Q1 2023 Office Space Report: Philadelphia, PA
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.
Philadelphia, the City of Brotherly Love, is renowned for its vibrant arts and culture scene, iconic historical landmarks, delicious cuisine, and its status as a central hub for business and commerce.
It’s home to major businesses such as Comcast, GlaxoSmithKline, Aramark, and Sunoco, making it a top choice for companies looking for a diverse economy and access to an educated labor force.
Unemployment in the city fell from 5.2% to 4.4% in Q1 2023 alone yet remained above Q3 2022’s rate as well as Q4 2022’s rate.
Philadelphia’s office space market saw negative absorption, rising vacancies, and declining rents in Q1 2023.
General Area Overview & Demographics
Philadelphia is a historically significant city in the Northeastern United States with a rich cultural heritage, diverse population, and thriving economy.
Philadelphia, PA’s Economy, Population, & Demographic Makeup
As of the 2020 census, Philadelphia had an estimated population of around 1.6 million people, making it the largest city in Pennsylvania and the sixth-most populous city in the United States. The Greater Philadelphia area, which includes the city and surrounding suburbs, is home to over 6 million people, yet most struggle to keep up with monthly rent payments.
Philadelphia has a diverse demographic makeup. It is a melting pot of different ethnicities and cultures. The city has a significant African American population, accounting for around 42% of the residents. The Hispanic and Latino community comprises approximately 14% of the people, while the Asian population comprises about 8%. Philadelphia also has a large white population, representing about 35%.
The city is known for its strong educational institutions, including the prestigious University of Pennsylvania, Temple University, and Drexel University, attracting students from across the globe. Philadelphia has a relatively young population, with a median age of around 34.
Philadelphia’s economy is diverse and robust. It is a major center for industries such as healthcare, education, finance, and technology industries. The Port of Philadelphia and Philadelphia International Airport are significant transportation and logistics hubs.
While Philadelphia has made significant progress in revitalizing its neighborhoods and reducing crime rates, it still faces some challenges, including poverty and income inequality. However, the city continues to invest in infrastructure development, affordable housing, and community initiatives to address these issues.
Summary of Philadelphia Office Space Performance in Q1 2023
Overall vacancies for Philadelphia office space increased quarter-over-quarter to 18.8% above Q4 2022’s 18.5%.
The Suburban Philadelphia submarket ended the quarter at a rate of 20.3%, while the CBD landed at 17.1%.
Class A vacancies were 17.6%, while Class B’s were 20.6%.
Absorption for both Philadelphia’s Suburban and CBD submarkets was negative: Suburban Philadelphia posted -265,000 square feet, and the CBD totaled -203,000.
Class B space absorbed approximately -90,000 square feet, and Class A reached -380,000.
What are Office Space Rents Like in Philadelphia?
Philadelphia office space rents declined slightly in Q1 2023 to $28.93 per square foot below Q4 2022’s average of $30.00 per square foot.
The Suburban Philadelphia submarket posted an average rental rate of $29.35 per square foot. The city’s CBD posted $34.09 per square foot.
Class A space posted $31.92, while Class B posted $25.29.
Purchase & Leasing Activity
Total sales volume for Philadelphia office space in Q1 2023 reached $125 million, with a sale price per square foot around $111.40.
Leasing activity reached nearly 580,000 square feet. The Suburban submarket accounted for 370,000, and the CBD accounted for 210,000.
Notable Office Space Deals in Philadelphia in Q1 2023
There were several notable deals that took place for Philadelphia office space in Q1 2023:
- Agree Realty Corporation purchased 61,300 square feet for $26.95 million.
- Intercontinental Development purchased 82,400 square feet for $9.35 million.
- Confidential Tenant leased 106,000 square feet.
- Morgan Stanley leased 31,000 square feet.
These are select examples among other activity.
New Office Space Development Activity in Philadelphia in Q1 2023
Philadelphia’s office space market saw no new deliveries in Q1 2023.
At the close of Q1 2023, 896,000 square feet of new office space in the city were under development. Philadelphia’s CBD submarket accounted for 746,000 square feet of that number, with the entirety as Class A space being built on Market Street West. The remaining 150,000 of that number is Class A space being built in Radnor, a suburban submarket of the city.
Market Forecast for Philadelphia’s Office Space Market
Volatility in capital markets and persistently high interest rates pose significant challenges to Philadelphia project completions.
Attention will be focused on managing several sizable office assets as their loans mature in 2023, thereby shaping market dynamics.
While future redevelopments hold promise, achieving macroeconomic stability is crucial for these projects to be feasible.
Takeaways for Office Space Investors
Philadelphia’s office space market weakened due to poor market fundamentals and growing economic uncertainty.
Investors should approach this market with caution until indicators show otherwise.
Do your research, stay diligent, and happy investing.
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