Greater Philadelphia Office, Q Region experiences strong year-over-year rent growth

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1 Greater Office, Q3 216 Region experiences strong year-over-year rent growth Net Absorption 2,14 sq. ft. Vacancy Rate 15.7 % Asking (FS) $25.38 Development 2.18 Million sq. ft. Figure 1: Greater Office Rent Growth year-over-year *Arrows indicate change from previous quarter (%) University City Fort Washington Main Line Upper Main Line Source: CBRE Research, Q Lehigh Valley East Conshohocken TOTAL Independence Hall Market East Wilmington CBD Delaware County Lehigh Valley West Horsham/Willow Grove Market West Exton/West Chester Plymouth Meeting/Blue Bell Bala Cynwyd Camden County Burlington County New Castle Co. Suburbs King of Prussia/Valley Forge Lower Bucks County Jenkintown Lansdale/Montgomeryville Gloucester County Downtown: Aramark made the decision to move to a new office development at 24 Market St., a new 6, sq. ft. trophy waterfront office project by PMC. Aramark preleased 3, sq. ft. of space in the building. Suburbs: Workspace Property Trust acquired 26 office and light industrial buildings in Malvern from Liberty Property Trust that totaled more than 1 million sq. ft. Northern Delaware: The Northern Delaware market continued to see occupancy gains in the New Castle County Suburbs significantly outpacing the Wilmington CBD. Southern New Jersey: Vacancy decreased this quarter to 17.1%, down from 18.4% last quarter. One of the larger transactions in the market was Compass, Inc., who occupied 2, sq. ft. of space at Three Executive Center. Despite a near-zero increase in occupied space across the region during Q3 216, asking rates in the majority of the region s submarkets continued on a trend of strong rent growth. The regional average asking lease rate increased every quarter since Q3 214 and year-over-year rent growth for the region was 4.3%. Twenty out of twenty-four regional submarkets experienced rent growth y-o-y and three submarkets, University City, Fort Washington, and the Main Line experienced double digit rent growth. Although demand stalled during the latest quarter, overall absorption posted strong gains year to-date with more than 1.5 million sq. ft. during 216. Year-to-date, only three submarkets posted significant occupancy losses. These submarkets include Market West, Independence Hall, and the Wilmington CBD. In the case of Market West and Independence Hall, losses were attributed mostly to a single tenant relocating out of the submarket to another submarket downtown. Q3 216 CBRE Research 216 CBRE, Inc. 1

2 Figure 2: Metro Office Market Statistics SUBMARKET Number of Buildings Inventory Vacancy Availability Under Construction 216 Ytd Net Absorption Avg. Asking Avg. Class A Asking Market West 52 26,5, ,285, (149,32) Market East 19 6,789, , Independence Hall 16 5,82, (158,852) University City 23 4,565, , 5, Downtown Subtotal 11 43,676, ,625, 278, Bala Cynwyd 29 2,873, (45,13) Conshohocken 26 3,394, (17,331) Delaware County 86 5,369, , 137, Exton/ West Chester 9 4,6, , 52, Fort Washington 45 3,27, , Horsham/Willow Grove 89 5,475, (4,653) Jenkintown 21 1,352, (4,514) King of Prussia/ Valley Forge ,788, ,55 594, Lansdale/ Montgomeryville 71 3,39, , Lower Bucks County 114 5,314, , Main Line 47 2,782, , Plymouth Meeting/ Blue Bell 118 6,427, , Upper Main Line 42 1,263, (5,22) Suburban Subtotal ,411, ,55 887, Source: CBRE Research, Q Q3 216 CBRE Research 216 CBRE, Inc. 2

3 Figure 2 (cont.) SUBMARKET Number of Buildings Inventory Vacancy Availability Under Construction 216 Ytd Net Absorption Avg. Asking Avg. Class A Asking Burlington County 195 9,687, , Camden County 12 6,97, , (17,696) Gloucester County , , Southern New Jersey Subtotal 34 17,157, , 12, Wilmington CBD 38 6,85, (137,939) New Castle Co. Suburbs 172 9,15, , Northern Delaware Subtotal 21 16,, , Lehigh Valley East 53 2,813, , 24, Lehigh Valley West 15 6,862, (57,278) Lehigh Valley s 158 9,675, , 147, TOTAL 1, ,922, ,176,55 1,537, Source: CBRE Research, Q Figure 3: Percentage of Submarket Inventory Absorbed in Q3 216 (select submarkets displayed) (%) (1) (2) (3) Source: CBRE Research, Q Q3 216 CBRE Research 216 CBRE, Inc. 3

4 OFFICE ABSORPTION Positive occupancy gains in a number of submarkets were erased this quarter by an equal number of occupancy losses in other submarkets. As quality available space in premier submarkets remained scarce and rates continue to climb, lower cost submarkets became more attractive for tenants. This trend was exemplified by the submarkets with the strongest absorption in Q3 216, Market East (114,184 sq. ft.), Fort Washington (111,955 sq. ft.), and Camden County (99,881 sq. ft.). OFFICE VACANCY Downtown, vacancy remained relatively flat since reaching a post-recession trough in Q More recently, much of the CBD s leasing activity resulted in tenants moving within the market, creating little net gain or loss. In the suburbs, overall vacancy levels remained higher than pre-recessionary levels but showed recent signs of improvment. Much like the downtown market, existing suburban office supply that is older and considered less attractive is slated for renovation into more quality office space or redevelopment into different product type such as Certainteed s former campus on Swedesford Road in Wayne, PA. The confluence of these activities will result in an overall more modern office supply. OFFICE DEVELOPMENT PIPELINE The amount of office space under construction this quarter ticked up to 2.2 million sq. ft. as two buildto-suit projects broke ground in the suburbs this quarter. Interest in proposed development remained concentrated in a select few submarkets, but PMC property group surprised the market by announcing a change at their 24 Market development site from mixed-use to office development. Aramark committed to half of what will be a new 6, sq. ft. trophy waterfront office building located on the Schuylkill River, bridging the gap between Market West and University City. Elsewhere, development activity, for the most part, was limited to build-tosuit projects as developers remain risk-averse to speculative development. Figure 4: Net Absorption 2, Sq. ft. (s) Sq. ft. (s) 1,5 1, 5 (5) Q3 214 Q1 215 Q3 215 Q1 216 Q3 216 Source: CBRE Research, Q Figure 5: Vacancy Rate (%) Q3 214 Q1 215 Q3 215 Q1 216 Q3 216 Source: CBRE Research, Q Figure 6: Development Pipeline 2,5 2, 1,5 1, Source: CBRE Research, Q Q3 216 CBRE Research 216 CBRE, Inc. 4

5 OFFICE LEASE RATES Average asking rates for the region continued their upward climb with yet another quarter of positive growth marking the eighth consecutive quarter of gains. As occupancy growth appears to be slowing, it is possible that the region could see a slowdown in rental rate growth. Although rent growth may have slowed in the premier submarkets, a number of submarkets were still well below pre-recession levels and have a lot of room for continued growth. Demonstrating this, the submarkets with the strongest quarter-over-quarter growth were those traditionally considered secondary submarkets: Plymouth Meeting/Blue Bell (4.3%), Fort Washington (3.1%), and Independence Hall (1.2%) OFFICE CAPITAL MARKETS After a slow second quarter, office investment picked back up to the levels seen during the last 18 months. With a number of deals poised to close in Q4 216, the region is predicted to see one of the strongest years of office investment activity ever. Notable deals this quarter included: the Arborcrest campus (Horsham/Blue Bell) and The Liberty Property Trust portfolio sale to Workplace Property Trust which represented assets in a number of markets with a high concentration in the King of Prussia/Valley Forge submarket. PHILADELPHIA OFFICE RENT GROWTH Not since the late 198s and early 199s, when Center City rents surged due to the completion of a number of the so called Trophy buildings, have rents been so much higher than their counterparts in the suburbs. A combination of new downtown office product being completed and relatively stronger employment growth pushed Downtown office rates to record highs while suburban rates have struggled to reach pre-recession levels. Though suburban office rates stagnated throughout the recovery, recent data suggest that suburban office occupancy will likely improve more than downtown with suburban rent growth nearly on pace with downtown. Per Sq. ft. Per Year ($, FSG) Figure 7: Office s Source: CBRE Research, Q Figure 8: Office Sales Transactions ($, Millions) Q3 28 Q3 21 Q3 212 Q3 214 Q3 216 Source: Real Capital Analytics (4-qtr. Average) Q Figure 9: Office s, Downtown vs. Suburban Per Sq. ft. per year($,fsg) Q3 214 Q1 215 Q3 215 Q1 216 Q Source: CBRE Research, Q3 216 Downtown Suburban Q3 216 CBRE Research 216 CBRE, Inc. 5

6 CONTACTS LOCAL OFFICES Ian Anderson Director of Research and Analysis Joseph Gibson Research Operations Manager Jack Corcoran Researcher Center City Two Liberty Place Cira Center Wayne, PA Conshohocken, PA Allentown, PA Harrisburg, PA Mt. Laurel, NJ Wilmington, DE Taylor Hayes Researcher taylor.hayes@cbre.com To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CRBE.