Philadelphia’s regional office sector may well be poised to weather an expected economic crash linked to COVID-19.
A new report from real estate consultancy CBRE saw surging demand and rising office rents throughout the end of the first quarter of 2020, which ended shortly after Pennsylvania went into a statewide lockdown to contain the spread of COVID-19.
The report predicted a short-term recession with the possibility of a modest recovery as early as the third quarter of 2020, with withering losses in retail, hospitality, and transportation sectors across the nation. But the CBRE report predicted “office-using employment may be less negatively affected than in recent recessions” in Philadelphia and its suburbs.
“The big takeaway is the office market here was staying the course pre-COVID. There was interest in new development, rents were beginning to rise,” said CBRE senior field research manager Joe Gibson. “In the short term, Philadelphia might fare better than other metro regions.”
He said the region had a more “mature, diverse” office economy than other regions, compared to those dependent on single sectors for much economic activity. Gibson said a separate analysis found the city and region had a higher concentration of office tenants with more limited exposure to the impacts of the shutdown, such as life sciences or health care-related tenants.
“15% of office tenants regionally were associated with more stable industries,” Gibson said. “I don’t expect the second-quarter numbers to show a tremendous amount of office vacancy.”
Over the past decade, the regional office vacancy rate has nearly halved, to 14.6% as of March 2020, with more robust submarkets, like University City, seeing rates as low as 7%.
Growth appeared on track to continue into 2020. In downtown Philadelphia, law firm Morgan Lewis would occupy 305,000 square feet of space in Parkway Corporation’s planned 2222 Market Street development, and University City’s massive uCity Square development had broken ground.
While many construction projects have been idled under a shutdown order from Pa. Gov. Tom Wolf, there was little indication that major projects had been derailed –– for now.
“I don’t see significant real estate decisions wavering or being made after a month or two,” Gibson said. “But real estate tends to be a lagging economic indicator. We’ll see the effects in a year or a year and half.”
Still, there was little certainty in such unprecedented times. Gibson said it might be possible that some companies might reconsider office usage after being forced to “beta test” work-from-home policies during the shutdown.
“Personally, I can’t wait to get back to an office just to be around other people again,” he said.