Center City Office Market Saw Absorption Grow In Q4 2024, But Pain Could Continue Into 2025

Philadelphia’s central business district office market found some stability at the end of last year, but it likely won’t be completely out of the woods in 2025.

Absorption rose to nearly 41K SF in the fourth quarter of 2024, leading to the best annual performance for that metric since 2020, according to JLL’s most recent office report for the neighborhood. But the year as a whole was still defined by a negative absorption rate, with move-outs in the CBD outpacing new leases by more than 700K SF.

Vacancy continued to rise throughout 2024 to 20.2% at the end of the year, though that growth was less dramatic than what the CBD saw in the immediate aftermath of the pandemic. The pain could continue into 2025, but vacancy woes are likely on the verge of peaking, JLL Philadelphia Research Manager Emily Friedman said.

“I do think we are really close to the top,” Friedman told Bisnow. “We’re not going to see any more major jumps.”

While that metric could shift up or down by roughly 100 basis points, the amount of office space taken off the market in recent years has left the CBD in a more stable position, she said.

The JLL report highlighted The Bourse and Three Parkway, two largely vacant office buildings sold at steep discounts last year, as examples of that. Both are slated for partial redevelopment with new hotel spaces and apartments.

The Wanamaker Building across from Philadelphia City Hall could be next on the redevelopment list. 

“Everyone’s talking about the Wanamaker,” Friedman said. “It is a very hot topic of conversation right now.”

The 1.4M SF vintage skyscraper is currently in the middle of bankruptcy proceedings, with a settlement conference scheduled for this week. The building could undergo an office-to-residential conversion, an unnamed source told the Philadelphia Business Journal last year.

Friedman said final plans for the building haven’t been shared publicly, but she expects the work would be similar to what’s slated for the Bourse and Three Parkway.

The Wanamaker isn’t exactly a prime candidate for residential redevelopment. The hulking 100K SF floorplate means there’s a limited number of rooms with outward-facing windows that could be built without removing the core of the building, which would be a huge project.

But as the value of struggling office buildings continues to drop gradually over the next five years or so, Friedman said lower sales prices will make projects like that more financially feasible.

“That’s going to take a while and it’s not going to happen across the board,” she added.

The report also noted that 1.6M SF of office space will roll over in 2025, creating an opportunity for reshuffling in the market. 

Such moves are mostly a “net-zero” for the CBD, Friedman said. Yet the trend can be more positive than a spate of lease renewals since relocations are a big expense for tenants and signal commitment.

“Renewals can almost prolong a holding pattern,” Friedman said. “Tenants moving speaks a little bit more toward staying power in the market.”

Downsizing is another major trend in the CBD of late. The report found that tenants decreased the amount of space they’re renting by 21% on average last quarter. 

“We are seeing at least the tail end of the downsizing,” Friedman said. “Not everyone is downsizing by 21% across the board.”

Some tenants that downsized in recent years are now looking to lease more space, she said.

Those tenants reentering the market will be looking at an increasingly scarce supply of trophy office space.

There’s currently a limited supply of available space on the highly desirable uppermost floors of the CBD’s elite office buildings. That means there will be more interest in the spaces on high floors of Class-A buildings, Friedman said, adding that landlords can boost their appeal even more by cobbling together several floors and offering competitive tenant improvement packages.

“It’s a good thing,” Friedman said, especially for the stock of high Class-A spaces immediately below the trophy tier.