Philadelphia Office Market Analysis: Class B Space Outlook

Introduction: Philadelphia as an Urban Center

Today, Philadelphia is a 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 many characteristics of a small-town environment, complete with trees, parks, and other open spaces — attributes that 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 region represents an enormous opportunity for those who recognize what will be needed in this environment today and in the future.

To this end, this paper provides a market analysis of Philadelphia to determine the condition of the local economy, the competitive supply and demand, and what the overall current and future market will be for Class B office space in the city. A summary of the research is provided in the conclusion.

Background and Economic 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.

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 past patterns of employment, ownership, education, and residence, all of which continue to influence the distribution of opportunities today. All of these factors, in turn, tend to influence the demand for office space in Philadelphia and its suburbs.

Local Economy and Decentralization

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 disproportionately affected 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 of Office Space

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 eager 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 broadly interested in Philadelphia during this period. 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 known as the Mellon Bank Center and helped 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. 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 attracted significant 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 — established operations there (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 viewed as a success in sharp contrast to similar initiatives in other cities — some challenges and obstacles remain. 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, characterized by lackluster business growth and weak demand for office space. Generally speaking, office market conditions remained depressed, based on the region's overall vacancy rate of 25.9%. Market highlights from the First Quarter 2004 report for Philadelphia are provided in the appendix.

Conclusion and Market Outlook

The competitive demand for Class B office space is directly tied to the availability of space that was not intentionally constructed for this purpose. As a result, to the extent that new construction projects targeted to the Class A market create new office space in the aggregate is the extent to which Class B office space will become available. In this supply-and-demand setting, a greater supply of Class B office space would normally mean less overall demand; however, offsetting this aspect of the market's "invisible hand" is the explosion in start-up enterprises that may be well suited to the segment of the Philadelphia population that has been historically marginalized — namely, minorities and low-income families who may view self-employment or small business ownership as a viable alternative to traditional employment, particularly given new opportunities afforded by improved telecommunications.

Based on the foregoing analysis of the local economy, competitive supply, and competitive demand for office space in Philadelphia, the overall current and future market for Class B office space should actually grow in spite of the increasing supply of such space.

Works Cited

Adams, Carolyn, Bartelt, David, and Ira Goldstein et al. Philadelphia: Neighborhoods, Division, and Conflict in a Postindustrial City. Philadelphia: Temple University Press, 1991.

Archer, Wayne R. and Marc T. Smith. "Explaining Location Patterns of Suburban Offices." Real Estate Economics 31, no. 2 (2003): 139–164.

Philadelphia, PA Office Market — First Quarter 2004. Cushman & Wakefield, 2004.

Imbroscio, David L. "Nontraditional Public Enterprise as a Local Economic Development Policy: Dimensions, Prospects, and Constraints." Policy Studies Journal 23, no. 2 (1995): 218–230.

Robertson, Kent A. "Downtown Redevelopment Strategies in the United States: An End-of-the-Century Assessment." Journal of the American Planning Association 61, no. 4 (1995): 429–437.

Appendix A: Significant Philadelphia Market Highlights

Source: First Quarter 2004 Market Report, Philadelphia.