It is no secret that office product has lagged behind other commercial real estate sectors in bounce back as how people interact with workspaces has shifted. In some degree hybrid work models and remote work are here to stay, and in turn, how we use buildings dedicated to working has changed. According to PwC Emerging Trends in Real Estate 2023 10-20% of office real estate stock may need to be removed or repurposed.
After commercial real estate markets enjoyed a run in the past few years with strong returns and growth, some had hoped at this time they would be investing those gains into other projects, and taking advantage of the low interest rates that had held for quite a while. Instead the quick and dramatic increase in interest rates has put pressure on owners, and the changing market has made everyone take a pause to reconsider their situation.
Yet as the challenges are being felt nationwide, the Philadelphia office market continues to fare better than other major metros, based on several natural characteristics of the region and the opportunities they provide.
Recent data points from CommercialEdge show office vacancy rates nationally continue to rise, currently standing at 16.7%, with Philadelphia faring better at 13.2%. As the ninth largest office market in the nation this is encouraging news for the area. Those markets dependent on the tech industry are recording the highest vacancy rates as companies announce layoffs and downsizing, such as Seattle and San Francisco with rates of 22.03% and 19.41% respectively.
Some of this good news for Philadelphia is based on the city being home to a wide range of industries. Financial services, technology, and advanced manufacturing have long been mainstays. As of April 2023 data, there is 2.94 million SF of office space under construction in Philadelphia, such as 2222 Market Street, the new home of the Philadelphia Ballet and the CHOP research facility in South Philadelphia.
The life sciences industry has grown up quickly in the area pushing its way onto the list of the city’s key industries. With a history of being an academic research powerhouse, local universities along with private companies have driven the influx of life sciences building. The commercial life sciences hubs being built by research institutions are energetic, creating communities that are nationally known. The people and talent coming are finding a city that is both leading-edge and historic, which few places in the nation can claim.
Although businesses may balk at the city’s high taxes, most see that the cost of living for a major metro is lower than other metros and therefore offsets the negative. Philadelphia’s geographic location, expansive cultural and sporting scenes, plus much more also makes the city desirable and attractive to businesses and the talent they require.
The strength of the Philadelphia market is further supported in looking at cap rates. The increase in interest rates has impacted cap rates in our region at a lower pace than the rest of the country. This gives owners a bit more latitude in terms of NOI and cash flow.
The mixture and types of businesses Philadelphia offers provides an advantage over other major metros, and in turn, a stronger position for the commercial real estate owner, developer, and investor.