Commercial Real Estate News / General CRE / Q3 2022 Office Space Report: Philadelphia, PA

Q3 2022 Office Space Report: Philadelphia, PA

Published: 01-31-23 Category: General CRE

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The Philadelphia office space market is showing continued progress from the work-from-home effect caused by COVID and recent interest rate hikes by the feds.

Despite increasing slightly in Q3, the unemployment in Philadelphia Metropolitan Statistical Area (MSA) is down to 3.9% when this time last year it was at 7%. Its current unemployment rate is near the nation’s 3.7% average. Employment is at 99% of what it was before the pandemic.

Many industries in Philadephia’s MSA have grown throughout 2022. Professional and business services, leisure and hospitality, and education and health are all up 6%-9%.

Most significantly, one of Philadelphia’s prominent tenants, Comcast, pushed for its employees to return to the office three days a week for work, causing an increase in downtown activity.

General Area Overview & Demographics

Philadelphia, PA, is the fifth most populous city in the United States and is home to more than 6 million people. It has a diverse population with various ethnicities, such as African American, Hispanic, Asian, and White. Philadelphia’s median household income is $54,609, and its median rent is $1,334 per month.

The metropolitan area encompasses the city and surrounding suburban townships in Pennsylvania, Delaware, and New Jersey. Philadelphia is known for its culture, art scene, and historical sites such as Independence Hall and Liberty Bell Center.

Philadelphia also has a rich education system with universities such as Temple University, University of Pennsylvania (Penn), Drexel University, and Villanova University located within the city limits or its suburbs. The Philadelphia School District serves over 140 public schools across the city’s neighborhoods, ranging from primarily residential areas to urban centers filled with businesses.

Philadelphia, Pennsylvania, is known for its four distinct seasons and moderate climate. Located in the humid subtropical climate zone, the city experiences hot summers and cold winters with occasional snowfall.

Summary of Philadelphia Office Space Performance in Q3 2022

Q3 2022 Office Space Report: Philadelphia, PA

During the third quarter, Class A buildings soared in desirability due to an increased demand for quality space with more amenities.

Though more Class A options were made available on the market (particularly sublease), lease terms have generally gotten longer, dropping from 25% of 2021 leases under 24 months to only 15%. Yet these extended deals are accompanied by generous free rent periods.

Correspondingly, occupancy rates decreased sharply among Class B spaces as companies implemented either full-time remote or optional office scenarios.

Philadelphia’s CBD leasing landscape remains dominated by short-term renewals as tenants ponder their long-term real estate needs; downsizing is also evident among those transitioning to hybrid work models.

Suburban sublease space has been on an upward trajectory, with quarter-over-quarter gains of 1.5% and year-over-year increases of 23%.

What are office space rents like in Philadelphia?

Rental rates have risen steadily quarter-over-quarter, reaching $29.29 per square foot, a 1.6% increase from the previous period.

This quarter saw an increase in rental rates for the CBD, with Class A rents going up throughout 2022 to $35.15 per square foot, up 1.4% from last year’s figure.

Purchase & Leasing Activity

Leasing activity for office space in Philadelphia for Q3 2022 underscored the flight to quality spaces. New tenants, such as Barnes and Thornburg and Capital One, signed leases in Trophy buildings, while most other relocation activity within the CBD has also followed this trend.

Nearly three-fourths of leasing activity has been for Class A buildings, and Class A subleases account for 18.0% of all Class A leasing activity. More than half of all relocations have been into Trophy buildings or Class A properties.

While quantity is always a variable in determining the health of the office space market, it’s clear that quality space is a premium.

Notable Office Space Deals in Philadelphia in Q3 2022

There were several deals for Philadelphia office space this quarter.

Prudential’s leasing of about 36,000 square feet.
CRB Engineering’s leasing of about 34,500 square feet.
TrueStone LLC’s purchase of about 80,000 square feet

These are a few among other transactions that took place.

New Office Space Development Activity in Philadelphia in Q3 2022

There has been no new office space development under construction in Suburban Philadelphia over the past year; however, Philadelphia’s more urban areas have seen activity.

Developers PMC Property Group, Brandywine Realty Trust, and Parkway all have projects that are currently underway, with builds ranging from 200,000-500,000 square feet.

Parkway’s 23rd and Market is the only notable development to be completed at the close of 2022. In contrast, Schuylkill Yards-West Tower of Brandywine and 2301 JFK by PMC Property Group are projected to be completed by 2023 and 2025, respectively.

Market Forecast for Philadelphia’s Office Space Market in 2023

After a summer of slower activity, the market has regained some momentum. While there is a modest increase in investment spreading, plenty of space remains unabsorbed.

However, several properties have already gone into an agreement, signaling a possible expectation of further growth moving into 2023.

Takeaways for Office Space Investors

If an investor is interested in office space in Philadelphia, the data shows more promise for Philadelphia’s more Urban and CBD areas and less for Suburban.

As we see nationally, Class A buildings prioritizing quality and amenities should also be a top consideration, as Class B and C builds show an overall lag in comparison.

Each investor will need to conduct their own research to determine what decisions are best moving into 2023.