Across the country, tenants expect – and are often willing – to pay a premium for new construction. The rent gap between existing buildings and new deliveries, however, can vary widely from place to place with certain markets standing out as more affordable than their neighbors. In the Northeast, JLL has found that Philly is the second most affordable office market for tenants interested in new construction.
For tenants looking into this region, Philadelphia new construction is a bargain; its rates are comparable to existing Class A spaces in Boston and well below the going rate for existing space in New York and Washington. While Philadelphia trails Newark in sheer affordability, the metro makes up for it with access to talent, housing for employees, and overall quality of life.
However, new office availability around the U.S. may be significantly constrained through 2020, with new buildings not yet underway unlikely to deliver until 2021 or beyond.
Though low interest rates, ongoing economic expansion, and tenant demand for modern office space have fueled significant new office construction during this market cycle – including 57.8 million SF delivered in the U.S. in 2017 – this new supply has put upward pressure on vacancy in most central business districts. As a result, rental rate growth has slowed, the construction pipeline has thinned beyond 2018, and 2019 will bring the lowest volume of deliveries since 2014 (25 million SF).
In the Philly CBD, all currently-underway construction will deliver in 2018, with no planned deliveries for 2019 or 2020. Despite approximately 300,000 SF of total renovated space available at 2400 Market and One Franklin, only 170,000 SF of truly new construction is unspoken for, all at 3675 Market.
In the meantime, large occupiers with their hearts set on new construction should prepare to bide their time; it will be a long wait before they have new buildings to call home in the CBD.