Philly’s Center City office district holding firm, but could see more departures post-COVID-19

Radian Group Inc.’s decision to move its corporate headquarters from Center City to a much smaller space in Wayne could be a sign of trouble for Philadelphia’s downtown.

The mortgage insurer, which employs 600 in the Philadelphia region, said it learned during the coronavirus pandemic that employees performed well without coming to the office every day and that the continued flexibility of remote work “best positions us for growth.”

The move by Radian into 55,000 square feet from 150,000 square feet, first reported by the Philadelphia Business Journal on Friday, is concerning, said Rose Penny, Greater Philadelphia market research director for the commercial real estate firm Colliers.

“In addition to leaving a major hole in Philadelphia’s [central business district], it potentially signals a trend that other tenants will be significantly shrinking their office spaces,” Penny said Tuesday.

Businesses throughout the Philadelphia region are undertaking analyses just as Radian did on how much space they need and where it should be as the economy emerges from the pandemic, market observers said. No one knows what the new world will look like, and the fallout could take a couple years or more to manifest itself.

What’s clear is that the economic consequences could be significant for Center City, long Philadelphia’s jobs engine, even as many office buildings have been converted to apartments and condominiums over the last 20 years. That trend has left Center City with a lower proportion of offices relative to residences compared with such places as Boston and San Francisco, muting somewhat the impact of an office exodus.

Still, Center City remains a major source of real estate and wage-tax revenue for the city.

» READ MORE: Center City is bouncing back from the pandemic, but businesses still have recovery work ahead

Another significant development involving Philadelphia’s office market is the recent decision by Children’s Hospital of Philadelphia to terminate its lease of 300,000 square feet over six floors of the Wanamaker Building, where CHOP housed back-office functions, said Bill Luff, founder of CRE Visions, a Philadelphia commercial real estate consultancy. CHOP did not provide details on its plans.

One key measure, the office vacancy rate, is not currently as high in Philadelphia’s central business district as it is in other major urban areas, such as Manhattan. The vacancy rate was 12.2% at the end of June, up from 11.5% in March, according to Colliers. The official vacancy rate includes leased space that is empty because employees are working remotely.

JLL, another commercial real estate firm, said its June figure for Center City was about the same as it was during the Great Recession more than a decade ago, but not as bad as during the dot-com bust of the early 2000s, when the vacancy rate neared 15%, said Clint Randall, director of research in JLL’s Philadelphia office.

But coming out of the pandemic, the key yardstick for future office demand, and for the surrounding businesses depending on office workers going out to eat for lunch and shopping after work, is not the traditional vacancy rate, but rather the actual occupancy rate of leased space, the ratio of people actually going to the office — what one expert called “butts in seats.”

JLL estimated that in May, 30% of the workforce was going to the office. At the bottom of the pandemic, only 10% of the workforce was going in, Randall said. “We expect it to come back to 85% of pre-pandemic levels,” but not until the first quarter of next year, he said.

Michael F. Young, who owns an office building at 230 S. Broad St., said the percentage of people back at work in that building has risen to more than 50% from a low of 30% during the pandemic. “The younger people are coming back, and they’re coming back pretty quickly,” he said.

Young and other commercial real estate experts said it’s going to take at least a year or two for employers to figure what their offices are going to look like, which is why lease renewals are only for two or three years right now, at the most.

There are three aspects to the process, said Luff, the real estate consultant. The first questions are how much office space the company needs and where it should be. Radian decided that it needed about a third of what it has now and that it would be most convenient for that space to be in the suburbs.

The next step is figuring out what the space is going to look like — how much space each employee will have, what “technology enhancers” will be installed, and how collaboration space will be configured, Luff said. Finally, companies will look for better deals from their landlords, Luff said.

No one knows how it will turn out. “It’s an evolution,” Luff said.

Lauren Gilchrist, who recently left JLL and is now managing director for research at Longfellow Real Estate Partners, which develops projects for technology and life sciences companies, said the Center City business district has fewer people out and about than she’s seen recently on work trips to San Francisco and North Carolina.

But there are signs of a turnaround, said Gilchrist, who is staying in Philadelphia and has been looking at coworking space for herself over the last two months. Between the beginning of May and early July, Gilchrist has seen a rise in people occupying coworking spaces.

“There does appear to be momentum.”