate lesser buildings. These abandoned buildings will provide opportunities for tenants looking for great deals. MBC will also become more aggressive in their pricing and concessions to attract new tenants. Tenants at the higher end may find aggressive deals at Mellon Bank Center and tenants at the lower ends may find aggressive deals at the buildings vacated by tenants moving to Mellon.
5. Brandywine will announce plans for 1900 Market Street. With Cozen O’Conner vacating this building in late 2015 or early 2016 when it moves to One Liberty, there will be almost 300,000sf of vacancy here. Brandywine, who purchased this building in 2013, will have several options to consider. As with One Franklin Plaza, this asset can have a significant impact on the market if all or a substantial portion of the building remains in the office inventory.
What will this mean for tenants? It could be either a cheap price point if Brandywine elects not to invest significant capital in the building or a more expensive one if Brandywine goes high end here. Again, this vacancy will eventually get filled leaving opportunities in vacated buildings. Further, as with MBC this asset will provide a much needed option for tenants requiring large blocks of contiguous space.
6. The construction industry is set to take off in the City and surrounding suburbs. Cranes have been ever present by Pennsylvania Hospital, Children’s Hospital and even Penn and Drexel campuses over the past five to seven years. This development will continue as evidenced by Drexel’s recently announced development of a 580,000sf, 24-story residential tower at 34th and Lancaster for 1,300 students. What’s new is that construction is now popping up in a big way outside of the “eds and meds” realm. Several large, new commercial construction projects have been announced or are rumored for this year. As discussed above, Brandywine is going to kick off its 47 story, mixed use FMC Tower at Cira Centre South next door to its 33 story Evo student housing tower currently under construction on 29th and Chestnut Streets. Comcast should announce its new Comcast tower(s) shortly. Carl Dranoff just announced his new, 422,000sf, 47 story boutique hotel and residential condominium tower at Broad and Spruce Streets. Brandywine is also gearing up for a residential development at 20th and Market Streets and potentially a major renovation project at 1900 Market. In Conshohocken, Keystone Property Group just announced a 200,000sf mixed use development on Elm Street and Don Pulver is aggressively seeking an anchor tenant to kick off Seven Tower Bridge. In sum, there is a lot of construction happening as well as planned.
What will this mean for tenants? For the past five to seven years, the real estate market has been stagnant from a development perspective aside from a few residential buildings/conversions and health system projects. Construction costs have been relatively flat and, as a result, some tenants have benefited from very aggressive bids on their tenant improvement projects. As the labor pool now becomes tighter with the construction boom, tenants may find that their budgets are inflating. As a result, tenants need to carefully scrutinize their construction budgets before making any move or renovation decisions. The favorable pricing of the past few years may not apply now. Further, tenants need to get assurances that their contractor will be able to secure high quality work teams as the existing labor pool gets stretched.
In sum, there will be some new and potentially upgraded buildings coming on line in the years to come creating more inventory; law firms, who have traditionally been one of the biggest consumers of space in the CBD, will continue to consume less and less space resulting in weakening demand and more inventory; and three buildings (Mellon Bank Center, One Franklin Plaza and 1900 Market Street) will have a lot to say about where the office market goes. Unless some major new corporations move to the city, what is now a fairly tight overall market should ease up in the years to come. On the construction cost side, things may get expensive in the next few years meaning moves and renovations will become trickier.
For more information contact Glenn Blumenfeld