"Metro Philadelphia's vacancy has eclipsed levels seen during the wake of the last recession in the early 1990s," he says. As a result, TI allowances of as much as $40 per rentable sf and increasing amounts of rent abatements are being offered in order for landlords to remain competitive, Guerrieri reports.
On the positive side, speculative construction is subsiding in the western suburbs with just a handful of properties scheduled for completion in 2004. This, combined with a rising economy, points toward a recovery in the office leasing market by the close of 2004, he predicts.
In the CBD, the South Broad St. submarket remained tight with a 6.4% vacancy in third quarter. The largest Center City submarket, West Market, however, remained the weakest, with a 14.6% vacancy rate, which is 2% above the CDB average. Still, "West Market is the place to be," Guerrieri says, "a fact reflected in its price for space."
The average asking rental rate in Market West class A trophy buildings is $29.82 per sf, compared with $22.26 per sf in class A properties in the South Broad submarket. The overall CBD average –including all classes in all submarkets –at the end of third quarter was $23.91 per sf, according to Grubb & Ellis data.
This compares with an asking average of $28.88 per sf for class A trophy properties in the Philly suburbs, and an average of $24.28 per sf when all classes of office buildings are included. "Landlords will tighten their grip on concessions before attempting any increase in asking rents," Guerrieri says.
He also cautions that office space in the CDB faces potential problems. Specifically he points to the large number of CBD tenants that will either renew or relocate during 2004 and 2005. "Most of these transactions will likely include more downsizing," he says, as witnessed in Ernst & Young's recent renewal for seven versus eight floors. If downsizing and relocations out of the CBD combine with what Guerrieri sees as the "slight possibility" of new construction, "there is little chance of the Philly office market strengthening substantially in the next few years."
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