Suburban office market bouncing back
A recent study done by an international real estate company finds suburban properties regaining an edge over the city. Is it temporary?
While developers have been touting the revitalization of Philadelphia’s commercial real estate market in recent years, an alternate trend has emerged. Suburban markets are reaching new heights or ones not seen since before the Great Recession.
That is the finding of a new report by JLL, an international commercial real estate services company, that looked at the sale prices of office properties in the Philadelphia region.
While recent years show a clear edge in the value of commercial real estate in downtown Philadelphia, or what JLL refers to as the Central Business District, when it comes to office sales the long-term view tells a different story: Suburban office space is selling at ever higher prices.
JLL said in its second quarter report that with so much of the Center City Class A space having already traded this cycle, “it is reasonable to expect that ongoing momentum in well-located suburban submarkets can help narrow or close the pricing gap and put the suburbs back on top.”
Suburban markets had traditionally traded higher but Philadelphia overtook them in 2014 and 2015, noted Lauren Gilchrist, vice president and director of re-
search at JLL.
“We felt is showed a little bit of a shifting tide,” Gilchrist said of the latest data.
Mike Grigalonis, chief operating officer of the Chester County Economic Development Council, said he’s noticed companies based in the suburbs opening operations in Philadelphia.
“But they maintain their core operations here,” Grigalonis said. “That may be a strategy that’s working for some companies.”
At play for developers is attracting Millennials, the current biggest generation of workers who are replacing retiring Baby Boomers in the workplace.
In general, according to many reports, Millennials like the “live, work, play” environments offered in urban settings. And Philadelphia has caught their attention, Gilchrist said.
“Philadelphia has added the largest percentage of Millennials of any of the 10 largest cities in the nation,” she said, adding that the suburban developers have taken note and are developing their own “live, work, play” centers.
“King of Prussia is doing that,” Gilchrist said. “There’s a pretty significant reverse commute going on there right now.”
Among JLL’s observations:
• Coming off of 2016’s historic peak of $235 per square foot, the city did not see any office sales exceed $200 per square foot in the first half of the year. Meanwhile, Conshohocken’s Three Tower Bridge ($257), Malvern’s Great Valley Corporate Center ($205), and Devon Square ($240) are just a few of the properties to clear the $200 mark outside the city limits.
• From a volume standpoint, the first half of 2017 was a good year for suburban office trades, which were already 14 percent ahead of 2016’s year-end totals on a square footage basis. The company expects both volume and pricing to improve in the suburban counties through the remainder of 2017 relative to the Philadelphia’s Central Business District performance.
• Most major leasing activity can be attributed to tenants seeking the best suburban location and selecting properties with amenities that compete with a more urban environment.
• Average asking rents rose across the suburbs with the recent listing of large, expensive spaces in Radnor and Conshohocken.
• The first half of 2017 saw a flurry of owner-user purchases with more under contract.
“The next 12 to 18 months will tell us about the trajectory of the market” for years after that into the future, Gilchrist said, noting that leases for a number of large tenants will be coming up for renewal.
Looking at individual markets, Conshohocken’s average leasing rate was $34 a square foot with a low 6 percent vacancy rate; Radnor, $36 per square foot with an 8.3 vacancy rate; Malvern/Exton, $27 a square foot with a 4.5 percent vacancy rate; and King of Prussia, which is getting $30 a square foot for Class A space with a 15.3 percent vacancy rate.
Flat leasing activity continued across the market for the first half of 2017, but a few notable tenant moves meant the suburbs entered the second half of the year with strong fundamentals. In King of Prussia/ Wayne, Vertex expanded to 180,000 square feet at the 2301 Renaissance, and Dell Boomi outgrew its space at Berwyn Park and moved to 1400 Liberty Ridge.
Also contributing to the quarter’s strong absorption is TelerX, which upgraded from a Class C office into the newly renovated 410 Horsham Rd. Recent moves from Radnor to King of Prussia/ Wayne for The Hartford and JG Wentworth have reinforced the submarket as a high quality, lower cost alternative to other core suburbs, the report found.