MARKET REPORT

OFFICE
Philadelphia Metro Area Q2/19
Moderating Construction and Greater Leasing
Activity Drive Down Vacancy, Boost Rents Office 2019 Outlook

Growing businesses devour space, lifting marketed rates. A strong first CONSTRUCTION:
quarter supports an increasingly positive outlook for Philadelphia office
The development pipeline will contract
properties in 2019. Corporate expansions and relocations are driving
this year following the completion of 3
demand, underpinning lower vacancy and faster rent growth. This is
especially true in Center City, where availability lies below that of the 1.8 MILLION SQ. FT.
will be completed
million square feet in 2018. Deliveries are
concentrated on the Pennsylvania side of
rest of the market, generating above-average rent appreciation. Several
the market.
submarkets outside the central business district are also outperforming
the metro. The colleges and hospitals in University City draw medical
tenants, benefiting local offices. Suburban locales with malls or walkable
VACANCY:
town centers that support amenities for office workers are also reporting
stronger fundamentals, as is the case with the Main Line submarkets. Limited speculative construction will en-
able vacancy to fall to 13.5 percent after

Medical office development expands as overall pipeline shrinks. The 30 BASIS POINT
decrease in vacancy
a cycle-high level of openings last year
pushed the rate up 70 basis points.
metro’s office supply will grow by a modest 0.7 percent in 2019, about on
par with last year when not including the Comcast Technology Center’s
completion. One of the marquee projects scheduled to open this year is
the Triad 1828 Center in Camden, part of an ongoing local redevelopment
effort. Developers are also active in suburban Philadelphia. Vanguard will
RENTS:
move into a new 240,000-square-foot facility in Frazer later this year, Contracting availability will spur acceler-
ated rent growth. The average asking rate
which joins a series of smaller deliveries in Conshohocken, Horsham/
Willow Grove and other submarkets. Much of the recent leasing activity 5.3% INCREASE will advance to $27.00 per square foot
this year after a 2.4 percent gain in 2018.
has been by healthcare-related businesses, reflecting strong demand for in asking rents

medical office space. Approximately 342,000 square feet is under devel-

opment this year, more than in 2018.

Investment Trends
• Favorable first-year yields maintain elevated levels of investor interest
Local Office Yield Trends
in the market. The average cap rate for assets traded over the past four
h quarters was in the high-7 percent zone, above that of many other prop-
12.0% erty types in the area. Offices in other major northeastern metros also
change hands at lower initial returns generally, drawing in more capital
10.5% from outside Philadelphia.
Average Rate

9.0%
• Buyers are actively pursuing suburban office properties located within a
few miles of restaurants, shops and other amenities. Higher demand for
7.5% assets near malls and small town main streets is reflected in the higher
sale prices observed in Conshohocken and the Main Line.
6.0% • Transaction velocity increased in Delaware County, Pennsylvania,
* 01 03 05 07 09 11 13 15 17 19*
in the 12-month period ended in March. A multitude of Class B and
C properties changed hands for less than $5 million with first-year
returns that extended beyond 8 percent. Buyers focused on assets in the
Sales Trends
larger towns of Media and Newtown Square as well as in areas closer to
Sales Price Growth
Wilmington in the state of Delaware.
* Cap rates trailing 12 months through 1Q19
er Square Foot

Sources: CoStar$240
Group, Inc.; Real Capital Analytics 30%
Year-over-Y

$180 15%
 Employment Trends 1Q19
Local Office – 12-Month
Yield Trends Trend
Employment Growth Office-Using Emp. Growth EMPLOYMENT
6% 12.0%
1.3% increase in total employment Y-O-Y
Year-over-Year Change

3% 10.5%• Approximately 37,300 jobs were created in the Philadelphia metro

Average Rate
over the 12-month period ended in March. During the previous
0% 9.0%
annual period, 32,700 positions were filled.

-3% 7.5%• The sizable education and healthcare sector hired the most
personnel at over 17,500, while the construction industry
-6% 6.0% expanded at the fastest annual pace, 6.7 percent. Traditional
09 10 11 12 13 14 15 16 17 18 19* office-using
01 03 employment
05 07 09 grew
11 by
13 2,270
15 roles.
17 19*

Office Supply and Demand Sales Trends

Completions Absorption Sales CONSTRUCTION
Price Growth
4
Average Price per Square Foot
$240 30%
3.1 million square feet completed Y-O-Y

Year-over-Year Growth
Square Feet (millions)

2
$180 • The completion of the 1.3 million-square-foot
15% Comcast
Technology Center, the ninth-tallest building in the U.S., pushed
0
$120 delivery volume for the past four quarters0%up to a cycle high. In the
preceding year, about 1.5 million square feet opened.
-2 $60 -15%
• Other major arrivals since March 2018 include uCity Square and
-4 $0 3600 Civic Center Boulevard. Both properties -30% are in University
09 10 11 12 13 14 15 16 17 18 19* 09City
10 and
11 span
12 a13little
14 more
15 16 17 300,000
18 19** square feet in size.
than

Vacancy Rate Trends

Metro United States VACANCY
20%
30 basis point increase in vacancy Y-O-Y
18%
• Supply additions surpassed net absorption to raise vacancy to
Vacancy Rate

13.4 percent in March, although availability declined where

16%
construction was absent. That includes the Washington/Spring
House, Independence Hall and Upper Main Line submarkets.
14%
• Vacancy dropped the most in North New Castle County, where
12% the local rate fell from 19.1 to 7.8 percent year over year due to the
09 10 11 12 13 14 15 16 17 18 19*
initiation of several large leases earlier in 2019.

Asking Rent Trends

Metro United States RENTS
14%
4.4% increase in the average asking rent Y-O-Y
Year-over-Year Change

7%
• The average marketed rate improved by its greatest annual margin
in 11 years to reach $26.19 per square foot at the end of the first
0%
quarter. Above-market appreciation occurred in South and West
Philadelphia, where the amount of available space is declining.
-7%
• Rents rose faster in the CBD than in the suburbs. A lack of deliver-
-14% ies besides the Comcast tower and acute tenant demand that sup-
09 10 11 12 13 14 15 16 17 18 19* ports below-market vacancy is contributing to higher asking rates.

* Forecast
Source: CoStar Group, Inc.
 Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 1.1% Metro 20.7% Metro 322

U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

Office Square footage*

21.8% Urban

2019 Office-Using Job growth Population of Age 25+ U.S. Average 32.0%

Percent with Bachelor Degree+**

Metro 1.1% 78.2% Suburban
U.S. Average 1.7% Metro 35.0% U.S. Average 68.0%

U.S. Average 29.9% *1Q19

**2018

SUBMARKET TRENDS SALES TRENDS

Sales Prices and Initial Returns Rise;
Lowest Vacancy Rates 1Q19*
Employment Trends Macroeconomic Headwinds MayTrends
Local Office Yield Affect Velocity
Employment Growth Office-Using Emp. Growth • Transaction volume remained elevated for the third year in a row in
Y-O-Y Average
6% Vacancy Y-O-Y % March as 12.0%
modest construction, improving fundamentals and favorable
Submarket Basis Point Asking
Rate Change
Change Rent yields motivate investment.
Year-over-Year Change

3% 10.5%
• The average sale price rose 5.4 percent to $173 per square foot at the
Average Rate

Market Street East 8.8% 140 $29.43 0.7%

end of the first quarter. At the same time, cap rates increased, bringing
0% 9.0%
the metro average up 20 basis points into the high-7 percent range.
Market Street West 11.8% 40 $30.86 5.8%
-3% Outlook: A healthy
7.5% metro economy represented by steady job growth will
Delaware County 12.8% -140 $25.53 3.5% continue to support sales activity, but uncertainty over national trade
-6% policy and growth
6.0% may prompt more caution from buyers and financiers,
09 10 11 12 13 14 15 16 17 18 19*
Northeast Philadelphia 12.9% -250 $21.17 4.2% lengthening the time 01 03 05 take
transactions 07 to09 11
conclude.13 15 17 19*

Exton/Whitelands 14.3% 530 $26.49 7.4%

Office Supply and Demand Sales Trends
Completions300 Absorption Sales Price Growth
Horsham/Willow Grove 15.3% $23.15 -3.3%
4
Average Price per Square Foot

$240 30%
Wilmington
16.6% 480 $26.33 -1.3%
Year-over-Year Growth
Square Feet (millions)

Central Business District 2

$180 15%

Lower Bucks County 18.5% -210 $21.09 1.2%

0
$120 0%

King of Prussia/Wayne 20.1% 570 $30.53 11.7%

-2 $60 -15%

Overall Metro 13.4% 30 $26.19 4.4%

-4 $0 -30%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19**

* Includes submarkets with more than 10 million square feet of inventory ** Trailing 12 months through 1Q19 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States

20%
 1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
a dichotomy, with Federal Reserve officials signaling more accom-
100%
modative policies. The impending end of quantitative tightening in
Percent of Dollar Volume

September, coupled with potential cuts to the Fed funds rate in the
75% Nat'l Bank/Int'l Bank
Reg'l/Local Bank second half of the year, highlight the shift in Fed policy. As a result,
50% CMBS long-term interest rates are likely to remain subdued, with Fed
Financial/Insurance policy leaning toward accommodation.
Pvt/Other
25%

• Conservative underwriting balances abundant marketplace

0% liquidity. While debt availability for office assets remains widely
14 15 16 17 18
available from a wide range of sources including local, regional and
* Trailing 12 months through 1Q19
national banks and insurance companies, sentiment surrounding
Include sales $2.5 million and greater the health of the economy has fallen somewhat in recent months.
Sources: CoStar Group, Inc.; Real Capital Analytics Lenders remain broadly cautious in underwriting, with loan-to-
value (LTV) ratios typically in the 55 to 70 percent range, depend-
ing on the borrower, asset and location. The conservative approach
has filtered into a focus on proven property results, with much less
National Office and Industrial Group willingness to lend against pro forma rents. This has prompted
Alan L. Pontius investors to turn toward short-term mezzanine debt and bridge
New York City Director | National Office and Industrial Group Ottawa Office:
Senior Vice President, National loans to cover capital improvements, while seeking long-term
J.D. Parker
Tel: (415) 963-3000 Executive Vice President of Investment Brokerage
| al.pontius@marcusmillichap.com Mark A. Paterson
solutions once returns have been solidifi
Vice President/Regional ed. Construction origina-
Manager
260 Madison Avenue 5th Floor New York, NY 10016
275 Bank Street, Suite 301
(212) 430-5100 | jd.parker@marcusmillichap.com tion remains muted,
Ottawa, Ontario K2P 2L6
with lenders focusing on core locations with
Prepared and edited by
Cody Young John Krueger Vice President/Regional Manager | Manhattan proven
(613) demand.
364-2300 | mark.paterson@marcusmillichap.com
(212) 430-5100 | john.krueger@marcusmillichap.com
Research Associate | Research Services
John Horowitz First Vice President/Regional Manager | Brooklyn
1 MetroTech Center, Suite 2001
For information on national office trends, contact:
Brooklyn, NY 11201
John Chang (718) 475-4300 | john.horowitz@marcusmillichap.com
Philadelphia Office:
Senior Vice President, National Director | Research Services
Brooklyn Office
Tel: (602) 707-9700 | john.chang@marcusmillichap.com Sean Beuche Regional Manager
John Horowitz Vice President/Regional Manager 2005 Market Street, Suite 1510
1 MetroTech Center, Suite 2001 Brooklyn, NY 11201 Philadelphia, PA 19103
Price: $250
(718) 475-4300 | john.horowitz@marcusmillichap.com (215) 531-7000 | sean.beuche@marcusmillichap.com
Manhattan Office
© Marcus & Millichap 2019 | www.MarcusMillichap.com
John Krueger Vice President/Regional Manager
260 Madison Avenue, 5th Floor New York, NY 10016
(212) 430-5100| john.krueger@marcusmillichap.com
Phoenix Office:

Ryan Sarbinoff Vice President/Regional Manager

2398 E. Camelback Road, Suite 300
Phoenix, AZ 85016
New Jersey Office:
(602) 687-6700 | ryan.sarbinoff @marcusmillichap.com
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee,
Brian Hosey Vice President/Regional Manager
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data
250 Pehle Avenue, Suite 501
includes transactions valued
Saddle Brook, NJat07663
$1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
(201) 742-6100
specific investment | brian.hosey@marcusmillichap.com
advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau

Pittsburgh Office:

Sean Beuche Regional Manager