February 11, 2005

Philadelphia weathers the competition for its largetst companies; long-term leases remain

By James E. Eaton, Jr., NAI Geis Realty

In 2004, competitors in New Jersey, suburban Philadelphia and Delaware were offering financial incentives to lure many of Philadelphia’s largest companies and office space users to their region, making City officials and building owners very anxious.

Except AAA Mid-Atlantic (relocating to Wilmington, Delaware), all decided to stay with long-term leases. The group includes Cigna, Towers Perin, Aramark, FMC, Sunoco, Ace LTD and Radian. Comcast’s corporate headquarters will also stay in the city as the lead tenant for Liberty Property Trust’s proposed 1.2 million square feet center city office tower called One Pennsylvania Center.

Overall, the market is still soft, asking rates were slightly lower than 2003, and there is still one million square feet of sublease space on the market as positive absorption is minimal.

Other significant transactions included Reed Elsevier for 134,000 square feet at 4 Penn Center, Deckert LLP for 245,000 square feet at Cira Centre, Post & Schell for 80,000 square feet at 4 Penn Center, Woodcock Washburn at Cira Centre for 109,000 square feet and SCA for 74,000 square feet at Cira Centre. As a result of the weak market conditions, Tenants are trading up to better quality of buildings at the same or lower rents than currently being paid.

The investment market was very active this year, ten (10) buildings totaling 4.5 million feet of space sold for near $600 million dollars. 2005 will be just as active, as investors are attracted to Philadelphia’s stable economy and minimal new construction in the pipeline.

The Philadelphia suburbs continue to experience negative absorption due to the general “no growth” state of the economy and lack luster leasing activity. With overall vacancy rates now 20%, the market will be supply driven for the foreseeable future. In the King of Prussia market alone, there are 40 opportunities to lease 20,000-30,000 square feet. In Blue Bell, Pennsylvania, a traditionally tight market, several major companies are downsizing and/or placing significant space on the market, including Unisys Corporation, 160,000 square feet; Aetna Healthcare, 100,000 square feet; and Merck & Company, over 100,000 square feet of leased space will be consolidated. However, there are signs the local economy is improving.

Philadelphia in recent years has emerged as a national player in the health care pharmaceutical and biotech industries. This resulted in Shire Pharmaceuticals relocating their U.S. headquarters to Wayne, Pennsylvania, leasing 210,000 square feet. Teva Pharmaceuticals expanded again leasing an entire 70,000 square feet building in Horsham, Pennsylvania. Barr Labs has relocated their research group to Bala Cynwyd, Pennsylvania leasing 40,000 square feet and Centocor has expanded by 188,000 square feet in Frazer, Pennsylvania.

As a result of the strong residential market, national home builder Toll Brothers recently purchased a 200,000 square foot building in Horsham, Pennsylvania for their new headquarters. Other significant transactions include Wells Fargo Financial, a 110,000 square foot lease at the Wharf in Chester, Pennsylvania; Medrisk, a 50,000 square foot lease in King of Prussia, Pennsylvania; and ESD, Inc., a 50,000 square foot lease in Fort Washington, Pennsylvania.