Why a Cable Company and Apartment Developer Hold the Keys to the Center City Office Market

Given that we are the fifth largest city in the United States, it is surprising that the near term future of our office market actually hinges on the decisions and success of two entities; neither of whom is an office developer.  Because our core Central Business District is so small and geographically concentrated, and availabilities are currently at historic lows, it won’t require a lot of new vacancy to turn the tide in favor of tenants.  Luckily for them, help may be on the way thanks to two unlikely players.

PMC Property Group (“PMC”), one of the region’s most successful multi-family developers, is diversifying into office product in Philadelphia and is jumping in with both feet.  It’s first project is the redevelopment of the former Design Center at 2400 Market Street which, when completed in 2018, will deliver over 500,000sf of new Class A office space into the market.  In addition, PMC, which acquired One Franklin Plaza, a 600,000sf building at 16th and Race in 2015, is planning a mixed use redevelopment of that building that is targeted to include approximately 200,000sf of Class A office space.

One Franklin Plaza was previously occupied by Glaxo SmithKline before it relocated to the Navy Yard in 2013.  This building has essentially been mothballed since then which elated anxious Center City landlords who were petrified about the gaping hole that GSK’s departure/vacancy would create in the Center City office market.  As Three Franklin Plaza (GSK’s other vacated building) was converted into a charter school shortly after their departure, none of the GSK 750,000sf of vacancy has hit the office market to date.

Because the Center City Class A office market is only about 39 million sf (excluding owner occupied or single tenant buildings like Comcast Tower), the creation of approximately 800,000sf of new class A inventory will have a significant impact on the market. Unless a new company is coming into town to take a big chunk of this new space, PMC’s new projects are creating approximately 25% more vacancy in the market.  In fact, by creating viable new move options, this space could actually facilitate even more effective vacancy in the market.  Most companies today that relocate are achieving material efficiency gains as compared to what they occupied in their old space due to the implementation of space programs with higher densities.  Thus, if a 300,000sf tenant moves into one of these new projects, there is a good chance they are vacating more than that.

The creation of new office inventory is not the only good news for tenants who, for the past year or so, have been struggling to find good move options.  The biggest space user in the City, Comcast, may be freeing up close to 500,000sf of office space that it currently occupies in various Center City buildings once its new Innovation and Technology Center opens in 2018.  To date, Comcast has not publicly stated whether its new tower will accommodate all of its immediate and near term space needs or whether it will continue to need overflow space outside of its growing urban campus between JFK Boulevard and Arch Street.  Given the exponential growth of Comcast and the fact that its planned third office tower on Arch Street could take another four years to build, Comcast may ultimately decide it will always need transition space in the market while its next project is in development.  Thus, the path Comcast ultimately takes with regard to its 500,000sf of overflow space could have a material impact on the market.

In the event Comcast elects to vacate all or a material portion of its overflow space when the Innovation and Technology Center comes on line, it will represent a major opportunity for other tenants in the market–especially those looking for larger blocks of space.  Right now, tenants looking for 50,000sf of Class A office space have few options.  That could change quickly.

The office rental market, like all markets, is simply a reflection relative supply and demand.  While many people would have us believe that the recent rise in Center City office rents is a sign of new prosperity, it is really the result of shrinking supply as millions of square feet of office inventory has been converted into apartments over the past 10 years.  More than twice the amount of current vacancy in the market has been converted into apartments.  Think of what the market would look like today if that space were still available to office tenants.  Yes, we’ve had some new businesses relocate into the City but it hasn’t been material enough to move the needle on demand especially since we’ve also had our share of major losses with companies like Sunoco, Dow and Lincoln Financial picking up and leaving.    In a truly healthy office market, rents go up because of significant increases in demand due to job growth not because we decommission existing inventory and shrink supply.

Given the tight market over the past year or so, many tenants have been frustrated by both the lack of viable move alternatives and the increasing rents that their landlords have been demanding for the same product.  Luckily, in a relatively small market like Philadelphia, one or two events can quickly change market dynamics.  An apartment developer and a communications company may very well prove to be the knights in shining armor for office tenants as they potentially create significant new vacancy in the market by 2018.  It would be a welcome change for a market that needs more options and certainly needs more competition. Sometimes relief comes from the most unlikely sources.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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