Philadelphia Office Market Analysis Term Paper

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Office Market Analysis of Philadelphia, Pennsylvania

Today, Philadelphia is highly modern and vigorous city that hosts a number of historic American sites and enjoys numerous natural resources. It is the fourth largest city in the United States and the largest in Pennsylvania. Philadelphia exhibits a number of characteristics of a small town environment complete with trees, parks, and other open spaces; these attributes reflect the legacy of the city's founder, William Penn. Philadelphia represents an important urban center of national and international commerce, with one of the largest and busiest freshwater ports in the world. The tremendous industrial production of the city and the surrounding metropolitan regions represent an enormous opportunity for those who recognize what will be needed in this environment today and in the future. To this end, this paper will provide a market analysis of the Philadelphia to determine the condition of the local economy, the competitive supply and demand, and what is the overall current and future market will be for Class B office space in Philadelphia. A summary of the research will be provided in the conclusion.

Review and Analysis

Background and Overview. According to Adams, Bartlet, Elesh et al. (1991), Philadelphia is much like other American cities in that it combines a number of contradictory realities. "Its public images range from the stodgy WASP fiefdom portrayed in The Philadelphia Story, to political graft and police payoffs, to bombed-out neighborhoods, to a gentrified, phoenix-like creature rising from the ashes of its past" (Adams et al. 1991:3). While none of these images is totally complete or even necessarily accurate, each is still a part of the total picture of Philadelphia today. However, these contrasts serve to reflect the fundamental social and economic inequalities that characterize Philadelphia in the 21st century; according to Adams et al., Philadelphia has rich as well as poor neighborhoods, black, Hispanic, and white communities, and gentrified as well as abandoned areas. "Poverty, homelessness, illiteracy, and health problems continue to haunt some residents of Philadelphia, Camden, Chester, Norristown, Bristol, and many older communities in the region" (Adams et al. 1991:21). The distribution of prosperity has been skewed by the past patterns of employment, ownership, education, and residence, which continues to influence the distribution of opportunities today. Therefore, all of these factors will tend to influence the demand for office space in Philadelphia and its suburbs today and in the future.

Local Economy. On the one hand, the economic changes that have shaped Philadelphia since the end of World War II have created a process of decentralization of commercial and residential locations. This decentralization has inordinately affected the minorities in the city, with a large segment of the black population becoming more concentrated in many of the city's neighborhoods to the extent that segregation is more pronounced today than at any time during the last half century (Adams et al. 1991). On the other hand, Philadelphia has enjoyed explosive growth in commercial office construction that has dramatically changed the appearance of the Philadelphia skyline in just a few years.

Competitive Supply. The competitive supply of office space in Philadelphia and its environs has been significantly influenced in recent years by patterns of foreign investment. According to Adams et al., during the 1980s, city businesses were able to absorb new office space at an average rate of 1.4 million square feet per year. During this period, investors had a renewed sense of confidence in downtown Philadelphia as a viable real estate market and appeared anxious to invest. "Particularly striking was the flood of foreign investments in real estate. Asahi Mutual Life Insurance Company of Japan paid $35 million for a half-interest in the thirty-two-story IVB Bank Building at 17th and Market streets" (Adams et al. 1991:20). Likewise, foreign investors became interested in Philadelphia during this period; for instance, Japanese banks became heavy investors in a $113 million hotel and retail complex, Two Liberty Place, located at 17th and Chestnut streets; the government of Singapore bought Four Penn Center; a French bank (Banque de Paribas) became the lead lender on the 54-story tower complex called the Mellon Bank Center, and helped to finance the $80 million renovation of the 30th Street Railroad Station at the western edge of the city's downtown (Adams et al. 1991). Foreign investors also expanded their interests into the city's suburbs during the 1980s; for instance, Japan's largest life insurance company, Nippon Life Insurance Company, refinanced the Court and Plaza at King of Prussia, an enormous shopping center complex in Montgomery County; investors from Switzerland purchased Suburban Square in Ardmore on the Main Line; a Chester County industrial and office park known as the Great Valley Corporate Center became the center of attention when five foreign-owned companies producing products ranging from disposable diapers to brake linings for locomotives, industrial vacuum cleaners, bakery equipment, and airplane instruments (Adams et al. 1991). The Gallery also represented an effort by the City of Philadelphia to help revitalize its infrastructure (Imbroscio 1995). In spite of these efforts (including the construction of a pedestrian mall that has been viewed as a success in sharp contrast to other such initiatives in other cities), there are some challenges and obstacles remaining. According to the First Quarter 2004 Office Market Report for Philadelphia, "Despite the sluggish demand for office space, which prompted competition between landlords of class A and class B properties to retain tenants looking to relocate, the Central Business District demonstrated a steady increase in business activity and capital investments" (2004:3). The economic downturn continued to hamper growth throughout the Suburban Philadelphia region, though, characterized by lackluster business growth and demand for office space; generally speaking, office market conditions remained low, based on the region's overall vacancy rate of 25.9%. Market highlights from the First Quarter 2004 for Philadelphia are provided at the appendix.

Competitive Demand. The competitive demand for Class B office space outside of Philadelphia's central business district is potentially growing but, perhaps, for the wrong reasons. In spite three decades of continuous redevelopment policies and projects, most American downtowns still have serious economic problems and are perceived, particularly by suburbanites, as inconvenient, obsolete, and even dangerous places (Robertson 1995). According to Archer and Smith (2003), suburban office markets tend to exhibit a pattern of variegated clustering that is not explained adequately by the conventional theories of urban form based on agglomeration effects and the cost of distance. Class B offices are what can be considered as "economy-seeking" entities (Archer & Smith 2003). In almost any North American city's central business district (CBD), there remains a competitive demand for the nonroutine, decision-making type of office spaced; by contrast, there are assumed to be two types of administrative/clerical offices that are capable of location outside the CBD. "The first type seeks space in what is commonly referred to as Class A buildings. Examples of such Class A offices, in actual practice, include the branch offices or subsidiaries of major national corporations, the national offices of international firms, the headquarters offices of local or regional nonfinancial firms and so forth" (Archer & Smith 2003:141). By contrast, Class B offices are what may be thought of as "economy-seeking" entities. Class B companies are generally comprised of a wide range of small, local, firms that are frequently start-ups, a number of government offices as well as a rich variety of other, often "marginal," office users. "In this analysis, Class B offices are presumed to be able to bid space away from marginal residential and central business district uses to the extent that they cannot afford space in office Class A clusters" (Archer & Smith 2003:140). The significance of the Class A market is two-fold: 1) it accounts for a large portion of private suburban office space (approximately half according to the authors); and 2) it is the dominating market, in…

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