Opinion: The Pulse on the Philly Workplace Spring 2022

By Matthew W. Frederick & Danielle Noel

PernaFrederick Commercial Real Estate

In case you didn’t realize, the commercial real estate market over the past 18-20 months has been less than stellar. Given the pandemic and subsequent work from home orders, the market, largely, ground to a halt. Deals that were in the works were put on hold, transactions imploded while waiting for a signature and even “done” deals went poof and never materialized. There were submarkets and sectors that did do very well. Industrial market sales and subsequent leasing due to “last mile” shipping needs and the warehousing of goods and materials because of supply chain issues eclipsed previous records. Today, there is more and more traffic on the roads and growing by the day. The mass transit concourses are seeing more foot traffic as ridership along the rails continues to increase and there are more people on the sidewalks. People are coming back to the office. While not at pre pandemic levels by any stretch, the workplace is coming back. That said, no one’s crystal ball has the clarity we would like in our business, but tenants are feeling more comfortable making longer term commitments. On a recent “zoom” roundtable meeting that I participated in, a senior partner at a major accounting firm that handles lease and corporate audits confirmed transactions are being executed and there appears to be vibrancy in small to mid-size deal flow while there are much fewer “large” transactions in the pipeline. While the CBD’s overall vacancy rates dipped as of late 2021 by a point and a half, rental rates have held firm, and we are currently seeing that rate improve during the first quarter of 2022.

The rent abatement/deferral negotiations in exchange for a lease extension that seemed to be the only deals that were getting done are now waning. Companies are feeling more comfortable asking workers to return to the office and reengage with their fellow workers, mentor younger associates and experience the energy of person-to-person interaction that was and does get lost with the work from home model.

I have spoken with many associates, clients, and partners at major law firms who have asserted that they have been just as productive given this work from home model. In fact, one client said they never skipped a beat and although they weren’t physically on site, business remained, and profitability were not hindered. In my opinion and given my experience, nothing can replace the energy and vibrancy derived from being around others and inability to meet face to face with clients. I do think the hybrid model (whatever that means for each individual business) is something that will take hold for the foreseeable future, companies need a place for workers to call home. To that end, building owners are investing millions of dollars in their assets to create a different and updated atmosphere… newer, brighter and more welcoming building lobbies, large scale common amenity spaces, fitness areas, outdoor/fresh air spaces and behind the scenes infrastructure improvements all focused on welcoming the worker back to the workplace and creating a place we want to leave home for including  BNY Mellon, One Liberty Place, 1600 Market Street and 123 South Broad Street to name a few. Add to these, Lubert Adler’s purchase of the Bellevue complex will bring one of Philadelphia’s most recognizable addresses back to life with a mix of residential, office, fresh new retailers and food options, a total and complete overhaul of the Sporting Club and upgraded common areas and amenity spaces. With the investment and reinvestment by Dranoff Properties along with ASI Management, Post Brothers and Blatstein, the corridor between City Hall and Washington Avenue is blossoming.

One of the sectors of the market that has remained robust is eds/meds/research…Lab Space. Although this began pre pandemic, this sector never took a “hit”. The University City and Navy Yard submarkets have continued to see an explosion in growth to meet the demand. Even with Brandywine’s Schuylkill Yards development and the amount of space being developed that never really hit the market because it was leased before it was built, vacancy in this market is in the low single digits and space can’t come to market quick enough. FMC Tower is 100% leased with the help of Glaxo’s relocation from the Navy Yard which also forced Brandywine Real Estate Trust (owner of FMC and CIRA) to move back to Cira after only a couple of years at FMC, CIRA has been able to retain the vast majority of its tenant roster since the KOZ benefits expired and the majority of vacant blocks that do exist, have been earmarked for lab or R&D space. Sterling Bay and Harrison Street of Chicago and Botanic Properties of New York formed a partnership to purchase 3801 Chestnut Street to develop 310,000 sf of ground-up lab space over 13 floors to take advantage of the demand and lack of supply. In addition, 4 projects alone are adding in excess of 1.5 million square feet of research and development space to this market including CHOP’s HUB for Clinical Collaboration, 3.0 University Place, One uCity Square and Drexel University’s Health Sciences Building will bring total current development in this submarket to over 10 million square feet. For this very reason, some CBD building owners have chosen to convert a portion of their large, contiguous vacant blocks to lab space and are investing the capital now, to make the needed infrastructure improvements necessary to eliminate or at least minimize the upfront time it takes for construction, ie. The Curtis Center, One South Broad Street and 2323 Chestnut Street.

The Navy Yard continues to grow, while not geographically, but within the 1200-acre campus adding to over 7 million square feet of either occupied or space in development. Glaxo’s relocation earlier this year from about 200,000 sf at 5 Crescent to 50,000 sf in University City is meant to accommodate a realignment of their physical office space needs due to a predominant work from home or hybrid model; their Navy Yard space is technically still leased through 2028. It is being marketed for sublease and on paper, doesn’t truly affect the perceived vacancy rate. Gattuso Development Partners is developing a 130,000 sf life sciences facility and the recently announced partnership between Ensemble/Mosaic and Oxford Property Group to develop or redevelop an additional 3 million square feet of existing and new mixed use Life Science space continues to add to the density of this population. In fact, Mosaic recently broke ground on a 125,000 sf spec GMP (Good Manufacturing Practice) manufacturing facility to accommodate the surge in this sector where existing facilities can’t seem to meet the increased demand. With hotels, office, retail, manufacturing and R&D, the Navy Yard has become a city within a city since Barthco Shipping and Urban Outfitters first put their flags in the ground in the mid 2000’s, which in reality, wasn’t that long ago.

Architectural firms are busy responding to RFPs at a pace that is necessitating the need for new hires, construction companies are as busy as ever and at times unable to respond to every bid request. Couple all of this demand with supply chain issues…costs are increasing at a pace that adds to a whole other aspect of deal negotiation. Landlords have no choice but to “up” the improvement dollars necessary to help offset tenant fit out costs and are increasing the water level in the concession pool to entice new tenants. The San Francisco Bay Area based payment processing firm Block, (formerly known as Square) recently signed a lease for +/- 35,000 sf at 1100 Ludlow; bringing that East Market development project to 100% occupancy. Gopuff continues to be lurking in the 75-100,000 sf range and The Inquirer has been rumored to have found a new home for their relocation from 8th and Market Street which will provide for a reduction in physical office space. A good chunk of the space that coworking companies have gobbled up over the past number of years has hit the market with additional blocks of sublease opportunities competing with direct vacancies, however, I understand that the co working giant Spaces/Regus is in the market looking for other opportunities and Corporate Suites, another co working operator from New York that recently landed on a full 26,000 square foot floor at 123 South Broad Street may have plans for expansion in the not too distant future. Morgan Lewis’s move to 23rd and Market in 2023 will allow for the redevelopment of their current home at 1701 Market Street.

The Philadelphia Commercial Real Estate Market remains a guessing game as companies continue determine how much physical space they will need moving forward. According to a prominent Philadelphia City Council member, the one major factor effecting the City’s reboot to pre pandemic levels is crime. The increase in crime in the CBD has exploded and you can’t pick up the paper or turn on the TV without it smacking you in the face and it seems, no one is immune. The City lost a major 150,000 sf company to the suburbs mid lease due largely to the increase in crime and employees, many who traveled from the suburbs to the City, feeling unsafe. The good news is, given the number of new leases and lease extensions being executed, an improving retail scene, and some fresh blood to the market, the future is getting brighter. According to a recent article in the SIOR Report, service-oriented firms are leading the back to office parade while larger corporations are still holding back. Speaking with a very active retail broker about the Mid-Town Village (loosely, Broad to 10th Streets and Market to Locust) scene, almost every vacant space has already been spoken for and new activity is just as brisk as ever. That said, the retailers, mom and pops, restaurants, food trucks and newsstands that rely on the foot traffic that comes with populated office buildings took an obvious, major blow because “we” weren’t physically here and relying on them for our day-to-day needs. Building management services were pulled back because daily occupancy rates were a fraction of what they were pre pandemic and some of those janitors, day porters, building engineers, etc. were either furloughed or given reduced hours. The City needs us to continue to come back to the office, spend money, patronize retailers and hopefully with warmer days around the corner, a great return will become a reality.