RESEARCH

A PROFILE ON SUBURBAN
PHILADELPHIA OFFICE
MARKET GROWTH

The suburban Philadelphia office markets gains in occupancy over the

past five years have doubled what was lost in the last recession, and
momentum has continued to escalate. In the first two quarters of 2016,
new tenancy trimmed overall vacancy to 16.2%, an eight-year low.
An examination of the markets progress reveals multiple contributing
elements and a positive outlook for the foreseeable future. Whats behind
the suburban Philadelphia office markets healthy expansion phase?

THIS PAPER EXAMINES THE CLEAR

CONNECTIONS BETWEEN SUBURBAN OFFICE
OCCUPANCY GROWTH AND FACTORS SUCH AS
IMPROVED ECONOMIC INDICATORS, SHIFTING
DEMOGRAPHICS, SOUND OFFICE MARKET
FUNDAMENTALS AND ACCESS TO GREATER
INFRASTRUCTURE AND AMENITIES.

ECONOMIC INDICATORS
According to the Bureau of Labor
Statistics, at the close of the second
quarter of 2016, Chester County had the
lowest unemployment rate of the four
Philadelphia suburban counties, 4.1%,
followed by Montgomery County at 4.2%.
Delaware and Bucks counties registered
5.1% and 4.6%, respectively. All four
counties rates were lower than the
state of Pennsylvanias, at 5.6%. While
these figures show the suburbs are in
fine economic form, data regarding job
growth tied directly to office occupancy
demonstrate an even stronger
connection to an improving office market.
From 2014 to 2015, all four counties
saw increases in employment within
the financial services, information, and
professional and business services
sectorsthe traditional office-using
industriesequating to over 6,000
new jobs. Montgomery County led the
charge with a 2.6% increase, the largest
year-over-year gain for any county
since 2012. More than half of the total
jobs added in office using industries
were in the professional and business

NGKF Reaserch

services sector, which drove the most

substantial office tenancy growth last
year, according to NGKF proprietary
research. That sector accounted for
approximately 30%, or 323,200 square
feet, of suburban net annual absorption
in 2015. This is a significant increase
from 2014, when the professional and
business services sector experienced a
net retraction of 50,000 square feet.

DEMOGRAPHICS
Where the jobs are, people will
follow. The U.S. Census Bureau data
released in March 2016 disclosed
that Chester County experienced
the largest population growth
among the Philadelphia
suburban counties, a 3.2%
increase over five years.
Montgomery County
ranked second,
tallying a 2.3%
growth rate.
The

correlation
between population
growth and increased office space
demand is evident, considering the
most dramatic drops in vacancy over
this period occurred in submarkets
located within these same two counties;

Blue Bell/Plymouth Meeting has seen

a 730-basis-point decrease in vacancy,
and the Southern 202 Corridor has
experienced a reduction of 710 basis
points.
Montgomery and Chester counties
also lay claim to the highest
household incomes in the suburban
region, averaging over $80,000
annually, according to geographic
information system provider Esri. A
heavy concentration of executives
and decision-makers reside in these
counties, and a conveniently
located office is
often an important
consideration.
Another factor
driving the
decrease
in

suburban
office vacancy
has been the
number of residents
aged 25 and over with
a bachelors degree or
higher. Montgomery County
gained nearly 28,000 college-educated
residents, a 3.6% increase. Bucks
County, although barely registering in
terms of total population growth, saw a
3.3% rise in college-educated residents
that likely contributed to the 450-basispoint drop in office vacancy.

SUBURBAN
PHILADELPHIA
POPULATION GROWTH
Percent Change from 2010-2015
4%

3%

2%

1%

Montgomery
County

College-Educated Population Growth

The King of Prussia submarket is a prime

example of how adequate infrastructure
and amenities fuel growth. At the close
of 2012, it had the largest amount of
office space in the suburban landscape
and the third-highest vacancy rate.
Regardless, since 2013, developers
have seen compelling opportunities in
the area, kicking off projects embracing
the live-work-play lifestyle, such as
the King of Prussia Town Center. This
walkable, mixed-use development is
set to open later this year. While King of
Prussia sits within a nexus of highways,
plans for increasing public transportation
options are slowly but surely gaining
more traction. In February 2016, SEPTA
released its chosen route proposal for a

CURRENT VACANCY BY SUBMARKET

30%

25%

20%

16.2%
15%

10%

5%

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he

Over the past five years, suburban

vacancy dropped 300 basis points to
16.2%. In reaction, landlords have been
steadily raising asking rents, although
space remains affordable, as increases
have been, on average, incremental. In
the second quarter of 2016, suburban
average asking rents were $25.77/SF
full service/gross, only a 2.3% increase
above the average at mid-year 2011
($25.18/SF). Even upward pressure
on rates for coveted Class A space
has been moderate overall, especially
considering how the flight-to-quality trend
has led to a 15-year record low vacancy
of 12.4% for that sector. Currently at
an average of $29.53/SF, overall Class
A rents have only increased 3.2%, or
$0.92/SF, over the past five years. In
submarkets that maintain single-digit
vacancy for Class A space, like Radnor/
Main Line, pricing for trophy assets
has experienced the greatest upward
movement. On the highest end of the
Class A pricing spectrum, asking rents

Access to greater infrastructure and

amenities is an increasingly important
consideration for space-seeking tenants
in the suburbs and one of the main
reasons why the submarkets closest
to the regions metropolitan core
have continued to enjoy consistently
low vacancy levels. Bala Cynwyd,
Conshohocken, and especially Radnor/

r/

The synergy of growing demand,

declining vacancy rates, modest rental
rate increases and restrained additions
to the supply pool over the past five
years has yielded a robust suburban
office market. From this position of
strength, it appears there is room yet for
further expansion.

INFRASTRUCTURE &
AMENITIES

ut

OFFICE MARKET
FUNDAMENTALS

no

Population Growth

Delaware
County

Main Line, which boasts a striking 1.9%

vacancy rate, all have easy access to
pedestrian-friendly communities rich
with establishments valued by office
tenants, such as dining, shopping,
childcare and banking facilities. There
are myriad transportation options in
these submarkets as well, from major
roadways like I-476, I-76, US-30 and
US-1 to multiple convenient public transit
alternatives.

So

Chester
County

ad

Bucks
County

Indicators in the suburban region

suggest that the current environment
of expansion is conducive to measured
speculative development in select
locations. Tenants desiring large blocks
of prime office space in ideal locations
have less and less options. Certain
submarkets like Conshohocken and
King of Prussia/Wayne benefit from the
combination of developable land and
ever-dwindling vacancy, the essential
fundamentals to support additions to the
supply pool.

0%

reached the $39.00 to $41.00/SF full

service gross range at the close of the
second-quarter 2016.

NGKF Reaserch

regional rail extension to King of Prussia,

which, if built, would be an immense
asset for the submarket in the long term.
Since reaching its peak during 2012,
vacancy in King of Prussia has fallen
480 basis points to 17.1% as of secondquarter 2016. This figure is set to
increase in the short term as a significant

tenant, Shire Pharmaceuticals, will be

consolidating operations and relocating
to the Exton/Malvern submarket.
However, growing interest in King of
Prussia should mitigate those losses;
a portion of Shires space has already
been backfilled. As of mid-year 2016,
there were multiple tenants with space
requirements measuring 70,000 square

feet or more looking in the submarket.

Also, in the first quarter of 2016, Radnorbased Highway to Health entered into a
long-term lease for a built-to-suit office
in King of Prussia. This will be the first
new office construction in the submarket
since 1000 Continental Drive was
completed in 2007.

LOOKING FORWARD
Suburban Philadelphia has benefitted from demographic, economic and commercial
real estate shifts that have catalyzed an increase in office occupancy. These factors are
expected to improve throughout the latter half of 2016; Moodys Analytics forecasts job
growth for Montgomery, Bucks and Chester counties will hit a 16-year record high this year.
Additionally, the existing infrastructure and amenities offered by the suburbs, as well as
an increase in vibrant development, are raising the stature of these areas. Philadelphias
suburbia is experiencing a true sweet spot within the commercial real estate cycle.

Daniela Stundel
Lisa DeNight

Research Manager
Research Analyst

215.246.2725 dstundel@ngkf.com
610.755.6969 ldenight@ngkf.com

880 East Swedesford Road, Suite 100, Wayne, PA 19087 | Office: 610.265.0600

www.ngkf.com
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