2017 has been an exciting and busy year for RothbergDubrow, Philadelphia, and the nation as a whole. Through Quarter 3, RothbergDubrow is on-pace to close a team-high number of transactions in the Philadelphia region and subsequently wanted to keep informed on the trends within national office market as a whole. Following Costar’s State of the Market: Q33 2017 Offices report, RothbergDubrow wanted to share a few key stats.
While the national vacancy rate for offices is holding steady at 10.2%, almost half of the submarkets nationwide have declining vacancy rates and 80% of markets have vacancy rates that are lower and a decade ago. These two rates make for a positive forecast where national vacancy rates will lower over time. The vacancy rate in Philadelphia is lower than the national average as it is between 7-10%. On par with that, the national rent growth is slowly declining (pulled down by negative outliers San Francisco and New York City), and Philadelphia’s rent growth is growing. This is in direct correlation with the level of offices available in each respective city.
There have been three consecutive quarters of corporate profit growth nationally which is helping keep the unemployment low at 3.6%. One must also keep in mind that the top five metro areas for employment growth are all located in the South where there are low barriers to entry for housing construction paired with low or no income taxes. With that being said, the national demand for offices rated four or five starts is three times higher than the demand for offices rated three stars. This discrepancy in demand is due to two reasons: there is a cutting of space used by companies which enables them to afford higher quality spaces, and, perhaps even more-so, there is a labor scarcity which forces companies to compete for employees by offering new, high-quality office space.
One of the more concerning statistics is that over 2/3 of new office construction in the US is in only 14 cities, and this does not include Philadelphia. While there still is plenty of construction happening in Philadelphia, which anyone who drives through the city can attest to, it is still important for the longevity of Philadelphia’s commercial boom to have developers invest in new and high-end office space.
When discussing the state of the office market, it is simply unavoidable to discuss the new Amazon Headquarters criteria. Out of the 238 cities that put forth proposals for “HQ2,” Costar has ranked Philadelphia as the 7th most likely to earn the new headquarters. This calculation is done using variables such as ease of doing business, corporate and income tax rates, new office space construction, high walk and transit scores, and proximity to major airports, though there are without a doubt additional factors that Amazon is weighing as well.
