Having worked on two office building appraisals since the beginning of the pandemic, I have been able to glean a ton of information and opinions from commercial real estate professionals on the state of the office market in the Philadelphia region.

While working on the first project, discussions with local brokers and bankers indicated there was still demand for office space in the region and they had seen no obvious COVID-19 related drop in demand.  However, there was an air of caution due to the knowledge that more companies were embracing remote working for their employees, and the rumors that several major companies would not be returning to their campuses or urban office settings until January 2021 or even January 2022.

The Second Quarter Commercial Real Estate reports tell a much different story.

CBRE reports that a majority of the leasing activity in the second quarter came from renewals and there has been a rise in subleasing in both Center City (CBD) and the suburbs. We are hearing about similar trends from brokers familiar with the market. During a recent discussion with a local broker, he revealed that he had a brand-new lease with a tenant in January, and by April, the tenant was asking for the space to be subleased.

Cushman & Wakefield’s Q2 2020 Office MarketBeat Report for the Philadelphia region reports that leasing in Center City is down 500,000 sq. ft. from this time last year. Despite the drop in leasing, demand has stayed steady with vacancy currently reported at 9.8%, up only slightly from Q1 2020 (9.6%), but slightly lower than Q4 2019 (9.9%), prior to the pandemic. In addition, overall asking rents are up 4.3% for Class A space and 7.9% for Class B. Brokers are unsure if this trend will continue.

On the other hand, leasing in the suburbs is down 41% and overall asking rents for all classes have dropped 2.3% year-over-year, with Class A space reporting a decrease of 1.9%. The overall vacancy rate for the suburbs is 15.6%, up slightly from Q1 2020 (15.3%) and Q4 2019 (15.5%). The overall average asking rent of $26.34/sqft/yr which is up slightly from Q1 2020 ($26.31), and down from Q4 2019 ($26.97).

While these numbers seem to be steady quarter-to-quarter, a broker in the area indicated that a 200,000 sq. ft. suburban office building could be soon placed on the market for sale, which would add to the already increasing vacancy. In addition, due to the uncertainty, long-term tenants are renewing their leases but for shorter terms.

Philadelphia Office Market

Vacancy: CBD:  9.8%  ____   SUBURBS: 15.6%  UP
Asking Rents: CBD: $32.13  UP   SUBURBS: $26.34  DOWN
Absorption: CBD: -98.9K sq.ft.  DOWN   SUBURBS: -172k sq.ft.  DOWN

It is too soon to predict what the long-term effects of this pandemic will be. However, a few months ago, most in the industry were optimistic; that optimism seems to be waning. We will keep you updated on the commercial real estate trends as the COVID-19 pandemic continues. If you are in the commercial real estate industry, reach out to us with your valuation questions.