Philadelphia Suffering From Vacant Office Space, But Developers Head To The Less Regulatory Suburbs For Apartment Conversions

While much attention has been paid to office vacancy rates in cities like Los Angeles and San Francisco, several cities are also struggling in the East. With companies moving to hybrid schedules or workers not returning, residents aren’t fleeing the city — they’re just looking for work in the suburbs. 

“There’s this weird phenomenon of residential construction continuing at a strong pace in Philadelphia, people wanting to live in the city, wanting to play in the city, wanting to dine in the city as restaurants and retail are reemerging,” CBRE Philadelphia Senior Vice President Nick Gersbach told The Philadelphia Inquirer. “But for whatever reason, not wanting to go into an office in the city.”

Property tech company Kastle Systems reported in late April that office occupancy in Philadelphia was 48.8% versus 57% nationally. But hybrid schedules are taking a toll, with many people opting to work remotely on Mondays and Fridays. Mondays in the Philly metro area are 5 percentage points behind the rest of the country, while Fridays are at 3% and down even more since the Eagles football season. 

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Despite efforts such as in Chicago, where the city is helping convert vacant office space to residential, the city of Philadelphia and its abundant regulatory environment are causing conversion investors to go to a more workable scenario in the city’s suburbs. 

Michael Thom, a partner with Philadephia-based law firm Obermayer’s Business & Finance Department, told Benzinga that suburban municipalities are more open to making changes to encourage the transition of office to residential in their communities. 

“Local suburban municipalities are more open to losing some of their building restrictions. They’re willing to work with developers more because they’re taking that abandoned office space and using it,” he said. “One of the reasons they’re more open to abandoning zoning and other restrictive regulations is that the suburban Philly vacancy rate is worse than in the city.”

CBRE’s first-quarter vacancy rate report showed that the total office vacancy rate in Pennsylvania suburbs, including sublease space, is at 23.5% of an inventory of over 62 million square feet, representing an 8.5% increase from pre-pandemic levels. But despite local suburban municipalities showing a willingness to work with developers transitioning office space, money is still hard to find. 

“Financing is definitely tougher. Banks are limiting the money they put on the street and then you have some that are moving forward, but the project might now work at a 7.5% interest rate,” Thom said. “It’s the mom-and-pop developers who are having the tougher time and sometimes get loans that have a floating rate. They’re the ones getting hurt. The seasoned developers have seen this scenario a hundred times and know how to manage the financing part of it.”

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