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April 29, 2016

Are select Philadelphia suburbs the next spot for commercial real estate investors to secure yield on office product?

It’s very sunny in Philadelphia’s office market: according the JLL, regional office transactional volume in Greater Philadelphia totaled nearly $2 billion in 2015, up 44 percent year-over-year. With plenty of product recently changing hands in the CBD, investors and tenants are casting a wider acquisition net and setting their sights on select suburban markets.

“Recently redeveloped suburban offices and properties in core, transit-oriented locations are performing as well as any segment of the market,” says Doug Rodio, Managing Director with JLL’s Capital Markets. “Although the depth of the investor audience is smaller in comparison to the CBD’s buyer ever increasing pool of buyers, we’re seeing more competition and better pricing through Q1 2016.”

JLL research shows that Philadelphia’s CBD cap rate range for core product falls between 5.5 and 7.5 percent whereas the city’s suburban cap rate range is 6.5 to 8.5 percent, proving that returns outside city limits are not only competitive, but may, in fact, be more lucrative.

In 2015, Greater Philadelphia Class A office sales transactions totaled approximately $945.4 million, up from $227.3 million in 2014. Top suburban markets include Radnor, King of Prussia, Malvern Conshohocken and Bala Cynwyd, given their proximity to transportation, plenty of amenities and a ”live, work, play” environment – and the latest deals on the market exemplify suburban appeal.

Transit adds to property appeal
In the case of reverse commuting, common to Greater Philadelphia, connectivity is key – whether by road or rail. King of Prussia’s 150 S. Warner Road is located near some of the most traveled roadways and a shuttle service providing access to SEPTA Regional Rail – convenient for a millennial workforce who may live in the city but work in the suburbs.

Transit isn’t merely limited to office: multifamily properties near transportation networks appeal to renters and investors. Location near the area’s major highways or railways provides renters easy access to large employment hubs.

On- and off- site amenities for millennials, generation x and boomers

In Malvern, ArborRidge is built to attract millennial employees and retain their bosses. A brand-new, sleek design includes a 5,000-square-foot amenity center and training facility, a state-of-the-art fitness center, a 24-hour ‘Grab & Go’ café, a food truck area and plenty of outdoor space while the office features high ceilings and collaboration space.

Amenities aren’t all about millennial preferences though – and trophy properties aren’t limited to CBDs.  One example of this is 1000 Chesterbrook, home to credit tenants within the King of Prussia submarket. The 172-327-square-foot trophy asset, which should command pricing around $300 per square foot, features amenities including a full-service cafeteria and biking trails and proximity to hotels, restaurants and retail centers.

With plenty of investment activity, momentum is being seen in office leasing as well.

According to JLL, Philadelphia’s CBD’s Class A average rent per-square-foot (p.s.f) in the first quarter (Q1) is $30.27 while the suburbs notched $28.45 p.s.f. In terms of vacancy rates, the CBD’s Q1 average is 8.6 percent whereas the suburbs stand at 14.8 percent.  But select suburbs like Radnor and Conshohocken command Class A average rents of $39.41 and $35.11 p.s.f. and total vacancy rates at 1.0 percent and 8.7 percent, respectively.

“Philadelphia’s core suburban submarkets are performing incredibly well and we’ve seen some rents in top markets increase $5 to $7 p.s.f. within the past five years,” says JLL Senior Vice President Patrick Gallagher. “As a result, surrounding submarkets are beginning to feel the effect of decreasing vacancy rates and while it’s a landlord’s market, owners are working with tenants to provide them with deals that work for both sides.”

What’s next for suburban Philadelphia? 

“Investors and developers/redevelopers who bought suburban office at the end of the last cycle and renovated or repositioned these properties have either recently sold their holdings or are currently vetting exit strategies,” says Rodio. “Given the current fundamentals, it’s a smart time for them to sell and the risk they took to redevelop is paying off.”

Doug Rodio and Patrick Gallagher
JLL Philadelphia

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