Philadelphia’s office construction scene is buzzing with activity, with a whopping 3.7 million square feet of office properties currently under development in the region. This significant construction surge has taken center stage in the third quarter of the year. Let’s look at the numbers:
Downtown Domination: The majority of this construction boom is concentrated in two key downtown areas: University City and the Market Street West section of Center City. University City is leading the pack, contributing a substantial 1.2 million square feet, which accounts for 32% of the ongoing office development. Meanwhile, Market Street West isn’t far behind, boasting nearly 1.5 million square feet, making up 40% of the region’s total office construction.
A Resilient Sector: While lenders have generally been cautious about providing office construction loans, there are some notable exceptions. Several projects have broken ground, highlighting the resilience of specific segments within the office sector. These include pre-leased corporate headquarters, speculative trophy-class office spaces, and speculative life sciences laboratories.
The Power of Long-Term Leases: In recent years, some high-profile build-to-suit, long-term lease agreements have made waves in Center City. Examples include Parkway Corp.’s 305,000 square foot office tower on Market Street (the new headquarters for law firm Morgan Lewis & Bockius), and the early-stage construction of a 438,000 square foot tower on Arch St, designated for Chubb’s consolidated headquarters. Another such example is Spark Therapeutics’ 500,000 square foot gene therapy innovation center in University City. These agreements have provided the financial security needed for lenders and developers to confidently initiate office developments. This vote of confidence in the face of uncertainty about office demand in a post-pandemic era is a noteworthy trend to watch.
While the three projects mentioned earlier had tenants lined up even before they broke ground, it’s worth noting that several new office projects in Philadelphia are forging ahead without a guaranteed tenant in sight. This bold move reflects the strong belief in the city’s life sciences sector, as developers are still able to secure construction loans without having a lease agreement in hand. Additionally, the “flight-to-quality” trend has bolstered developer confidence, encouraging them to construct top-notch trophy-class office buildings on a speculative basis. It’s an interesting testament to the dynamic and evolving nature of the Philadelphia real estate market.
Costar.com, Brenda Nguyen