Weak Investment, Steady Pipeline for Philadelphia’s Office Sector

Philadelphia’s office sector showed modest signs of recovery through the first 10 months of the year, Yardi Matrix data shows, mirroring broader trends in commercial real estate. As of October, the metro recorded one of the lowest investment volumes in the U.S., with assets trading at almost half the national average price.

However, development activity is holding up better than investments. Philly’s office pipeline ranked among the top 10 nationwide, remaining broadly in line with levels recorded earlier in the year. The disconnect suggests that while investors remain cautious, developers are still betting on the market’s longer-term fundamentals.

Construction activity remained steady

Philadelphia’s office development pipeline at the end of October amounted to 1.1 million square feet, ranking in the top 10 nationwide. Austin (1.6 million square feet) and Houston (1.3 million square feet) were some of the peer metros that fared better, while Phoenix (850,000 square feet) and Atlanta (730,000 square feet) were at the opposite end.

Nationally, just a little over 33 million square feet of office space were under construction. Boston, Manhattan and Dallas were the only metros to surpass the 2 million-square-foot threshold.

Parkway Corp. is working on 2000 Arch Street, a 550,000-square-foot office building in Center City. The firm broke ground on the project in 2023, using funds from a $408.6 million loan originated by UMB Bank, Yardi Matrix data shows. The development is slated to come online in the first quarter of next year.

As for office deliveries, five properties totaling 534,894 square feet came online in the first 10 months of the year. They accounted for 0.2 percent of the metro’s office footprint, less than half the 0.5 percent national figure.

Earlier this year, Breakthrough Properties completed the redevelopment of 2300 Market, a 225,000-square-foot life science building also in Philadelphia’s downtown area. The project involved the adaptive reuse and rehabilitation of two adjoining buildings while also adding five new stories. A joint venture between Tishman Speyer and Bellco Capital backs the property.

Philly office prices below national figures

Philadelphia’s office space sales totaled $454 million year-to-date through October, one of the lowest investment volumes in the U.S. Peer markets such as Dallas ($2.5 billion) and Atlanta ($1.2 billion) were among the top 10 metros for transactions, while Austin ($542 million) and Tampa, Fla. ($535 million) joined Philly in the bottom half of the ranking.

Assets in the metro traded for $100 per square foot, almost half the national average of $191 per square foot. Austin ($216 per square foot) and Atlanta ($131 per square foot) registered higher prices, while Houston properties sold for less ($90 per square foot).

In the third quarter of this year, Mesirow Financial acquired 1170, 1180 & 1190 Devon Park Drive, a three-building office campus in Wayne, Pa. Merion Realty Partners sold the 250,185-square-foot asset for $66.5 million, after 10 years of ownership.

Office vacancy, unchanged over the year

Philadelphia’s office vacancy rate remained unchanged year-over-year as of October, clocking in at 18.8 percent, 20 basis points above the national average. Similar markets such as Tampa (14.2 percent) and Phoenix (17.4 percent) also had lower vacancies, while Atlanta (19.8 percent), Dallas (22 percent) and Austin (26.9 percent) had more space available.

In September, the U.S. Securities and Exchange Commission renewed its 44,765-square-foot leasing agreement at One Penn Center, a 650,000-square-foot building in Center City. The government agency will continue to occupy the space for another 10 years. Realex Capital owns the 20-story asset completed in 1930.

The average listing rate for office space in Philadelphia was $31.69 per square foot in October, down 3.2 percent year-over-year. The figure was below the $32.81 national average, but surpassed those recorded in Phoenix ($29.67) and Houston ($27.49). Among similar markets, Austin led the ranking with $45.79 per square foot.

Philly’s coworking footprint below U.S. index

Philadelphia’s coworking footprint clocked in at more than 3.2 million square feet across 177 locations, according to CoworkingCafe. This accounted for 1.7 percent of the market’s office inventory, 50 basis points below the national average.

All peer markets had a larger share of coworking space out of the office inventory, including Atlanta (2.6 percent) and Houston (2 percent). Nationally, Miami (4.3 percent) ranked first.

Regus continued to have the largest shared space inventory in Philadelphia, with 620,355 square feet across 33 locations. HQ (144,149 square feet) and WeWork (132,388 square feet) rounded out the market’s top 3 coworking operators.