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Need for modern workspaces driving suburban office boom

May 13, 2019

Source, Philadelphia Business Journal, Natalie Kostelni

Multiple new office projects, totaling nearly 1 million square feet, are in various stages of planning in Philadelphia’s suburbs as developers seize on a lack of available space and rising rents that can financially support new construction.

This points to a potential wave of new development later this year and into next year.

At least one developer, Equus Capital Partners Ltd., is trying to get ahead of the competition by building on speculation, or without any tenants lined up. The company is finalizing approvals on a 145,000-square-foot building at 675 E. Swedesford Rd., in Wayne. “We plan to start construction in September,” said Steve Spaeder of Equus.

It’s considering another spec project. “We’re taking a serious look at 400 Barr Harbor [Drive] in Conshohocken,” Spaeder said. That proposed 218,000-square-foot building is going through the approval process and Equus will “take a hard look” at breaking ground on it next spring, Spaeder said.

Other projects in the works but not on spec include: Seven Tower Bridge, a 250,000-square-foot building in Conshohocken that may have Hamilton Lane as an anchor; Metroplex Two, a 280,000-square-foot structure in Plymouth Meeting; and 650 Park Ave., a 100,000-square-foot building in King of Prussia.

Two projects are underway that have substantial pre-leasing. Keystone Property Group broke ground on Sora West, a 429,000-square-foot complex in Conshohocken, and Brandywine Realty Trust is developing 145 King of Prussia Rd., a 150,000-square-foot structure in Radnor as part of Penn Health’s new campus.

It’s not often a combination of factors conspire to support new office construction. However, higher rents, low vacancies, a lack of large blocks of space — particularly for trophy space — and tenants desiring fresh, new space are driving developers to queue up these projects.

A new building costs about $400 a square foot to construct, but the rise in rents now justifies the expense. Average rents in the suburbs have exceeded $27 a square foot for the first time. It grew by 1.5 percent quarter-over-quarter to $27.33 a square foot and is expected to continue this year, according to Newmark Knight Frank data. Other markets are seeing record rents. Average rates in Conshohocken are $36.27 a square foot, according to JLL. Class A rents in Radnor are $40.73 a square foot and in the Wayne-King of Prussia area they are approaching $40 or more.

Vacancies are on the decline throughout the suburbs, particularly in Radnor, Conshohocken and the Wayne-King of Prussia area, which are at or below 10 percent. “This vacancy stabilization will drive new construction and everyone I’m dealing with needs more space,” said Jeff Mack of Newmark. “They are densifying, but hiring more people.”

Not all of the proposed projects will get built. “The question is always around pre-leasing and what banks will support,” said Lauren Gilchrist of JLL.

Even with those parameters, there has been no new construction, but increased demand for it amid continued job growth and companies chasing labor and contemporary work environments to attract and retain labor, Gilchrist said. “A lot of what is driving this is the talent piece of it and not the cost,” Gilchrist said. “People don’t want to work in old, outdated office space.”

Companies are paying more attention to millennials as the workforce of the future and figuring out what their needs and wants are, said David Fahey of Avison Young. “They want to live in more urban environments,” he said. If companies don’t want to move to Philadelphia, they are finding King of Prussia, Radnor and Conshohocken live-work-play alternatives and that’s where the new developments are clustered.