Q1 2023 Commercial Real Estate Report: Philadelphia, PA
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Philadelphia's commercial real estate market saw a somewhat-underwhelming Q1 2023 thanks to sluggish office space performance and difficulties with industrial space construction.
Although most of the city's sectors saw average rents increase, vacancies climbed slightly in both the office space and industrial markets, while multifamily rents slowed after fierce multifamily growth in 2022.
General Philadelphia Commercial Real Estate Market Trends
The average price of commercial real estate across Philadelphia in Q1 2023 was $64.43 per square foot, while the median price per square foot was $113.67. Average and median prices increased by 0.95% and 1.32% over the last 90 days, respectively.
Notable Commercial Real Estate Transactions in Philadelphia in Q1 2023
Some of the most notable commercial real estate transactions this quarter were:
- AmeriHealth's 100,000 square foot lease at 203 Squire Dr.;
- Planet Fitness' 25,000 square foot lease renewal at Warwick Square;
- Barry Callebaut USA's 350,000 square foot lease at 1500 E 2nd St.;
- Yesway Logistics' 251,336 square foot lease at RT-73; and
- KKR's $342 million purchase at $334,331 per unit at Presidential City.
Overall, suburban Philadelphia saw the lion's share of the most notable transactions.
Philadelphia Office Space Performance in Q1 2023
Philadelphia office space activity in Q1 2023 slowed slightly thanks to increased uncertainty and headwinds of recession. Asking rental rates for office space were $31.48 per square foot — a decent jump from $28.62 per square foot in Q4 2022 and a 5.9% YoY change since Q1 2022. This quarterly jump comes after a quarterly decrease in office rents from $29.29 in Q3 2022 to Q4 2022.
Although average rents rose, availability rates for office space jumped to 24% in Q1 2023, registering a YoY increase of 190 basis points. Additionally, total leasing activity was nearly 44% lower than the previous quarter at 726,350 square feet.
Philadelphia Office Space Construction and Volume
Philadelphia added about 1 million square feet of new office space product to its stock between Q4 2022 and Q1 2023, reaching a total office space inventory of 134 million square feet.
Like many other office space markets in the nation, there is still low demand for office space in Philadelphia due to widespread remote and hybrid work schedules.
Philadelphia Industrial Real Estate Performance in Q1 2023
Average triple-net (NNN) lease asking rates for Philadelphia's industrial real estate market rose to $11.56 per square foot — the first time in the city that average industrial rents have ever risen to over $11 per square foot. This change represents a significant jump from averages of $10.13 at the end of Q4 2022.
As far as sales prices go, the median price per square foot increased by 1.62% over the last 90 days to $62.50 per square foot, with a median property size of 24,000 square feet.
Vacancy rates for industrial real estate in Philadelphia rose slightly to 4.4%, maintaining the low vacancy rates we saw between Q3 and Q4 2022. At least some of this rise in vacancy rates can be attributed to new additions to the city's industrial real estate inventory.
Philadelphia Industrial Real Estate Construction and Volume
Construction rates fell below pre-pandemic averages as high interest rates and increased construction costs make it harder to break ground on new projects.
In addition to lower construction rates, pre-leasing on new construction sat at only 20%.
New additions have caused vacancy rates to jump slightly, but once the market rebalances, low construction rates will likely keep pushing rents higher as competition for space grows.
Philadelphia Multifamily Real Estate Performance in Q1 2023
As of Q1 2023, average multifamily rents in Philadelphia sat at $2,200 per month at $2.41 per square foot per month — a 2.8% growth over the past year. Philadelphia multifamily real estate has shown good growth over the last two years but is starting to moderate.
Vacancies for Philadelphia multifamily increased to 4.4%, a rise of 160 basis points from 2.8% in Q3 2022 and a YoY increase of 140 basis points. Most of the rising vacancy rate was attributable to the 6.8% vacancy rate in the city submarkets.
Philadelphia Multifamily Construction and Volume
The city of Philadelphia added at least 1,000 new multifamily units this quarter and currently has an additional 16,090 units under construction and another 73,000 units in the permitting process. Estimated deliveries for the rest of 2023 are 5,200 units.
Transactions hit a decade-high of $3.9 billion in 2022 but have virtually ground to a halt as of Q1 2023. High interest rates and construction costs have made investors more hesitant to invest in multifamily construction.
Philadelphia Retail Performance in Q1 2023
Thanks to a resistant tourism industry and growing job market, Philadelphia retail figures in Q1 2023 were strong, with falling availability rates and steady rental growth.
Availability rates for retail space fell to 7.8%, and average NNN anchor asking rates were $15.60 per square foot. Average in-line asking rents were slightly higher at $17.91 per square foot.
Absorptions, however, fell nearly 400,000, settling at just under 200,000 square feet of positive absorption. As of the end of Q1 2023, the Philadelphia retail sector had 498,579 square feet of new retail space under construction.
Takeaways for Philadelphia Commercial Real Estate Investors
Philadelphia's commercial real estate market performance was something of a mixed bag this quarter. All sectors saw decent rental growth, but the market was characterized by falling construction and sales activity.
The best-performing sector this quarter was industrial, but even the momentum there is expected to slow as construction rates continue to fall.
Industrial rents made significant strides as more companies are renting warehouse space to meet online sales, and multifamily deliveries are on track for over 5,000 deliveries this year. The weakest performing sector this quarter was office space, which is still acclimating to the new norm of remote work.
Methodology
This report was written with property information from the MyEListing.com platform in corroboration with other freely available commercial real estate research data.
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