Philly's 'Bullish' Suburban Office Landlords Won't Look Past 6 Months In The Future

The continued effects of the coronavirus and the total uncertainty of when it will recede have made long-term planning virtually impossible in commercial real estate. But for now, some office landlords in Philadelphia’s suburbs consider themselves lucky.

“There’s been a lot of positive things that have happened over the past six months, much more positive than we thought it would be when the pandemic hit in March,” Hayden Real Estate Investments Leasing Associate Stephanie Hayden said during Bisnow’s Philly Suburban Office webinar Wednesday.

Hayden Real Estate owns a mixture of industrial and office buildings in Greater Philadelphia, and it has sustained about 96% of rent collection in its office portfolio, Hayden said. Oliver Tyrone Pulver Vice President Esther Pulver reported similar success among its office buildings in Conshohocken.

“I’m always bullish on Conshohocken,” Pulver said. “This market can hold its own through anything.”

Pulver said Conshohocken’s combination of highway and transit accessibility and walkable downtown make it among Philadelphia’s strongest suburban submarkets, keeping nearly every one of Oliver Tyrone Pulver’s office tenants from exiting their leases or declining to renew for 2021.

“We’ve had satisfaction in all the 2021 renewals already,” Pulver said. “One tenant is leaving, but they’ve been with us for 23 years and these things happen. As long as we keep a good outlook on COVID, we’re going to be just fine. And our tenants have been very happy with how we’ve handled it.”

From March through the summer months, new leasing activity ground to a halt as businesses of all types focused on their own finances and how to get through the next few months. The only tenants that shopped for space only needed offices between 2K SF and 5K SF, Hayden, Pulver and Avison Young Vice President Michael Sweeney agreed.

“Some of the smaller businesses [have been] fighting for their lives and they’ve remained in their [office] space,” Sweeney said.

Starting in September, some requirements between 10K SF and 20K SF have started sniffing around, and their tendencies so far are in contrast to the flight to quality that has defined the suburban office market for the past few years. Hayden Real Estate’s eight-building, 130K SF campus in Wayne (formerly occupied by Safeguard) is a prime example that “value properties in the suburbs are having a bit of a comeback,” Hayden said.

“It doesn’t have the best curb appeal, but we saw the most activity there over the summer,” Hayden said. “It has private entrances and private bathrooms, which has appeal especially during COVID, and it also was priced aggressively in the mid- to high-20 [dollars per SF].”

Despite their rosy outlook on the present day, none of the panelists was willing to project what the market could look like more than six months into the future. The uncertainties surrounding how the coronavirus will affect the area and the U.S. in the colder months and when treatments and vaccines will be available introduce too many variables.

“I think we have about six months left until decisions start to be made, because the data will come in as far as how things are working in schools opening, students going back to college and so forth,” Pulver said. “I think companies are trying to work out their liability if employees want to sue them for damages over getting sick. Once they work that out, then they’ll be able to make decisions.”

Some companies based in Downtown Philadelphia have started looking in the suburbs to assess available space, Sweeney said, but such discussions have been so preliminary that they haven’t narrowed down to specific submarkets yet. Philadelphia has lost residents to its suburban counties since the pandemic hit, which has led businesses to consider how in-person can retain appeal for such migrants.

“I’m in my early 30s, and I moved right out to Haverford from Philly [after the pandemic hit],” Hayden said. “Friends of mine who work for URBN and Comcast have done the same thing ... They’re working from home right now, but when people start going back to the office in earnest, I think you’ll start to see more of a demand for flexible and satellite offices in the suburbs.”

Whenever workers do start to return to the office in greater numbers, no one doubts that safety and hygiene will remain paramount concerns. Virtually every tenant improvement package in buildings new or old now includes touchless bathroom facilities and, to a lesser extent, more smartphone access to doors and elevators, Pulver said. So far, that has only applied to the smaller prospective tenants that have dominated the recent market; what larger companies with deeper pockets and more leverage to negotiate TI packages will do has yet to come into focus, Hayden said.

“In March, you already had your 2020 budget set,” Sweeney said. “Coronavirus was disruptive, but the state and federal government did help out, and most have gotten through 2020. After Thanksgiving and as the year comes to the end, a lot of decisions will be made as far as, ‘What do the next 18-24 months look like?’ And for those budgets, a lot of serious conversations are happening.”

For new construction that has been under development through the past few months like Oliver Tyrone Pulver’s Seven Tower Bridge in Conshohocken, plans have been forced to be updated several times to keep pace with the latest safety updates. All of it is in anticipation of the next round of major leasing, whenever it happens. 

Pulver noted that Seven Tower Bridge has changed the number of conference rooms it is offering from six to four (each of them larger to encourage social distancing), has upgraded its air filtration system and is installing holographic elevator buttons so that riders can “push” numbers projected into the air. The building is expected to come online in April.

“We don’t want to deliver 2021 office space with 2019 standards,” Pulver said.