PHILADELPHIA, PA–Jones Lang LaSalle reports that rental rates were sharply up for Center City’s trophy office properties in the third quarter – by 32% - even though the vacancy rate was also sharply up.
There was negative net absorption of 93,720 square feet – and a sudden 100-basis-point increase in vacancy – for the quarter, as nine of the top ten top-tier buildings had tenants consolidating space or relocating. Still, says JLL’s research analyst Sean Coghlan in the firm’s “Skyline Market Review,” the occupancy rate is up 230 points for the year-to-date compared to 2011.
Last year, Brandywine, which is the largest owner of trophy properties in the downtown business district, leased up 579,600 square feet. The stabilizing effect of the Logan Square leasing helped trophy landlords generally to maintain leverage through the first three quarters of 2012, Coghlan said in his report.
With trophy-building rates now “surpassing historical highs,” according to JLL’s analysis, the firm predicts that Class A properties a notch below top-ten trophy status will see gains. Class A buildings in Center City are also benefiting from an overall trend of corporations looking to Central Business Districts and away from suburban locations.
Behringer Harvard REIT I, Inc. - the Skyline’s third largest owner - is currently capitalizing on the trend to Class A, JLL notes, particularly at its newly renovated 1650 Arch. The REIT has seen a surging improvement in vacancy at all of its downtown properties; over the past six months, occupancy is up 360 basis points.
Consolidations continue to riffle through the trophy marketplace: In a consolidation of three leases within Brandywine’s Logan Square complex, Marsh & McLennan Companies leased 102,608 square feet at Three Logan Square, vacating 122,630 square feet of noncontiguous space at neighboring Two Logan.
JLL’s report notes that, “large tenants are coming to market two to three years ahead of expiration, finalizing leasing decisions as far out as 2015.” There is some built-up demand, as so much of the premium space is being committed, according to JLL’s Coghlan.
This year to date, law firms were responsible for the majority of large transactions. Reed Smith, Cozen O’Conner and Ballard Spahr both signed long-term deals at trophy buildings.
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