End of 2012 Office Market Report – by Bryan Cole

Greater Reading Office Market Overview
End of 2012 Report
By Bryan Cole

Suburban Office Market Overview

The Greater Reading Suburban Office Market ended 2012 with a vacancy rate for Class A Office buildings at 18.5%. This is a slight increase in vacancy rates from 3rd quarter 2012 and an increase in vacancy from same period 2011. The average rental rates remained steady at $16.00 – $19.50 per square foot Modified Gross which is a slight decrease to the rates from the same period 2011.

Deals of primary focus within the Class A building sector in 2012 were the 48,000 sf National Penn Bank location proposed at the Spring Ridge Corporate Center, which will be leased 100% to Nat Penn, the new Fairfield Inn proposed along Meridian Blvd., the Fairfield Inn is purchasing three proposed office pad sites along Meridian Blvd, and the 30,000 sf leased to Digestive Disease Associates and BCDH at the Wyomissing Corporate Campus.

The Class B Suburban office market ended 2012 with a vacancy rate of 18.98%. This is a decrease in vacancy from 3rd quarter 2012 by less than one percent; however it is an increase from the same period 2011 by almost four percent. The average rental rates remained unchanged from 3rd to 4th quarter 2012 at $11.00 – $16.50 per square foot modified gross opposed to the average rental rates from the same period 2011 which was $13.00 – $18.00 per square foot.

Deals of primary focus within the Class B building sector in 2012 were the purchase of 210 George Street in Muhlenberg Township, a building consisting of approximately 40,000 sf and bought by the Municipality for their operations center, and the purchase of 6 Commerce Drive consisting of approximately 30,966 sf. which was purchased by Brentwood Industries and will be home to their new Headquarters.

The Class C Suburban office market sector ended 2012 with a vacancy rate of 10.97% which was an increase from the 3rd quarter 2012 and similar to the same period 2011.

Our outlook for the suburban office market going into 2013 is very optimistic with activity levels at new highs within the market place and owners offering additional incentives and concessions to assist in getting deals done.

Downtown Reading Office Market Overview

The Greater Reading Downtown Office Market ended 2012 with a vacancy rate for Class A Office buildings at 22.96%. There was no change in vacancy rates from 3rd quarter 2012; however it was a significant increase from the same period 2011. The average rental rates slightly decreased from 3rd to 4th quarter 2012 at $14.00 per square foot Modified Gross to $13.50 per square foot Modified Gross.

The largest additions to the overall vacancies in Class A facilities were at 401 Penn Street and 201 Penn Street, which caused Class A vacancy rates to sky-rocket from 2011 into 2012. Due to the current economic climate and overall interest in the City, these buildings remain vacant and are still taking a toll on the overall vacancy rate within Downtown.

The Class B Downtown office market ended 2012 with a vacancy rate of 22.08%. There was no change in vacancy rates from 3rd quarter 2012, and it was a slight increase from the same period 2011. The average rental rates dropped from $11.50 per square foot Modified Gross in the 3rd quarter 2012 to $10.00 per square foot Modified Gross in 4th quarter 2012 this is also a slight decrease to the rates from the same period 2011.

Overall Vacancy Rates for Class C buildings remained unchanged throughout 2012, however various buildings previously tracked as Class B buildings were changed to Class C buildings, due to re-evaluating the assets and conditions.

Tenant perspective: (As a Tenant Representative)
The Greater Reading market has experienced a high level of interest within the 4th quarter 2012, although activity is high and deals are steadily coming forward, the A and B product is still offering incentives/concessions which have allowed Tenants to continue to capitalize on past market conditions.
However moving forward, especially in 2013, landlords will begin to limit the concessions and negotiate much harder on higher base rates.
Tenants should begin to negotiate any leases that are within 18 months of expiration. This allows for enough room to negotiate and capitalize on the current conditions.
Although the markets are improving and landlords will begin to lock in better terms, we feel the market will continue to be a “Tenant’s Market” into the late stages of 2013 based on current vacancies and leasing activity.

Landlord perspective: (As a Landlord Representative)
Greater Reading’s recent activity will sway some landlords to think the market has turned around. Be cautious as we feel well into 2013 the market will maintain its “Tenant Market” status.
Rates have been low over the past few years, so by offering free rent on the front end while maintaining higher base rates will not only provide tenants the ability to get into the space on a lower initial cost for year 1, it will allow landlords to maintain higher valuations on their assets since most “Free Rent” is outside the term. This allows landlords to still get effective 3, 5, or 7 year terms while limiting their exposure long-term.
By maintaining the base rates and offering incentives on the front end, Landlords maintain solid valuations for their assets while still staying competitive in the marketplace.
Interest rates will probably remain low, well into 2013. This will allow tenants to finance the tenant improvements themselves at sometimes better rates than landlords. This makes the Free Rent on the front end even more appealing to some tenants.

 

By Bryan Cole, NAI Keystone Commercial & Industrial, LLC
Office & Medical Real Estate Specialist
www.Bryan-Cole.com  or www.WyomissingOfficeSpace.com

Bcole@naikeystone.com | 610.370.8502

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