The City of Brotherly Love has no love for commercial real estate.
Office occupancy in Greater Philadelphia has contracted by nearly 10 million square feet since 2019, the Philadelphia Inquirer reported, citing data from CBRE. Hybrid work models and remote work have cut significantly into the market.
“The downtown market is beat up right now pretty good,” Nick Gersbach, senior vice president in CBRE’s Philadelphia office, told the Inquirer. “I’ve been here 23 years in this market, and I haven’t seen it contract at this pace before … We’re a three- to five-year window from stabilizing and experiencing a slow recovery. … People are not going back into offices.”
The concern is that rather than a sluggish recovery, the current situation is really the new normal, leaving the office sector to grapple with how to deal with the losses.
Trophy buildings are feeling less of the pinch, with the vacancy rate in downtown Philadelphia at just above 10 percent at the end of the first quarter of this year.
“There is still a core set of buildings in Philadelphia suburbs and in core [city] locations, where we have started to see signs of recovery in that trophy set and in very specific sub markets,” Joe Gibson, associate director of research at CBRE, told the Inquirer. “But if deals are getting done, they tend to still go to those higher end buildings, looking to amenities and quality space to get people back in the office.”
Class B buildings are being hit even harder.
Philadelphia is hardly alone, with cities like San Francisco, Los Angeles, Chicago and Washington, D.C., among others, struggling with low office occupancy rates.
For example, about 2.2 million square feet of office leases in Los Angeles were signed in the first quarter of this year — down 37 percent compared to the last quarter of 2022 and about 40 percent year-over-year, according to a CBRE report.
Meanwhile, the office vacancy rate in San Francisco spiked to 29.5 percent in the first quarter, up nearly 2 percent since the end of last year and nearly 10 percent from a year ago, the San Francisco Business Times reported, citing data from the brokerage CBRE.
While Philadelphia may not be appealing to go to work in an office, people still want to live there.
“There’s this weird phenomenon of residential construction continuing at a strong pace in Philadelphia, people wanting to live in the city, wanting to play in the city, wanting to dine in the city as restaurants and retail are reemerging,” Gersbach told the Inquirer. “But for whatever reason, not wanting to go into an office in the city.”
— Ted Glanzer