"Although this could be just a blip on the radar screen," concedes Matthew Guerrieri, senior research manager, "it is still exciting to see some major growth after seven consecutive quarters of level or growing vacancies."
All classes of office property in the CBD saw vacancy rates decline, but rates at non-trophy class-A buildings dropped the furthest. Guerrieri puts their 4th-quarter decline at 1.8%. Overall CBD office vacancy stands at 12%.
Throughout 2002, office vacancy here grew just 0.9%, Guerrieri says, noting that Philly fared well compared to other CBDs across the country. Subleases represent nearly 22.3% of the current 12% vacancy, according to his research.
"Unlike previous down periods, when this space captured its share of active tenant prospects, sublet space seemed to be languishing on the market without a great deal of activity," he says. "This situation is most likely the cause of lower market rates for prime space, in conjunction with nonexistent tenant improvement allowances being offered by sublandlords."
Of TIs, Guerrieri says they returned to high levels in 2002, commanding from $35 to $45 per sf allowances on many 10-year transactions. At the market's tightest level in 2000, the range was between $15 and $25 per sf, he notes.
He calls current CBD rental rates an "anomaly." Despite rising vacancy rates, rental rates statistically increased, yet most landlords discounted asking rates 10% to 15%. "The anomaly exists because the statistics reflect a weighted average asking rate, based on the amount of vacancy, which now contains a larger percentage of more expensive space than it did previously," he explains.
"At the effective rent level, factoring in concessions, rates have certainly declined throughout 2002," he says. Grubb & Ellis puts current asking rental rates for class A properties at $25.72 per sf, while the average asking rate for class B space is $19.33 per sf.
What's next? Bala Cynwyd, PA-based American Business Financial gave the CBD a boost in fourth quarter 2002 by relocating to 234,000 sf in Downtown. "The CBD is unlikely to see another large group of suburban tenants move in," Guerrieri says. "Therefore, the dynamics of internal growth must be relied on in 2003."
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