Philly's Older Suburban Offices Are Emptying Slowly, Probably For Good

Since the outbreak of the pandemic nearly three years ago, two commercial real estate axioms have largely held true through all the upheaval: the flight to quality in the office market and slow-and-steady Philadelphia.

Despite Philly’s insulation from extreme economic swings, its suburban office market is particularly vulnerable to the flight to quality. Office buildings in the Pennsylvania suburbs are older on average than in Center City, a particular problem in a market that virtually never develops new office space that isn’t build-to-suit.

New JLL data tells the story: In the Philadelphia region, office buildings delivered before 2010 have experienced 7.5M SF of negative absorption since the start of 2020. Meanwhile, post-2010 office buildings have seen positive absorption of 662K SF over the same time frame.

More than half of the negative absorption for pre-2010 buildings was concentrated in Philly’s Pennsylvania suburbs, which contain just under 40% of the region’s pre-2010 stock.

Much the same story has played out at the national level, though Philly experienced a less extreme example of the trend than gateway cities that had more office leasing momentum in the preceding cycle, JLL Philadelphia Research Director Clint Randall told Bisnow.

Even so, the pre-2010 space already vacated represents only 6% of that category’s total, leaving a significant amount of runway for the trend to worsen.

“In general, what we’re seeing is that it’s the commodity space that’s struggling the most,” Randall said. “Commodity space isn’t uniquely urban or suburban, but it’s fair to say that the suburbs have more commodity office space. Tenants are gravitating towards places that are not only amenitized but that feel like a place. That’s why the Conshohockens and King of Prussias of the world have fared better, while areas that are experiencing less dynamic mixed-use development are generally struggling more.”

The negative absorption trend has slowed dramatically since late 2020 and early 2021, when over 1M SF was being vacated each quarter, JLL found. Its data included space made available for sublease, some of which was pulled off the market in subsequent quarters, Randall said.

That may have bolstered the absorption figures for those quarters without addressing the central issue, but the data still suggests older office buildings are experiencing more of a slow bleed than a hemorrhage.

“I think we’re approaching something like a new normal,” Randall said.

Should the flight to quality continue to leave older office buildings behind, the suburbs aren’t likely to feel the worst of the effects until 2025, the start of a three-year period in which over 2M SF of leases are due to expire annually. Less than 1.5M SF worth of leases are due to expire in the suburbs this year, as well as in 2024.

After so many office buildings in Center City were vacated in the 1980s and 1990s, Philly became one of the most prolific cities in the country at converting older office buildings to residential uses. The practice has been a rousing success, making Center City one of the most densely populated central business districts in the country and reducing the average age of its office stock.

By and large, suburban office properties are far more difficult to convert into residential uses than high-rise towers in urban cores, both in a practical sense and in terms of economic fundamentals, multiple experts told Bisnow.

Velocity Venture Partners has been buying up suburban offices locally for conversion into distribution centers, but few remaining properties have the combination of physical requirements, proximity to highways and permissive local zoning for the practice to make a dent, Randall said.

One factor could play into the suburbs’ favor, at least for the star submarkets: Lease expirations in Center City are more weighted to this year and next, per JLL data, and suburban moves could be logical for companies with workforces that largely reside in the suburbs and are resistant to resuming long commutes.

“Mid-rise buildings have been popular,” Ensemble Real Estate Investments Executive Vice President Mark Seltzer said. “People don’t want to be 25 stories up in the air. They want to drive themselves to work, want to be able to take a nice walk outside and get light in their buildings, and that’s been sort of the secret sauce.”

Ensemble, which owns four Philadelphia Navy Yard office buildings with only one 2,500 SF vacancy between them, purchased two older office buildings in the heart of the King of Prussia submarket this week. One underwent extensive renovations in 2018, including the replacement of one external wall with floor-to-ceiling windows, and Ensemble plans to renovate the other in similar fashion, Seltzer said.

“As a buyer in this space, I’m less interested in what year the building was built,” he said. “I’m way more interested in where it’s located, the quality of the renovation and the ability to fit the building out from there. You could see buildings that were built more recently in worse locations, and they wouldn’t be attractive to move to.”