Greater Philadelphia Office, Q4 2017

Demand grows in most

portions of market in 2017
Net Absorption Asking Lease Rate (FS) Development
Vacancy Rate
-324,375 sq. ft. 14.9% $25.71 3.04 Million sq. ft.

Figure 1: 2017 Total Net Absorption vs. Year-Over-Year Occupancy Growth *Arrows indicate change from previous quarter
Thousands (Sq. ft.)

Basis points (bps.)

1,800 300
Forecast
1,200 160 bps. 200

600 80 bps. 80 bps. 100

20 bps.
-363 KSF
0 1,328 KSF
0
103 KSF 178 KSF 93 KSF

-600 -150 bps. -100

-1,200 -200
Downtown Phila. Suburban Phila. Southern N.J. Northern DE Lehigh Valley

Net Absorption (L) Change in Occupancy (R)

Source: CBRE Research, Q4 2017
Downtown: Consolidations and space utilization
cooled demand growth downtown in 2017. With
additional supply coming to market in 2018,
expect vacancy to continue to rise and rents to
reach peak levels.
Suburbs: Annual absorption in the suburbs was 1.3
MSF, exceeding 2016 totals. The boom in demand
should catalyze upward pressure on rents,
especially for properties with access to public
transportation, amenities and educated labor.
Northern Delaware: Overall occupancy grew in
2017, specifically in the CBD market where
business sectors such as financial services, legal
and chemical manufacturers helped grow
occupancy by more than 280,000 sq. ft.
Southern New Jersey: Occupancy growth focused
exclusively in the Camden County portion of the
Southern NJ market in 2017. With significant tax
incentives handed out during the past few years to
attract businesses to the city of Camden,
momentum seems to be building.
Almost every portion of the greater Philadelphia office
market contributed positively to the 1.38 million sq. ft. of
annual absorption tallied during 2017. The Philadelphia
CBD was the sole exception, as consolidations and space
utilization trends eroded demand by 363,118 sq. ft.
Conversely the region’s standout market, Suburban
Philadelphia, posted another year of more than 1 million
sq. ft. of positive absorption. About half of those gains were
captured in Class A product where current vacancy sits at
11.9%, compared to its peak of 21.1% tallied in early 2010.
But, while vacancy dropped year-over-year in the suburbs,
intra-market activity suggests that some tenants are
becoming price sensitive, evidenced by the trend of tenants
relocating out of the Main Line submarket into King of
Prussia where Class A rents sat 17.7% lower than in the
Main Line.
In the remaining portions of the metro, occupancy trended
upward, but at a slower pace compared to 2016, except for
Southern NJ where gains accelerated. This suggests future
demand growth in these markets should persist, but at a
more moderate pace.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 1

 GREATER PHILADELPHIA OFFICE

Figure 2: Philadelphia Metro Office Market Statistics

2017 YTD Avg. Class A

Total Total Under Avg. Asking
Number of Inventory Total Net Asking
SUBMARKET Vacancy Availability Construction Lease Rate
Buildings (Sq. ft.) Absorption Lease Rate
Rate (%) Rate (%) (Sq. ft.) ($Fsg/Psf/Yr)
(Sq. ft.) ($Fsg/Psf/Yr)

Market West 51 26,291,604 12.9% 14.9% 1,854,000 -350,424 $29.38 $31.12

Market East 19 6,737,314 12.7% 17.8% 0 -2,857 $28.20 $29.03

Independence
16 5,820,454 14.3% 22.1% 0 130,820 $29.43 $29.80
Hall
University City 23 4,565,028 7.2% 10.6% 340,000 -140,657 $41.28 $41.91
Downtown
Philadelphia 109 43,414,400 12.5% 15.9% 2,194,000 -363,118 $29.98 $31.55
Subtotal
Bala Cynwyd 29 2,873,637 11.3% 14.8% 0 48,057 $29.89 $32.17

Blue Bell 79 3,975,000 19.2% 23.2% 0 159,340 $22.48 $28.78

Central Bucks County 54 1,927,682 20.5% 25.2% 0 213,047 $20.41 $27.74

Conshohocken 26 3,394,001 10.2% 14.4% 0 15,099 $35.93 $38.41

Delaware County 84 5,200,168 12.5% 17.1% 0 13,366 $25.40 $27.55

Exton/West Chester 91 4,120,931 14.0% 15.9% 0 71,544 $24.12 $25.77

Fort Washington 44 3,226,763 21.2% 28.1% 69,000 -87,453 $23.72 $27.55

Horsham/Willow
84 5,138,706 18.3% 22.1% 0 69,740 $23.34 $27.33
Grove
Jenkintown 21 1,352,695 15.0% 16.0% 0 42,900 $23.66 $24.93
King of Prussia/
232 16,837,424 12.3% 15.7% 0 620,479 $26.74 $30.96
Valley Forge
Lower Bucks County 111 5,256,034 21.2% 25.5% 0 113,633 $22.97 $24.79

Main Line 46 2,770,882 8.4% 10.6% 0 -71,041 $36.32 $37.62

North Penn 14 936,098 37.7% 37.7% 0 93,644 $19.43 $18.69

Plymouth Meeting 37 2,352,075 18.1% 22.8% 0 -30,381 $31.40 $31.34

Upper Main Line 38 1,171,589 18.8% 21.8% 0 56,216 $26.99 $29.33

Suburban
Philadelphia 990 60,533,721 15.4% 19.1% 69,000 1,328,190 $25.41 $29.01
Subtotal

Source: CBRE Research, Q4 2017.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 2

 GREATER PHILADELPHIA OFFICE

Figure 2 (cont.)

2017 YTD Avg. Class A

Total Total Avg. Asking
Number of Under Total Net Asking
SUBMARKET Inventory Vacancy Availability Lease Rate
Buildings Construction Absorption Lease Rate
(Sq. ft.) Rate (%) Rate (%) ($Fsg/Psf/Yr)
(Sq. ft.) (Sq. ft.) ($Fsg/Psf/Yr)

Burlington County 192 9,542,244 15.7% 18.7% 0 -132,667 $19.76 $23.62

Camden County 120 6,970,634 17.4% 19.8% 472,376 247,107 $20.36 $24.20

Gloucester County 24 467,492 16.1% 20.0% 0 -11,355 $21.96 --

Southern New
336 16,980,370 16.4% 19.2% 472,376 103,085 $20.09 $23.80
Jersey Subtotal
Wilmington CBD 37 6,824,639 19.1% 20.7% 0 280,470 $24.36 $26.14
North New Castle
42 2,290,476 21.0% 21.4% 0 -42,093 $22.69 $24.06
Co.
South New Castle
79 4,210,280 17.8% 20.2% 0 65,274 $21.90 $22.79
Co.
West New Castle
47 2,366,278 9.7% 10.5% 63,000 -125,242 $25.11 $25.42
Co.
Northern Dela-
205 15,691,673 17.6% 19.1% 63,000 178,409 $23.70 $25.23
ware Subtotal
Lehigh Valley
55 3,013,188 23.4% 24.5% 99,263 -19,405 $20.25 $21.38
East
Lehigh Valley
102 6,628,165 13.0% 18.5% 142,000 112,306 $18.86 $21.60
West
Lehigh Valley
157 9,641,353 16.2% 20.4% 241,263 92,901 $19.34 $21.53
Totals
TOTAL 1,797 146,261,517 14.9% 18.2% 3,039,639 1,377,529 $25.71 $28.82

Source: CBRE Research, Q4 2017.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 3

 GREATER PHILADELPHIA OFFICE

OFFICE ABSORPTION
Figure 4: Net Absorption
New occupancy in the Philadelphia region slowed in
2017 having netted 1,377,529 sq. ft. of positive 1,600

Sq. ft. (000s)

absorption compared to 2,043,123 sq. ft. of occupancy
1,200
gains in 2016 . Geographically, the suburbs continued
its trend of strong demand growth, posting 1,328,190
800
sq. ft. of occupancy gains in 2017. The majority of the
activity in the suburbs was attributed to small to mid- 400
cap tenants, as 121 out of 129 new leases tracked were
less than 50,000 sq. ft. In the CBD, the negative 0
occupancy change was attributed to the continued
trend of corporate downsizing and consolidations, as -400
tenants continue to find more efficient use of Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017
office space.
Source: CBRE Research, Q4 2017.

OFFICE VACANCY Figure 5: Vacancy Rate

(%) 17
At the end of 2017, the total vacancy rate in the
Philadelphia Region was 14.9%, compared to 15.3%
posted at 2016’s end. Vacancy trended downward in the 16
suburbs while vacancy rose downtown as a result of
corporate right-sizes and consolidations. Vacancy
fundamentals in the traditionally sought-after core and 15
western suburban submarkets such as the King of
Prussia, Main Line, Conshohocken, and Bala Cynwyd
14
markets remained strong as flight-to-quality continues.
The same was true for the Northern DE market where
Class A vacancy fell 30 basis points. Looking forward, 13
speculative product delivering downtown will keep Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017
upward pressure on vacancy while the rest of the
market should see relatively stable vacancy rates in Source: CBRE Research, Q4 2017.
2018.
Figure 6: Development Pipeline

OFFICE DEVELOPMENT PIPELINE 4,000

Sq. ft. (000s)

The development pipeline remained at its highest level

during the post-recession era at year’s end. During
3,000
2017, the built-to-suit projects for Highway to Health
and Franklin Mint delivered in the suburban markets. 2,000
Throughout the rest of the market, built-to-suit projects
for Comcast, Subaru American Water and Bank of
America remained underway and are all slated to 1,000
deliver in 2018 . Looking forward, the first phase of
Schuylkill Yards in University City is scheduled to break
0
ground in 2018, adding approximately 780,000 sq. ft. to 2011 2012 2013 2014 2015 2016 2017
the market by 2020.
Source: CBRE Research, Q4 2017.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 4

 GREATER PHILADELPHIA OFFICE

OFFICE LEASE RATES Figure 7: Office Lease Rates

26.00

Per Sq. ft. Per Year ($,FSG)

Lease rates continue to climb to record highs in the
Philadelphia region. The average asking lease rate in
25.60
the Philadelphia CBD and Suburbs sits at $27.28 – the
highest figure on record . In light of increasing vacancy
25.20
across the region, landlords increased tenant
concession packages in order to meet their proforma
24.80
rents while affording tenants a bit more leverage in
negotiations. In the suburban markets, climbing lease
24.40
rates led tenants to think more about their price
sensitivity. Companies such as The Hartford and JG
24.00
Wentworth relocated from Main Line, the most
Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017
expensive suburban submarket, to King of Prussia, a
more affordable alternative. Source: CBRE Research, Q4 2017.

OFFICE CAPITAL MARKETS

Figure 8: Office Sales Transactions
3,500

($, Millions)
Capital markets activity in the Philadelphia region 3,000
continued its robust performance. Part of this strong
2,500
activity level was attributed to shorter hold periods
than seen in the past. In the fourth quarter, Duane 2,000
Morris Plaza traded to Oaktree Capital, a fund sponsor
1,500
for an Asian institutional group. Institutional investors
seeking safety were increasingly drawn to CBD office 1,000
assets, while private investors seeking yield flocked to
500
the suburbs. Cap rate compression seen throughout
this cycle is expected to continue, as capital continues 0
to chase office product in the region. Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Real Capital Analytics (4-qtr. Aggregate) Q4 2017.
OUTLOOK

This year the Greater Philadelphia office market
demonstrated compelling demand, rent and supply
growth. While the region as a whole is projected to
continue comfortably maturing in 2018, each
geography has its own narrative of challenges and
advantages. The tie that binds, however, is supply.
2018 will deliver the largest amount of new stock in
at least 10 years, the lion’s share in the CBD where a
5% share of the current inventory is under
construction. More is likely to break ground. Large
block requirements are seriously considering build-
to-suit opportunities in Philadelphia’s suburbs,
strong incentivization is surrounding new
construction on Camden’s waterfront and the
ambitious Schuylkill Yards project is set to kick off.
It is both correct and incorrect to say the region may
veer into oversupply: the market responded
exceedingly well to new and renovated office space
across the region, with preleasing for new
development at 88% and vacancy for buildings
delivered since 2016 at 11.8% and falling. Yet, with
demand trends focused on “right-sizing” and a
moderation of office-using job growth forecasted by
Moody’s Analytics for the MSA in 2018, the region
and especially the CBD will need more homegrown
company expansion, and more local or out-of-
market companies choosing or doubling down on
Greater Philadelphia as a prime location, to temper
rising vacancy, especially in the sector of inventory
that does not smell of fresh paint.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 5

 GREATER PHILADELPHIA OFFICE

CONTACTS LOCAL OFFICES

Ian Anderson Center City Allentown, PA

Director of Research and Analysis Philadelphia +1 610 398 6900
+1 215 561 8997 Two Liberty Place
ian.anderson2@cbre.com +1 215 561 8900 Harrisburg, PA
+1 717 540 2700
Joseph Gibson Cira Center
Research Operations Manager +1 215 921 7400 Mt. Laurel, NJ
+1 610 727 5922 +1 856 359 9500
joseph.gibson@cbre.com Wayne, PA
+1 610 251 0820 Wilmington, DE
Greg Dagit +1 302 661 6700
Researcher Conshohocken, PA
+1 610 251 5182 +1 610 834 8000
gregory.dagit@cbre.com

To learn more about CBRE Research,

Liam Fahey
or to access additional research reports,
Researcher please visit the Global Research Gateway at
+1 215 561 8740 www.cbre.com/researchgateway.
liam.fahey2@cbre.com

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not
verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is
presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CRBE.