Executive Summary
- sales volume drops 46% from Q1 to Q2
- price per square foot drops below 5-year average
- largest office sale of Q2 closed for $45.3M
- office development winding down in Q3
After ending the first quarter of 2017 with close to $490 million in total sales volume, Philadelphia’s office sales market took a dive in Q2. Both sales volume and the average price per square foot dropped in the year’s second quarter, though the number of deals closed remained steady. However, this slowdown might not pose a concern, as the market is prone to variations from one quarter to the next.
Total Sales Volume Drops 46% from Q1 to Q2
The Philadelphia office sales market seems to be having a moderate year thus far. Closing Q1 with $487 million in sales volume, the market slowed down the pace over the months that followed, as suggested by in-depth Yardi Matrix data. The second quarter of 2017 saw 14 large office deals closed for $265 million in total sales volume–nearly half the volume recorded in Q1. However, the total office sales volume increased 26% year-over-year, from the $211 million worth of properties that traded in Q2 2016. The decrease in volume from the first quarter to the second doesn’t mean Philadelphia won’t pick up the pace in the coming months, as seasonality also plays a big factor and fluctuation on the market is not unusual. The most obvious example of this is the five-year peak of the Philly office market in Q1 2016, when 10 deals closed for over $1 billion in total volume.
Price per Square Foot Drops Below 5-Year Average
The average price per square foot for office buildings trading on the market fell below the average of the past five years, resting at $137 at the close of Q2. The second quarter of 2017 also marked a 16% drop from Q1, when the average price reached $163. Moreover, though prices rose 33% year-over-year, that might not be a sign of improvement, as Q2 2016 was one of the worst performing quarters of the past five years, in terms of both sales volume and price per square foot. Nevertheless, though prices may vary from quarter to quarter, the number of office deals closed is consistent, signaling that such fluctuations are not necessarily the result of waning buyer interest. It might just be that investors are focusing on more affordable options–the 14 office transactions that closed in Q2 included 9 Class B properties, 1 Class C property and just 4 Class A assets.
$45M Exton Sale Tops List of Largest Q2 Deals
There were 14 notable office deals closed in the year’s second quarter, for a combined sales volume of $265 million. The properties traded at an average of $137 per square foot, and totaled over 1.9 million square feet of office space.
Valley Creek Corporate Center (via Yardi Matrix)
The largest office transaction to close in Q2 2017 was the $45.3 million sale of the Valley Creek Corporate Center in Exton, Pa., to a partnership between Pembroke Hobson and Ten Capital Management. Located at 220 Valley Creek Blvd., the two-building, garden-style office complex was built in 2002 and features 256,981 square feet of space. The Class B asset was previously owned by Rubenstein Partners, which continues to manage the property. According to Yardi Matrix data, the June 2017 sale was subject to a $34 million loan held by Barclays.
802 Delaware Ave. (via Yardi Matrix)
Valley Creek Corporate Center was the only office asset to fetch a sale price above the $40 million mark. The second-largest deal of Q2 was the $34 million sale of 802 Delaware Ave. in Wilmington, Del. Oak Street Real Estate Capital acquired the 240,780-square-foot, 14-story high-rise in the Wilmington CBD from Equity Commonwealth in May, with the help of a $20.4 million loan held by Citizens Bank. The Class A property was originally built in 1986 and completely renovated in 2014, per Yardi Matrix data, and is currently managed by CBRE.
Office Development Winding Down in Q3
The second quarter of 2017 saw five notable office projects come online, totaling nearly 1.7 million square feet of space. Three of these projects are medical office buildings: the new Roberts Center for Pediatric Research at 700 Schuylkill Ave. in Philadelphia, the Kennedy Health Medical Office Building at 2201 Chapel Avenue West in Cherry Hill, and the Main Line Health Medical Office Building at 135 South Bryn Mawr Ave. in Bryn Mawr. Another milestone of Q2 2017 was the completion of Brandywine Realty Trust’s FMC Tower at Cira Centre South. Rising 49 stories at 2929 Walnut St. in the University City District, the Class A office tower designed by Pelli Clarke Pelli is Philadelphia’s seventh-tallest building.
Things aren’t looking quite as promising for the Philadelphia office market in Q3. A single large office project is scheduled for delivery in the third quarter–National Real Estate Advisors’ East Market development at 34 South 11th Street. Comprising 185,000 square feet of Class A office space, the eight-story mid-rise is set to include 25,000 square feet of retail and earn LEED certification from the USGBC. Delivery is scheduled by the end of July.
Methodology
- Data source: Yardi Matrix (download raw data);
- Square footage parameters: over 50,000 square feet;
- Minimum amount per transaction: $5,000,000;
- Transactions recorded until July 12th, 2017;
- We excluded ‘ownership stake,’ ‘ground lease,’ ‘controlling interest’ and ‘portfolio’ transactions from our calculation of the average price per square foot.
