Office Sector Update 11/1/2015

A recent report from CBRE indicated that office vacancy rates across the U.S. fell to 13.5 percent during the third quarter of 2015. Vacancy rates have fallen in every quarter since the recession, and the most recent data shows a yearly decrease of 80 basis points from this time last year. Growth in the demand for office space is expected to continue to outpace growth in supply as firms are leasing more space than is being delivered by new construction. As a result, vacancy should continue to decline, keeping rent growth above inflation in most U.S. office markets. The report stated that office rents increased by 1.6 percent during the third quarter, resulting in a yearly increase of 4.3 percent since the beginning of the year. Groundbreakings for new office developments will begin to accelerate in the coming months, fueled by the Federal Reserve’s decision to delay a hike in its interest rate. The Fed’s low interest rate makes borrowing money relatively cheap, incentivizing new construction as developers can more easily repay construction loans. Landlords of new spaces will likely charge rents well above market rate, as more companies are relying on their office space as a recruitment tool in the increasingly competitive employment market. With job growth occurring in all professional services sectors, office demand is expected to be tight through at least the middle of 2016.

Brandywine Realty Trust, Philadelphia’s largest office landlord, has recently agreed to sell some of its properties at the Laurel Corporate Center in Mount Laurel, New Jersey. The offices at those properties encompass more than 560,000 square feet of Class A office space. The price of these sales have not yet been disclosed, though it is speculated that the company will use the cash raised to fuel development projects it is planning for several recently acquired properties in Philadelphia. The company sold another office building in Mount Laurel for $16.5 million last month. Brandywine is also rumored to be searching for a purchaser for the IRS Building across from 30th Street Station, on which the company spent $252 million in renovations in 2010. The properties for which Brandywine is currently developing plans include parcels on the 2100 block of Market Street, a parking garage on the 700 block of Market, and a plot on JKF Boulevard across from 30th Street Station. The first image below shows the completed Cira Complex with Brandywine’s currently under construction FMC Tower and its yet-to-be-developed Cira II tower behind 30th Street Station. The second image below shows conceptual renders of a mixed-use residential and creative office building it has planned for the 2100 block of Market Street.