Lots of Residential Development, Where's the Office?

**JakeL** · 08-22-2012, 10:02 AM

As a fan of urban development, I'm excited to see all the large amounts of construction occuring. From 281 apartments going into the AAA building, to 300 apartments at the Hillman Medical Center, to 160 apartments at the Goldtex building, to the former State Office building on Broad St., we're experiencing a large amount of new rentals coming on the market in Center City and surrounding communities.

However, as I've seen this rapid expansion of new housing, I haven't heard a whole lot on new office development. Infact, some of the examples above are of office space being converted into residential. Are we at risk of overbuilding residential without the office space to match? Or are the jobs already there in Center City and this is a demographic shift of more people wanting to live in the city?

**darthsinatra** · 08-22-2012, 10:17 AM

Both commercial and apartment rents are up and vacancies are down. I think if commercial vacancies continue to shrink, we will have to see more office development.

https://www.reisreports.com/Markets/...elphia/Office/

**JakeL** · 08-22-2012, 12:24 PM

Originally Posted by darthsinatra

Both commercial and apartment rents are up and vacancies are down. I think if commercial vacancies continue to shrink, we will have to see more office development.

https://www.reisreports.com/Markets/...elphia/Office/

I guess my concerns are based on Center City's Office Report, which shows occupied office space growing by only .2% since 2000, whereas the population living in Center City grew by 24% over the same time period.

How much can housing growth is possible based purely desire for city living (over than suburbs), rather than through job growth? Are we reaching our peak, or do we still have a ways to go?

**The Count** · 08-22-2012, 01:20 PM

As of 2Q 2012, there is 4.8 million sf of Class A and B office space in the CBD.

Vacancy is at about 12% and recent absorption has been tepid at best.

Given the local job growth outlook, I don't think we're in imminent danger of office space shortage.

**billy ross** · 08-22-2012, 04:22 PM

Originally Posted by The Count

As of 2Q 2012, there is 4.8 million sf of Class A and B office space in the CBD.

Vacancy is at about 12% and recent absorption has been tepid at best.

Given the local job growth outlook, I don't think we're in imminent danger of office space shortage.

I have a hard time believing that there are only 4.8 million square feet of office space in the CBD. Each full-sized skyscraper is good for about a million feet. Are you trying to tell me that we only have the equivalent of five semi-modern skyscrapers in Center City, in aggregate? It is my understanding that the Center City market contains 42 million square feet. Am I to believe that only 15% of that is the better stuff in the main business district? As a matter of fact, EACH tower of the Twin Towers at the World Trade Center contained 4.2 million square feet. Are you trying to tell me that Philly's office market is only slightly larger than one of the twin towers?

**The Count** · 08-22-2012, 04:40 PM

Originally Posted by billy ross

I have a hard time believing that there are only 4.8 million square feet of office space in the CBD. Each full-sized skyscraper is good for about a million feet. Are you trying to tell me that we only have the equivalent of five semi-modern skyscrapers in Center City, in aggregate? It is my understanding that the Center City market contains 42 million square feet. Am I to believe that only 15% of that is the better stuff in the main business district? As a matter of fact, EACH tower of the Twin Towers at the World Trade Center contained 4.2 million square feet. Are you trying to tell me that Philly's office market is only slightly larger than one of the twin towers?

I meant $4.8 million vacant sf.

**billy ross** · 08-22-2012, 05:01 PM

How much of that 4.8 million feet is contiguous? What is the largest block of space available? I know a law firm just took about 250k square feet at One Liberty (or maybe Two Liberty). It seems to me that a large building will get built when a company wants space that either doesn't presently exist or isn't presently available. The smaller the chunks of available space are, the more likely that is to happen. I have been expecting Comcast to need more space as it continues to grow; I don't think it took them long to fill their tower. There are other candidates out there too.

Originally Posted by The Count

I meant $4.8 million vacant sf.

**kidphilly** · 08-22-2012, 05:39 PM

Originally Posted by billy ross

How much of that 4.8 million feet is contiguous? What is the largest block of space available? I know a law firm just took about 250k square feet at One Liberty (or maybe Two Liberty). It seems to me that a large building will get built when a company wants space that either doesn't presently exist or isn't presently available. The smaller the chunks of available space are, the more likely that is to happen. I have been expecting Comcast to need more space as it continues to grow; I don't think it took them long to fill their tower. There are other candidates out there too.

One and Three Franklin have a decent amount soon when GSK moves to the Navy Yard

**the mule** · 08-22-2012, 08:21 PM

Originally Posted by billy ross

How much of that 4.8 million feet is contiguous? What is the largest block of space available? I know a law firm just took about 250k square feet at One Liberty (or maybe Two Liberty). It seems to me that a large building will get built when a company wants space that either doesn't presently exist or isn't presently available. The smaller the chunks of available space are, the more likely that is to happen. I have been expecting Comcast to need more space as it continues to grow; I don't think it took them long to fill their tower. There are other candidates out there too.

Cira South wasn't able to find an anchor tenant for its office space when they failed to bring BlackRock in, so the project stalled. Now that it's been revived, still without an anchor tenant, the taller tower has been shortened and proportion of residential space increased.

The Comcast Center was such a success because Comcast was able to occupy 89% of the space. Their original intention was to occupy less than half that, and they were already based in the city and wanted to occupy contiguous space. Having developer-friendly Ed Rendell as governor willing to make the tower a KOZ didn't hurt either.

A fairly large organization will have to move its headquarters to the city (as was the plan for Cira South) for another major office tower to go up, and the City will have to start wooing businesses with tax breaks again before that happens, but don't count on Nutter and Corbett working together to make any landmark deals.

**Jayfar** · 08-22-2012, 08:38 PM

Originally Posted by the mule

Having developer-friendly Ed Rendell as governor willing to make the tower a KOZ didn't hurt either.

Except Comcast Center never did get the KOZ designation, although it did get a booby prize of sorts from the state. Major opposition from other CC office building owners put the kibosh on the proposed KOZ.

Comcast Center (Philadelphia) - Wikipedia, the free encyclopedia

Chances the bill would be passed ended in November 2004 when House Republicans in the Pennsylvania General Assembly decided not to bring the bill to a vote. Later that year, Governor Rendell released US$30 million from the Redevelopment Assistance Budget to Liberty Property Trust. Through the state's Department of Economic and Community Development, Comcast received US$12.75 million that included a US$4 million opportunity grant, US$6.75 million in job creation tax credits, and US$2 million in job training assistance. Despite the failure of receiving KOZ status, the project received US$42.75 million in financial incentives from the state.

**BarryG** · 08-22-2012, 11:17 PM

This topic has come up many times before.

The simple answer is that as the desirability of Center City and the surrounding neighborhoods grows, the business tax environment is a major drag on office demand. But there is good news. First, is that a modicum of business tax relief has been passed by council and phases in over the next few years. This reform alone probably won't draw in anchor tenants for a tower, but will encourage startups to begin here, and hopefully stay here as they grow. Second, the investment partnership tax reform just passed has already lured the third largest venture capital firm in the country into the city from Conshohocken. This tax break plus KOZ could definitely attract a tower anchor tenant. Third, as residential desirability grows, demand for a shorter commute follows. We've already seen large firms from the suburbs open offices downtown, like Bentley Systems, as well as some smaller firms like Fiberlink. The reason is that their young talent lives in the city and doesn't want to schlep out to Malvern or Blue Bell. Expect more to follow.

Further, I'm not convinced that offices are a growth industry. More and more workers are independent contractors or remote employees who never need to step foot into an office. Increased efficiency means that businesses do more with less staff. Combine those trends with the movement towards city living, and Philadelphia's heavily mixed use downtown could be a snapshot of the future, and the envy of other cities in 10-20 years.

I also am not convinced that Market West or around 30th St is definite center of office growth. Old City and Northern Liberties ("N3rd Steet") is emerging as a tech cluster in its own right. These kinds of businesses don't need thousands of employees so if we see several low rise office and mixed use successes along this corridor, we might be happy that Market West is plump with residents as office growth there stagnates.

All that said--the city needs to continue to improve the business tax climate, period.

**darthsinatra** · 08-22-2012, 11:22 PM

Originally Posted by BarryG

This topic has come up many times before.

The simple answer is that as the desirability of Center City and the surrounding neighborhoods grows, the business tax environment is a major drag on office demand. But there is good news. First, is that a modicum of business tax relief has been passed by council and phases in over the next few years. This reform alone probably won't draw in anchor tenants for a tower, but will encourage startups to begin here, and hopefully stay here as they grow. Second, the investment partnership tax reform just passed has already lured the third largest venture capital firm in the country into the city from Conshohocken. This tax break plus KOZ could definitely attract a tower anchor tenant. Third, as residential desirability grows, demand for a shorter commute follows. We've already seen large firms from the suburbs open offices downtown, like Bentley Systems, as well as some smaller firms like Fiberlink. The reason is that their young talent lives in the city and doesn't want to schlep out to Malvern or Blue Bell. Expect more to follow.

Further, I'm not convinced that offices are a growth industry. More and more workers are independent contractors or remote employees who never need to step foot into an office. Increased efficiency means that businesses do more with less staff. Combine those trends with the movement towards city living, and Philadelphia's heavily mixed use downtown could be a snapshot of the future, and the envy of other cities in 10-20 years.

I also am not convinced that Market West or around 30th St is definite center of office growth. Old City and Northern Liberties ("N3rd Steet") is emerging as a tech cluster in its own right. These kinds of businesses don't need thousands of employees so if we see several low rise office and mixed use successes along this corridor, we might be happy that Market West is plump with residents as office growth there stagnates.

All that said--the city needs to continue to improve the business tax climate, period.

Beautifully said, BG

**ArcticSplash** · 08-25-2012, 11:36 AM

The Comcast Center is NOT a KOZ building.

**the mule** · 08-25-2012, 09:01 PM

Originally Posted by ArcticSplash

The Comcast Center is NOT a KOZ building.

Yeah in an effort to be succinct I wasn't very clear with that. The prospect of being designated a KOZ was one of the factors that kept the project alive, but the millions in RACP funds, the Opportunity grant, tax credits, and other incentives were enough to balance that out when it was denied. The concept of establishing a KOZ in Center City is ludicrous, but that speaks to Rendell's enthusiasm for development at all costs. I don't think that would even be a discussion with Corbett.