Philadelphia

No Change

2012 Rank: 9

2011 Rank: 9

Employment Trends
2%
Year-over-Year Change Nonfarm Ofce-Using

0% -2% -4% -6%

08

09

10

11

12*

Ofce Supply and Demand

2
Square Feet (millions) Completions Absorption Vacancy

estrained construction will magnify the benefits of strengthening demand, and lead to the first drop in vacancy in the Philadelphia metro in five years. New and expanding tenants will absorb nearly 900,000 square feet this year, fueled by growing pharmaceutical, biotech, healthcare and education sector employers. Other office-using sectors will also continue to upgrade to higher quality space in properties owned by well-capitalized building owners, a trend that emerged in 2010. In fact, more than 500,000 square feet of space slated for delivery in 2012 is in new buildings pre-leased to Endo Pharmaceuticals and GlaxoSmithKline. Those leases, however, will result in a slight drop in occupied space, as the latter tenant is downsizing. Overall, 17 million square feet of space is planned in the metro, but few projects will move forward without significant tenant commitments in hand. Many investors are actively pursuing value-add opportunities and are willing to take on some near-term vacancy in properties in order to create potential upside. The chance to purchase at prices low enough to support property operations at competitive rents continue to be a primary driver in these types of deals. Investors also remain interested in suburban assets with market-level occupancies and minimal near-term lease turnover. Cap rates generally range from the low- to mid-8 percent range, which translates to about $130 per square foot. In general, investors underwriting is conservative, and rent rolls, leasing commissions and potential capital expenditures will receive considerable scrutiny throughout 2012. Note sales also remain an area of interest for many investors, and additional opportunities will arise as owners that purchased at the peak of the market face re-financing. 2012 Market Outlook

Value-Add Opportunities Surface in Philadelphia; Draw Wide Range of Investors

18% 16%
Vacancy Rate

1 0 -1 -2

14% 12% 10%

08

09

10

11

12*

Rent Trends
Asking Rent Effective Rent

$25
Rent per Square Foot

$23 $21 $19 $17

2012 NOPI Rank: 9, No Change. Philadelphia remains in the top ten of this years ranking despite the soft local job market. Employment Forecast: Employers will create 23,500 jobs in 2012, including 12,000 positions in primary office-using sectors. Last year, 6,100 total jobs were cut. Construction Forecast: Developers will complete 740,000 square feet of space this year, representing a scant 0.2 percent gain to competitive inventory. During 2011, 442,000 square feet was brought online, including the 114,000-square foot Hillcrest I in Blue Bell. Vacancy Forecast: Solid demand growth will generate a 60-basis-point decline in vacancy to 14.6 percent. The vacancy rate was unchanged in 2011. Rent Forecast: Asking rents will rise 1.8 percent to $24.86 per square foot and effective rents will gain 2.6 percent to $20.41 per square foot in 2012. Investment Forecast: Strengthening property performance and improved access to financing will support additional deals, but cap rates are not likely to significantly compress.
Construction: 740K s Vacancy: 60 bps t Asking Rents: 1.8% s

08

09

10

11

12*

Sales Trends
$140
Median Price per Square Foot

$125 $110 $95 $80

07

08

09

10

11

* Forecast
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
page 42

Employment: 0.9% s

2012 BLACK TEXT VERSION Annual Report