2014 fall suburban office market report

Suburban Office Market

2014 FALL REPORT

Dear Friends,

Welcome to the inaugural edition of the Colliers International Suburban Office Market Report, a practical analysis of the Greater Philadelphia Suburban Office Market, prepared exclusively by the Suburban Philadelphia Office Division of Colliers International.

As real estate consultants and advisors, we constantly track market trends and statistics to understand market dynamics and better advise our clients. Often however, when we analyze market data we find that the numbers do not always fall in line with our experience on the ground, but instead reflect statistical anomalies. By example, many surveys include owner occupied buildings as part of the market inventory, thus inflating occupancy levels. Some surveys include non-conforming properties as part of the office market supply or list inferior properties as ‘A’ or ‘B’, again distorting the real picture. The list goes on.

This disconnect between published reports and the reality on the street, made us wonder if there wasn’t a better way to correlate and present accurate market data to our clients. The format of most surveys is acceptable, it is the population that is corrupting the results.

In an effort to create a meaningful overview of the local suburban office markets, one that reflects true market conditions and trends, we have rigorously screened the inventory in each market and included only those properties that meet our criteria.

Keep in mind, it is not always about large discrepancies in all categories, but having accurate information and a better feel for a market; the true number of candidate properties and the real vacancies therein.

It is therefore with some pride and trepidation that we present to you, our valued clients and friends, what we believe is a more accurate and more importantly, more useful overview of the Greater Philadelphia Suburban Office Market.

We welcome your feedback and please let us know your thoughts, or any questions you may have.

As always we look forward to the opportunity to work with you in achieving your real estate goals.

Colliers International Suburban Philadelphia Division:

COLLIERS INTERNATIONALEight Tower Bridge161 Washington Street, Suite 1090Conshohocken, PA 19428

+1 610 684 1850

The foregoing information was furnished to us by sources which we deem to be reliable, but no warranty or representation is made as to the accuracy thereof. Subject to correction of errors, omissions, change of price, prior sale or withdrawal from market without notice.

SUBURBAN PHILADELPHIA SUBMARKETS

> Bala Cynwyd

> Conshohocken

> Delaware County

> Fort Washington/Spring House

> Horsham/Willow Grove

> King of Prussia

> Lower Bucks County

> Malvern/Exton/West Chester

> Norristown/Valley Forge

> Plymouth Meeting/Blue Bell

> Radnor/Main Line

960 Harvest Drive, Blue Bell

2014 SUBURBAN OFFICE MARKET REPORT AND OUTLOOK | PG. 4

SUBURBAN PHILADELPHIA OVERVIEW

151 S. Warner Road, King of Prussia

MAJOR TENANTS IN THE MARKET Vertex - 200,000 SF1041 Old Cassett Road, Berwyn

National Medical Services - 125,000 SF3701 Welsh Road, Willow Grove

Linde Engineering - 75,000 SF5 Sentry Parkway, Blue Bell

Jacobs Engineering - 70,000 SF2 Ash Street, Conshohocken SunGard - 60,000 SF680 E. Swedesford Road, Wayne

Express Scripts - 55,000 SF920 Harvest Drive, Blue Bell

EisnerAmper - 30,000 SF101 West Avenue, Jenkintown

SIGNIFICANT LEASE TRANSACTIONS

eMoney Advisors - 80,000 SF 4 Radnor Corporate Center, Radnor

AmerisourceBergen - 70,000 SF Three Millenium, Conshohocken

Berkadia - 70,000 SFSpring House Corporate Center, Ambler

Harte Hanks - 45,000 SF 3800 Horizon Boulevard, Trevose

IFM Efector - 45,000 SF1100 Atwater Drive, Malvern

Stryker - 35,000 SF ArborRidge, Malvern

Coredial - 33,000 SF751 Arbor Way, Blue Bell

MEDecision - 25,000 SF550 E. Swedesford Road, Wayne

Inovio Pharmaceuticals - 24,000 SF660 W. Germantown Pike, Plymouth Meeting

Balfour Breath - 23,000 SFOne Country View Road, Malvern

ArborRidge, 70 E. Swedesford Road, Malvern - Rendering

Spring House Corporate Center, 323 Norristown Road, Ambler


OUTLOOK

Rental RatesRental rates have remained stable over the first half of 2014. Expect Class A rates to begin a slow, steady march higher, as demand for Class A space outstrips the demand for B space. In certain submarkets such as Radnor and Conshohocken, the lack of available A space will continue to drive rates higher, going back to pre-recession levels. Where landlords are unable to achieve higher rental rates, expect to see a decrease in rent concessions; the days of significant free rent for tenants are ending.

VacancyAs with rental rates, vacancy rates across the suburbs have remained steady for the first half of 2014. Demand for Class A product, especially new or renovated assets, has remained especially strong and is forcing landlords to consider repositioning class B buildings with the systems and amenities that tenants desire. Submarkets such as Radnor and Conshohocken that have access to mass transit systems continue to experience significant demand for space. This trend will continue and will drive future development. An example is Conshohocken where over 1 million square feet of new product has been approved.

Leasing VelocitySlow and steady is the mantra for leasing velocity. Tenants are coming into the market earlier than usual, often up to two years prior to their lease expiration. Frequently this “tire kicking” does not result in deals. Instead, negotiations get pushed back until close to the termination date as Tenants remain unsure of future growth and headcount.

Investment SalesThe suburban Philadelphia office sales volume is well below 2013 levels, as fewer properties were brought to market in late 2013 through early 2014. The 2013 volume was also outsized due to large portfolio sales. The local decrease in volume is in contrast to the national suburban market which is posting significant volume increases.

Recently, more office properties have been placed into the pipeline in reaction to sustained low interest rates and a buildup of investor capital now seeking yield in office product. Cap rates for suburban Philadelphia office investments are declining as sale prices increase. Opportunistic investors pursuing higher yield investments are targeting the suburban sector, particularly in secondary markets.

Post great recession pricing highs for suburban office were set early in the year with the sale of 1000 Continental Drive at a price of over $300 per square foot. That high may again be topped by new offerings.

New DevelopmentWhile there is still no speculative office development in the Philadelphia suburbs, the Great Valley area has seen build-to-suit activity with buildings being built for Vanguard and IFM Efector. In the Conshohocken submarket, several developers are planning new buildings as they chase large lead tenants such as Amerisource Bergen. None of these projects will kick off without a tenant pre-leasing 50-60% of the building.

CLASS A CLASS B TOTAL

INVENTORY

Square Feet 25,865,463 32,161,545 58,027,008

# of Buildings 253 837 1,090

RENTAL RATE AVG

Mid-Year 2014 $26.57 $20.47 $23.19

VACANCY RATE AVG

Mid-Year 2014 11.17% 13.87% 13.98%


BALA CYNWYD

HIGHLIGHTS

> Keystone Property Group has submitted a sketch plan for a 207 unit apartment building on the site of its six-story office building at 150 Monument Road.

> O’Neill Properties is going forward with the development of apartments on its site on Rock Hill Road. In addition to the improvements to both Rock Hill Road and Belmont Avenue, the influx of residential development has predicated the pedestrian bridge linking the Cynwyd Heritage Trail to Manayunk.

> LF Driscoll has relocated its headquarters to 20,000 square feet at 401 City Line Avenue from 9 Presidential Avenue.

OUTLOOK CLASS A CLASS B TOTAL

INVENTORY

Square Feet 1,907,033 839,469 2,746,502

# of Buildings 10 11 21

RENTAL RATE AVG

Mid-Year 2014 $28.95 $26.95 $28.34

VACANCY RATE AVG

Mid-Year 2014 9.70% 7.90% 9.14%

1 Presidential Boulevard, Bala Cynwyd

With the competition of Conshohocken, Radnor and Center City Philadelphia, Bala Cynwyd has continued to redefine its role in the suburban office market. Expect to see flat rates in the office sector, with limited positive absorption. New projects along Rock Hill Road will enhance the entry to the submarket from the west, but overall the market remains flat.


CONSHOHOCKEN

HIGHLIGHTS

> Keystone Property Group is re-developing the former Verizon building on Fayette Street. The building will house the Conshohocken borough offices, the police station and retail.

> O’Neill Properties has received approval to expand its office development on Washington Street, with phase one being the addition of 50,000 square feet to Three Millenium.

> Equus Capital Partners has shelved plans for apartments at its 20 acre site on West Elm Street opting instead for a seven-story 320,000-square-foot office building.

> Oliver Tyrone Pulver Corporation has the foundation in the ground and plans ready for an anchor tenant at the developer’s proposed 14-story 260,000-square-foot class A office building on the river adjacent to Eight Tower Bridge.

> E. Kahn Development has announced plans to construct an office building just over the Township line in Whitemarsh along the Schuylkill.

> AmeriourceBergen has signed a 70,000-square-foot lease at Three Millenium to accommodate their growth from Chesterbrook.

OUTLOOKCLASS A CLASS B TOTAL

INVENTORY

Square Feet 2,636,455 748,951 3,385,406


RENTAL RATE AVG

Mid-Year 2014 $30.77 $21.59 $28.74

VACANCY RATE AVG

Mid-Year 2014 14.70% 8.90% 13.41%

The Conshohocken market will remain tight, as tenants continue to absorb smaller spaces and drive the vacancy rate down. Rents will remain stable but expect to see fewer tenant incentives. Developers continue to jockey for the potential AmerisourceBergen headquarters relocation, but do not expect to see any speculative construction any time soon. Without a minimum of 50% preleasing, no developer will take a building out of the ground.

Eight Tower Bridge, Conshohocken


DELAWARE COUNTY

HIGHLIGHTS

> Axalta inked a 55,000-square-foot lease at Applied Card Way in Glen Mills for its North American headquarters. Additionally, they took 30,000 square feet at Commerce Square in Center City, Philadelphia for their Global Headquarters.

> Since acquiring Mack-Cali’s office portfolio in suburban Philadelphia during the third quarter of 2013, Keystone Property Group has committed to upgrade the building façade, systems and common areas at Rose Tree Corporate Center. The renovations at the 270,000-square-foot complex are expected to kick off this quarter.

> Philadelphia International Airport (PHL) has come to an agreement with Delaware County, Tinicum Township and the Interboro School District to not displace over 300 residents in 72 Tinicum Township homes and retain the ability to move forward with their $6.4 billion airport expansion. The agreement comes after eight years of disagreements and litigation over the Capacity Enhancement Program, which aims to expand and modernize PHL in phases over the next 12 to 15 years.

Historically the Delaware County submarket has been flat in regards to rental rates and absorption. That trend has continued throughout the first half of 2014. Most tenants have remained in-place with little movement. Vacancy rates remain relatively low. Expect this to continue through the 4th Quarter.

OUTLOOK

Newtown Square Corporate Campus14 Campus Boulevard, Newtown Square


INVENTORY

Square Feet 2,584,006 2,974,666 5,558,672


RENTAL RATE AVG

Mid-Year 2014 $26.17 $22.10 $23.99

VACANCY RATE AVG

Mid-Year 2014 7.30% 9.80% 8.63%


FORT WASHINGTON | SPRING HOUSE

HIGHLIGHTS

> 335 Commerce Drive, the former headquarters location for URS Corporation is available for lease for the first time. Built in 2003, this 75,000-square-foot, Class A building owned by Lower Gwynedd based Somerset Properties is being marketed by Colliers International.

> ReSearch Pharmaceuticals Services and URS Corporation have both vacated their office locations in Fort Washington. ReSearch Pharmaceutical Services has been acquired by PRA, another healthcare service firm, and is moving its headquarters to COPT’s ArborCrest in Blue Bell. URS Corporation has relocated to Exeter’s Conshohocken Ridge in Conshohocken. The departures will leave in excess of 125,000 square feet available in the Fort Washington submarket.

> Upper Dublin Township has completed two Flood Retarding Structures (FRS) and dams at cost of over $9 million. The Pine Run FRS, located in the Village of Dresher, consists of 12 concrete walls, is 20.6 feet in height and has a total length of 834 feet. The Rapp Run FRS also consists of 12 concrete walls, is 21 feet in height and has a total length of 700 feet. Both FRS consist of labyrinth spillway structures that have already had a great impact in reducing flooding in Fort Washington.

335 Commerce Drive, Fort Washington


INVENTORY

Square Feet 827,911 1,584,584 2,412,495


RENTAL RATE AVG

Mid-Year 2014 $24.44 $18.89 $20.79

VACANCY RATE AVG

Mid-Year 2014 18.00% 27.30% 24.10%

Leasing activity for the Fort Washington submarket has been stagnant. Several large tenants are vacating the market and their space will be coming directly available or by sublease, including URS & PRA. Rental rates have remained flat. Expect Class A properties to lease relatively quickly, as the Class A space in neighboring submarkets continue to be absorbed.

OUTLOOK


HORSHAM | WILLOW GROVE

HIGHLIGHTS

> Goodman Properties plans to convert the former Capmark offices at 116 Welsh Road into retail. This will add to Goodman’s strong retail holding along that strip of major roadway in Horsham.

> Liberty Property Trust has increased its occupancy rate in its Class A product to over 95% leased. Recent transactions include Capmark, TNS, and MorningStar.

> Liberty Property Trust has completed upgrades to 200, 220, and 240 Gibraltar Road. Those three buildings are now 100% leased.


INVENTORY

Square Feet 1,596,542 2,344,136 3,940,678


RENTAL RATE AVG

Mid-Year 2014 $22.64 $19.62 $20.84

VACANCY RATE AVG

Mid-Year 2014 7.00% 21.50% 15.62%

601 Dresher Road, Horsham

Class A space continues to lease-up briskly as many tenants look to lock in rates on quality space with long term deals. Asking and effective rental rates for Class A space continue to rise as Landlords push rates and reduce concessions in response to increased demand. Class B space will see greater activity as the supply of A space diminishes. Look for landlords to invest in cosmetic and other improvements to the B inventory to add value and meet the demand. Expect effective rental rates to rise $1 to $2 in the next six months. Fort Washington will benefit from Horsham’s lack of space and increase in rates.


KING OF PRUSSIA

HIGHLIGHTS

> With leases pending for the entire third floor, Crosspoint’s vacancy rate dropped below 10%. Teleflex took occupancy to its space and officially opened the building (see photo).

> The Trout-Run site at the corner of Old Eagle School Road and Swedesford Road was approved for office development. The project will not commence without a lead tenant.

> Landlords kicked off projects to upgrade existing product. Liberty refurbished 1170 Devon Park Drive, Hayden Real Estate Investments redid 150 S. Warner Road, and Brandywine started work on refurbishing Bay Colony. Lastly, Keystone readied plans to upgrade the Westlakes Corporate Center in Berwyn.

> Construction at the King of Prussia Mall is in full swing with a 140,000-square-foot expansion linking the Court and the Plaza. > Construction also continued at the 120,000-square-foot specialty care center for Children’s Hospital of Philadelphia at the Village at Valley Forge.

The vacancy rate for class A space has dropped from 12.7% at year end to 9.2% while the B space remained flat. Much of this change was due to the lease-up of Crosspoint and other top tier product. Landlords have noticed that the Class A product is in greater demand so expect to see Landlords continue to spend money to upgrade older buildings with new features and amenities.

OUTLOOK

Crosspoint530 & 580 Swedesford Road, Wayne


INVENTORY

Square Feet 3,287,110 8,427,036 11,714,146


RENTAL RATE AVG

Mid-Year 2014 $27.98 $21.31 $23.18

VACANCY RATE AVG

Mid-Year 2014 9.20% 18.00% 15.53%


LOWER BUCKS COUNTY

Horizon Corporate Center, Trevose


INVENTORY

Square Feet 2,885,605 3,033,243 5,918,848


RENTAL RATE AVG

Mid-Year 2014 $25.65 $17.95 $21.70

VACANCY RATE AVG

Mid-Year 2014 24.00% 22.60% 23.28%

HIGHLIGHTS

> Simon Property Group is planning a major overhaul at One Oxford Valley, their 120,000-square-foot office building located behind the Oxford Valley Mall. The renovation would bring a completely new look and feel to the property, in addition to creating a rare Class A office availability in the Langhorne market.

> Waste Management subleased a portion of the third floor at 100 Brandywine Boulevard, in Newtown to the residential real estate agency Coldwell Banker Hearthside.

> Harte Hanks leased 45,000 square feet at 3800 Horizon Boulevard.

> Zencorr Properties bought the 335-unit, two-story apartment complex, Center Square Towers, located at 555 N. Broad Street in Doylestown from AIMCO for $31.5 million. The complex was 97% leased at the time of the sale. New ownership is planning some minor upgrades to the units.

Rental rates and absorption has remained stagnant. There has been little to no new development in the Lower Bucks submarket over the last six months. Expect most of these trends to continue, however with a few new ownership groups entering the market and some existing owners showing renewed interest, activity should see a slight uptick.

OUTLOOK


MALVERN | EXTON | WEST CHESTER

ArborRidge, 70 E. Swedesford Road, Malvern - Rendering


INVENTORY

Square Feet 4,838,268 4,843,960 9,682,228


RENTAL RATE AVG

Mid-Year 2014 $22.08 $20.29 $21.18

VACANCY RATE AVG

Mid-Year 2014 13.30% 10.30% 11.79%

HIGHLIGHTS

> Alliance HSP’s ArborRidge, a three building redevelopment on Swedesford Road in Malvern, is beyond 50% pre-leased. Transactions include Stryker and Cadient.

> A full renovation of the former Westbrook Corporate Center, located just off Route 202 at the Route 401 exit, is underway and will become the new home of St. Gobain/Certainteed. Planned occupancy is for August 2015.

> Construction on U.S. Route 202 continues along the entire 6.5 mile section that stretches from just south of the Swedesford Road/Route 252 Interchange in Tredyffrin Township to the U.S. Route 30/Exton Bypass Interchange in East Whiteland Township, Chester County. Construction on the $105.4 million project began in April 2011.

OUTLOOKClass A space remains the attraction in this submarket, as tenants are drawn to newly upgraded buildings such as ArborRidge. Look for redevelopment plans to spread throughout Great Valley as landlords take advantage of the turnpike interchange to promote redeveloped buildings. Rents will remain steady in Exton, but across the submarket the class A buildings will start to see rent increases along with a decrease in tenant incentives such as free rent.


NORRISTOWN | VALLEY FORGE

HIGHLIGHTS

> Construction has commenced at the Rt. 422 and Trooper Road interchange. The improved interchange will alleviate congestion on Egypt and Trooper Road as well as Rt. 422.

> Additional retail sites have been developed at the Egypt Road interchange. These include restaurants and a Wawa.

> Keystone Property Group is planning upgrades to 1000 Madison Avenue after acquiring the building from Mack-Cali. These upgrades will be completed by years end.

The Norristown/Valley Forge market remained stagnant with flat rents and little absorption. Expect the same for the remainder of 2014 as the market remains a spill-over for King of Prussia, and without significant growth there, it will be difficult to see any material change along Trooper Road or in Norristown.


INVENTORY

Square Feet 687,009 1,754,167 2,441,176


RENTAL RATE AVG

Mid-Year 2014 $20.81 $19.37 $19.78

VACANCY RATE AVG

Mid-Year 2014 11.80% 14.50% 13.74%

1000 Madison Avenue, Norristown


PLYMOUTH MEETING | BLUE BELL

HIGHLIGHTS

> Redevelopments and renovations are planned throughout the market. Keystone Property Group has building upgrades and amenities planned at 16 and 18 Sentry Parkway West in Blue Bell. Endurance Real Estate Group has renovations underway at 960 Harvest Drive, the 120,000+ square-foot, three building portfolio in Blue Bell. Alliance continues to redevelop ArborCrest, the former Unisys headquarters.

> Brandywine Realty Trust has expanded their parking along Walton Road to accommodate Accolade’s growth at 660 W. Germantown Pike, Plymouth Meeting. Inovio Pharmaceuticals also inked a 20,000-square-foot, long term lease at the property that brings its occupancy rate to nearly 97%. The former IHS headquarters has seen a drastic overhaul to become a multi-tenant building that includes an on-site café, fitness center and conference facility.

> Pennsylvania Turnpike Commission (PTC) leaders and elected officials broke ground on the $198 million project to completely reconstruct a five-mile section of Interstate 476 and expand the highway from four to six lanes, helping ease access into Plymouth Meeting and surrounding areas. The project — funded wholly by toll revenues without any state or federal tax dollars is being built by Allan A. Myers (AAM) of Worcester, PA.

4000 Chemical Road, Plymouth Meeting


INVENTORY

Square Feet 1,983,997 3,918,075 5,902,072


RENTAL RATE AVG

Mid-Year 2014 $27.29 $19.53 $22.14

VACANCY RATE AVG

Mid-Year 2014 7.30% 24.08% 18.43%

Leasing activity in the Plymouth Meeting/Blue Bell submarket continues its steady climb. Redevelopment projects and strong REIT owned properties have added several new leases to their portfolios. Tenants are locking in rates and signing long term renewals. Rental rates have remained relatively flat, although given recent activity, expect to see increases shortly.

OUTLOOK

1000 Madison Avenue, Norristown


RADNOR | MAINLINE

HIGHLIGHTS

> After Rovi’s departure from 4 Radnor Corporate Center, Brandywine has embarked on a project to modernize the building and will be redesigning the common areas and the tenant conference center. eMoney Advisors will be moving to and back-filling this space.

> BioMed Realty Trust continues to be in discussions with Radnor Township regarding the zoning of their building at 145 King of Prussia Road. The debate centers on the amount of development that will be allowed on the 19 acre site at the Rt. 30 exit of I-476.

> Development is set to begin at the former Waterloo Gardens site in Devon. The property was sold last year to developer Eli Kahn. Plans include a boutique hotel, along with retail stores.

> Construction is in full swing at 353 W. Lancaster Avenue in Wayne to convert the building to class A space. The building was sold in November 2013 to Larsen MacColl. They will occupy the 3rd floor, and lease out the rest of the 19,000 SF building.

Class A and B office space along the Main Line remains in tight supply with class A vacancy rates below 5%. Expect landlords to continue to escalate rents in this area, while they continue to update and modernize buildings. It is expected that in the top class A buildings rental rates will push towards the high $30 level in 2015.

OUTLOOK

Radnor Corporate Center, Radnor


INVENTORY

Square Feet 2,631,070 1,590,328 4,221,398


RENTAL RATE AVG

Mid-Year 2014 $32.99 $22.21 $28.93

VACANCY RATE AVG

Mid-Year 2014 4.80% 8.70% 6.26%


ABOUT COLLIERS

COLLIERS 2014 STATS

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15,800 professionals

1.46B* square feet under management

$75B USD in total transaction value

*Together, Colliers International and FirstService manage 2.51 billion square feet of property — the second-largest in the world. Real estate is a location business.

That’s why we do business where you do business.

Colliers International is a leader in global real estate services, defined by our spirit of enterprise. Top down, from a corporate culture of service excellence and a shared sense of professional initiative, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners.

Our headquarters in Seattle, Washington, and 485 offices worldwide share a common brand and vision to provide the best service experience available. To us, that means empowering our service teams to partner with each client, listening to their unique business needs, and designing an integrated service response.

Colliers in Philadelphia is one of the oldest and most respected local owners of Colliers International. Formerly Lanard & Axilbund, we are a privately-held, full-service commercial real estate firm serving Pennsylvania, Southern New Jersey and Delaware. For over 90 years, Colliers in Philadelphia has delivered comprehensive strategies to clients who buy, sell, lease, develop and invest in commercial real estate. We have over 80 professionals working throughout 6 regional offices locally working in partnership with you to create a seamless solution for all of your commercial real estate needs.

LOCAL EXPERTISEGLOBAL REACH

COLLIERS INTERNATIONALEight Tower Bridge161 Washington Street, Suite 1090Conshohocken, PA 19428+1 610 684 1850

The foregoing information was furnished to us by sources which we deem to be reliable, but no warranty or representation is made as to the accuracy thereof. Subject to correction of errors, omissions, change of price, prior sale or withdrawal from market without notice.

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