Savills Studley Report Philadelphia office sector Q4 2016

Savills Studley Research Philadelphia

SUMMARYMarket Highlights

LEASING STEADY

Quarterly deal volume across the Philadelphia region totaled 1.9 msf, up from 1.7 msf leased in the third quarter. Tenants have leased 6.6 msf in the last four quarters, well below the long-term average of 8.5 msf.

AVAILABILITY DROPS

Overall availability in Center City fell by 110 basis points to 13.5% during the fourth quarter, spurred by a 230 basis point drop in the Class B and C rate to 14.8%. Suburban Philadelphia's availability rate fell by 170 basis points to 18.9%, and has fallen by 300 basis points from year-end 2015.

ASKING RENTS RISE

Overall asking rent in Center City ended 2016 averaging $30.73, an increase of 3.5% from year end 2015. The Class A rent average has jumped by 5.3% year-on-year to $32.53. Class A asking rent in Suburban Philadelphia ($26.98) rose by a similar 5.2% amount.

SALES UP SHARPLY FROM A YEAR AGO

Sales this year have surged compared to 2015—as of November year-to-date office sales totaled $2.7 billion, a 40.0% spike from the $1.9 billion in the first 11 months of 2015.

“Larger tenants encountered

increasingly tight conditions both

in Center City and select suburban

submarkets during 2016. Sustained

leasing by a diverse array of firms kept

activity elevated. These conditions are

expected to carry into 2017”

Hether Smith, Senior Vice President

02

Savills Studley Report | Philadelphia

Philadelphia Region Ends Year on a Strong Note

Tenants were very mobile and active across the region in 2016 with sustained leasing activity. Suburban Philadelphia and Center City both posted material decreases in availability in 2016 – the first time in years that the urban and peripheral markets moved in the same direction. Tenants leased 6.6 msf across the entire metro region in 2016, leasing totalling nearly identical to annual leasing in Center City and Suburban Philadelphia.

Tenants Dealing With Rising Rent & Construction Costs

Sustained leasing, coupled with very limited new construction, has started to impact availability. Availability remains much tighter in Center City, which ended the year with a Class A rate of 12.8% - a 190 basis point decrease from year-end 2015, and the lowest mark since early 2009. Class A availability rates also dropped sharply in Suburban Philadelphia, falling by 340 basis points to 17.0%, led by a year-on-year dive of 880 basis points in Route 202/422/King of Prussia. Rental rate growth in East and West Market has been nearly twice that of suburban Philadelphia – jumping by just under 10.0% to $30.73 from a year ago. Overall average rent in Suburban Philadelphia ended 2016 at $25.70, an annual increase of 4.7%.

In addition to absorbing elevated rent (with the highest-caliber Class A space seeing rent in the mid-$40.00/sf range), tenants are dealing with rising build-out costs. Typical space build-outs have jumped as much as 20% year-on-year in Philadelphia, hovering between $60.00 and $80.00 per square foot. Like so many other major metros, Philadelphia is dealing with a labor shortage in its construction sector. Office construction has been limited, but multi-family development has been booming and the city’s hospitals and universities continue to expand.

Tenant improvement allowance and turnkey packages will remain critical differentiators between one landlord and the next as construction costs are likely to continue their rapid ascent. Landlords have responded to rising expenses in different fashions – some have tried to keep pace with the rising construction costs, others not so much. In most cases relocating tenants (unless they are shifting to quality built space) can expect that the allowance will not cover the full cost of the build out.

Source: Bureau of Labor Statistics

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

0.15

0.16

0.17

0.18

0.19

0.20

0.21

0.22Millions

PHI. Office Emp. PHI.(% Annual Change) U.S. (% Annual Change)

Office-Using Employment Trends

$27.14$24.32

$28.85

$25.99

$24.45$21.83

$10

$15

$20

$25

$30

$35

4Q16 4Q15 4Q14 4Q13 4Q12 4Q11 4Q10

($/sf) Rental Rate Trends

Total Class A Class B

Asking Rent Trends

16.6%

18.5%

15.1%

17.5%

19.3%

20.7%

10%

12%

14%

16%

18%

20%

22%

24%

4Q16 4Q15 4Q14 4Q13 4Q12 4Q11 4Q10

(%) Availability Rate Trends

Total Class A Class B

Availability Rate Trends

savills-studley.com/research 03

Q4 2016

Tenant Sq Feet Address Market AreaVertex Inc. 168,000 2301 Renaissance Blvd Route 202/422/King of PrussiaCambridge Innovation Center 127,000 3675 Market St West MarketMontgomery McCracken 101,874 1735 Market St West MarketThe Philadelphia Archives 70,000 456 N 5th St East MarketWeWork 55,238 1900 Market St West MarketLinde Engineering 51,646 325 Sentry Pky E Blue BellSpark Therapeutics 49,598 2929 Walnut St West MarketDell Boomi 41,409 1400 Liberty Ridge Dr Route 202/422/King of PrussiaTrevena 40,565 955 Chesterbrook Blvd Route 202/422/King of PrussiaBerger Montague 40,000 1818 Market St West MarketSum of Leases 745,330 Sum of 4th Quarter Leasing Activity 1.9 MSF

Diverse set of Active Tenants

Demand has been on a roll despite a weakening in office-using employment growth. Office-using employment rose by only 0.9% in the last 12 months, less than half of the 2.4% growth in the prior 12 months and also well below the national growth rate of 2.3%. As has been the case for quite some time, though, most of the demand for office space has come from non-traditional space occupiers – pharma, medical and educational users. The second half of the year has brought a flurry of larger leases from a wide array of tenants – ranging from pharm and co-working space providers, to government agencies. More than 10 leases over 50,000 sf were completed in the second half of the year.

Vertex Inc.’s 168,000-sf lease at 2301 Renaissance Blvd in Route 202/KOP was the largest of the fourth quarter. Law firms were busy as well. This included Montgomery McCracken which signed a 101,000 sf lease at 1735 Market Street. They will shift operations from 123 S. Broad Street; they have been at the building for two decades. The firm said it wanted more open and collaborative space as well as a floorplate that enabled it to achieve more space efficiency -- they shed 10,000 SF in the lease. The owners of 1735 Market are still left with nearly 275,000 sf of vacant space due to relocations by FMC Corp and Sunoco. Merrill Lynch was also on the move. They committed to 26,696 sf at Four Penn Center (1600 John F. Kennedy Blvd) and will move from One Liberty Place where they occupy about 45,000 sf. Merrill will join Bank of America, which is already a major tenant at Four Penn Center.

The inflight of a few suburban firms has supplemented this movement within Center City. In December, Radnor-based Freedom Pay announced a 24,799 sf lease in FMC Tower at Cira Center South (2929 Walnut Street). The fintech firm will bring 150 of its employees to the Brandywine Real Estate Trust complex. Brandywine is keeping the tenant within its portfolio, as FreedomPay currently occupies 12,000 sf at Five Radnor Corporate Center. In addition to expressing a “vote of confidence for the city” Freedom Pay said it wanted to “become an integral part of Philadelphia’s emerging tech presence.”

UCity Square Taking Form

The tenant roster at UCity Square (3675 Market Street) is starting to take shape.

Cambridge Innovation Center (CIC) leased 127,000 sf at the building. The Boston-based firm provides co-working space and services to startups. University Science Center will relocate and expand its headquarters into a 50,000 sf space at the building. They will also triple the size of Quorum – an entrepreneur’s clubhouse that offers events and meetings – and build a bigger FirstHand Lab to house STEAM seminars. This will be CIC’s sixth location – they have two in Boston as well as locations in Miami, St. Louis and the Netherlands. The Science Center could help Philadelphia in its ongoing efforts to compete for relocating tech firms, including some foreign firms, considering US operations. Cave Digital, a Portuguese software company, has Philadelphia on its short list for its first U.S headquarters.

The State recently granted 10-year extensions on Keystone Opportunity Zone designations to 3400 Market Street and

3800 Market Street at uCity Square. The two sites are part of the joint venture by University City Science Center and Wexford Science & Technology. Upon completion uCity Square will have 6.5 msf of residences, office and lab space in 15 new buildings. Plans for the two buildings call for a 16-story building at 3400 Market and a 19-story 400,000-sf building at 3800 Market.

Looking Forward

The market is not expected to change much in 2017. Businesses in Philadelphia will keep an eye on the first 100 days of the new Administration. Optimism regarding the potential for “pro-growth” legislation such as a major infrastructure bill or reduced banking regulation has some market observers predicting a boost in economic growth next year. Even if such legislation does see the light of day, it will take until late 2017 for any material impact to emerge.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

$34.04

$32.78

$31.92

$31.50

$30.73

$29.20

$28.60

$27.14

$26.40

$26.35

$25.70

$25.04

$24.81

$24.61

$24.39

$23.46

$22.70

$22.30

$21.93

$21.23

$0 $5 $10 $15 $20 $25 $30 $35

Main Line/Conshohocken

US Index

Bala Cynwyd

West Market

CBD

East Market

Plymouth Meeting

Philadelphia (Region)

Rte. 202/422/King of Prussia

Wilmington

Suburban Philadelphia

Delaware

Blue Bell/Plymouth

Horsham/Willow Grove

Delaware County

Fort Washington

Exton/West Chester

New Castle County

Bucks County

South Jersey

($/sf)

Overall Rental Rate Comparison12.2%

12.8%

13.1%

13.5%

15.0%

15.4%

15.8%

15.8%

16.6%

16.7%

17.1%

18.7%

18.8%

18.9%

19.6%

20.8%

21.1%

23.8%

29.7%

31.1%

0% 5% 10% 15% 20% 25% 30% 35%

Exton/West Chester

West Market

Bala Cynwyd

CBD

South Jersey

East Market

Main Line/Conshohocken

Delaware County

Philadelphia (Region)

Rte 202/422/King of Prussia

US Index

Horsham/Willow Grove

Wilmington

Suburban Philadelphia

Delaware

New Castle County

Fort Washington

Plymouth Meeting

Blue Bell

Bucks County

(%)

Availability Rate Comparison

Savills Studley Report | Philadelphia

04

Map Submarket Total

SF(1000's)

Last12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

West Market 31,802 2,140 4,059 -6.9% 3,564 12.8% -0.9% 13.6% $31.50 1.7% $28.59West Market - Class A 23,438 1,818 2,716 -4.8% 2,513 11.6% -0.6% 13.8% $32.70 0.6% $30.35East Market 13,009 804 2,003 -8.3% 1,981 15.4% -1.4% 18.9% $29.20 2.1% $26.88East Market - Class A 5,527 117 995 1.5% 817 18.0% 0.3% 18.8% $32.09 1.2% $30.32Bala Cynwyd 3,232 86 423 -4.2% 446 13.1% -0.6% 14.3% $31.92 9.0% $28.85Bala Cynwyd - Class A 2,258 60 338 13.1% 296 15.0% 1.7% 13.3% $32.49 0.7% $32.06Blue Bell/Plymouth Meeting 5,334 316 1,437 1.1% 1,263 26.9% 0.2% 19.6% $24.81 4.9% $23.71Blue Bell/Plymouth Meeting - Class A 2,705 146 469 3.2% 345 17.3% 0.3% 9.6% $25.82 -3.7% $24.37Fort Washington 3,647 210 771 -14.9% 1,183 21.1% -3.7% 35.3% $23.46 -1.2% $23.41Fort Washington - Class A 2,516 142 366 -21.7% 769 14.6% -4.0% 34.6% $24.04 -1.7% $23.62Horsham/Willow Grove 4,527 138 848 -15.4% 785 18.7% -3.4% 21.2% $24.61 0.0% $25.58Horsham/Willow Grove - Class A 3,401 119 370 -8.8% 375 10.9% -1.0% 12.6% $24.44 -2.5% $25.62Route 202/422/King of Prussia 13,614 1,393 2,275 -17.8% 3,064 16.7% -3.6% 23.0% $26.40 -0.6% $25.71Route 202/422/King of Prussia - Class A 9,147 1,102 1,548 -19.2% 2,196 16.9% -4.0% 25.7% $28.68 -0.8% $27.28Exton/West Chester 4,826 178 589 -3.2% 672 12.2% -0.4% 13.0% $22.70 2.4% $22.06Exton/West Chester - Class A 3,155 142 388 -6.2% 472 12.3% -0.8% 13.5% $24.11 3.9% $23.04Main Line/Conshohocken 5,740 205 906 15.9% 696 15.8% 2.2% 11.6% $34.04 2.4% $31.20Main Line/Conshohocken - Class A 4,506 180 734 15.4% 508 16.3% 2.2% 10.8% $36.05 1.0% $34.16Delaware County 4,672 194 740 -5.1% 998 15.8% -0.8% 21.5% $24.39 0.4% $23.70Delaware County - Class A 3,782 40 630 -1.3% 791 16.7% -0.2% 21.2% $24.53 0.3% $23.81Bucks County 5,164 237 1,607 -2.8% 1,700 31.1% -0.9% 31.2% $21.93 0.3% $21.73Bucks County - Class A 3,772 163 1,140 -3.9% 1,206 30.2% -1.2% 29.9% $21.96 0.4% $22.02Wilmington 7,867 96 1,480 1.2% 1,512 18.8% 0.2% 17.9% $26.35 -0.7% $25.68Wilmington - Class A 6,314 75 1,195 0.1% 1,162 18.9% 0.0% 18.4% $27.84 0.2% $27.34New Castle County 5,150 47 1,071 17.7% 770 20.8% 3.1% 15.6% $22.30 2.5% $21.63New Castle County - Class A 3,285 39 458 36.2% 209 13.9% 3.7% 7.2% $23.75 6.0% $22.03South Jersey 14,780 525 2,214 -6.6% 2,654 15.0% -1.1% 17.8% $21.23 1.0% $20.85South Jersey - Class A 7,104 152 894 -4.5% 1,119 12.6% -0.6% 15.7% $22.91 0.6% $21.89Philadelphia CBD Total 44,811 2,944 6,062 -7.3% 5,545 13.5% -1.1% 15.1% $30.73 1.9% $28.00Philadelphia CBD Total - Class A 28,965 1,935 3,711 -3.2% 3,330 12.8% -0.4% 14.7% $32.53 0.7% $30.35Suburban Philadelphia Total 50,756 2,957 9,595 -8.2% 10,803 18.9% -1.7% 21.9% $25.70 1.6% $24.66Suburban Philadelphia Total - Class A 35,243 2,094 5,984 -7.1% 6,997 17.0% -1.3% 20.4% $26.98 1.2% $25.64Delaware Total 13,018 143 2,551 7.5% 2,282 19.6% 1.4% 17.0% $25.04 -0.4% $24.66Delaware Total - Class A 9,599 190 1,653 8.0% 1,371 17.2% 1.3% 14.6% $27.11 0.6% $26.69Philadelphia Region Total 123,365 6,569 20,423 -6.1% 21,285 16.6% -1.1% 18.4% $27.14 1.7% $25.13Philadelphia Region Total - Class A 80,911 4,295 12,241 -3.9% 12,817 15.1% -0.6% 17.3% $28.85 0.9% $26.45

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LeasingActivity

AvailableSF

AvailabilityRate

Asking Rents Per SF

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@SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2016 Savills Studley

Savills Studley50 South 16th StreetSuite 3400Philadelphia, PA 19102

Branch ManagerH. Hetherington Smith,Senior Vice Presidenthsmith@savills-studley.com(215) 563-4000

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Montgomery County

Chester County

Delaware County

Blue Bell

Gloucester County

Camden County

Burlington County

Philadelphia

Philadelphia Airport

Bucks County

Wilmington

New Castle

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611

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7Co-Branch ManagerGreg Soffian,Senior Vice Presidentgsoffian@savills-studley.com(215) 563-4000