Philly-area workers prefer to work from home, leaving millions of square feet of office space vacant

Owners of office buildings put on a brave face during COVID-19, saying white-collar work life would return to normal. It might take a few years, but something like 2019-levels of occupancy could eventually be expected.

But more than three years since the pandemic first swept the country, it appears there’s no going back. A new normal seems to have taken hold, and the commercial real estate industry is grappling with what it might mean.

“The downtown market is beat up right now pretty good,” said Nick Gersbach, senior vice president in CBRE’s Philadelphia office. “I’ve been here 23 years in this market, and I haven’t seen it contract at this pace before. … We’re a three- to five-year window from stabilizing and experiencing a slow recovery.”

Gersbach’s work focuses on Center City, but the outlook appears similar in the Pennsylvania suburbs and in South Jersey. CBRE’s analysis of the first quarter of 2023 found that since the onset of COVID, office occupancy across the greater Philadelphia region has shrunk by over 9.7 million square feet or the equivalent of almost eight Comcast Centers.

CBRE defines the region as the city, its collar counties, northern Delaware, and South Jersey — which is generally what’s meant by the Philadelphia metropolitan area — but also includes Harrisburg and the Lehigh Valley.

» READ MORE: Philly area developer Bill Glazer warns a commercial real estate slowdown is coming

Occupancy losses in the last three quarters have reversed the signs of recovery that emerged following the COVID vaccines. Many office tenants who have not reached the end of their contracts are trying to sublease large amounts of space on the already flooded market.

The available space for lease in the region is at an all-time high, outstripping the previous record set during the Great Recession, according to a first-quarter report from the CoStar Group, a commercial real estate tracker based in Washington, D.C.

“People are not going back into offices,” said Gersbach. A report from the CoStar’s Brenda Nguyen says such trends may indicate “that work patterns are reaching a new equilibrium in Philadelphia.”

This is not a Philadelphia-region phenomenon. A new study from the National Bureau of Economic Research shows the huge potential reach of remote work trends, reporting that half of the U.S. workforce did their jobs from home at least one day a week in December 2020.

Hybrid work — with employees going into the office a few days a week — is the new expectation of many office workers. Tuesdays, Wednesdays, and Thursdays are the most popular days. Office suites and parking garages remain notably barren on Mondays and Fridays.

That’s true across the United States. But according to data from Kastle Systems, which monitors workers swiping in and out of buildings that use its security services, Philadelphia lags much of the country in return to office.

On the most recent week for which data is available — the one ending Friday, April 21 — office occupancy in Philadelphia was 48.8% vs. 57% nationally. On Mondays, the Philadelphia metropolitan area — which includes much of South Jersey and northern Delaware, but not the Lehigh Valley or Harrisburg as CBRE’s data does — lags the national average by 5 percentage points and on Fridays by 3 points. (The Monday after the Eagles Super Bowl loss saw office attendance decline even more sharply.)

Most companies are not choosing fully remote work. But with workers in the office fewer days a week, they need radically less space.

“Companies still have to have a presence,” said Tom Weitzel, managing director with Jones Lang LaSalle (JLL) in Philadelphia. “But companies that I work with are saying, ‘Maybe we’ll just have an outpost or a touchdown space in the city and one in the suburbs.’ ”

Weitzel points to a law firm client that rents 30,000 square feet of office space in the city. As they are figuring out their post-COVID leasing in 2023, they are aiming to have a 10,000-square-foot office in Center City and a 5,000- to 7,000-square-foot counterpart in the western suburbs.

“They’re convinced that this trend is here to stay, and we don’t need all this space,” said Weitzel of office tenants more generally.

CBRE’s first quarter report shows that the total vacancy rate, including sublease space, is highest in the suburban Pennsylvania counties, where almost 23.5% is vacant in an inventory of over 62 million square feet (an 8.5% increase from pre-pandemic). In Center City, the inventory is almost 44 million square feet, and the total vacancy is 19.2% (a roughly 9% increase).

These overall numbers hide variations in both markets. In both the city and the suburbs, higher-end offices are in a stronger position and seeing much lower vacancy rates.

“There is still a core set of buildings in Philadelphia suburbs and in core [city] locations, where we have started to see signs of recovery in that trophy set and in very specific sub markets,” said Joe Gibson, associate director of research at CBRE.

But even in the high-end markets of western Center City, and the western suburbs, such as Radnor and Conshohocken, vacancy is ticking up.

In the first quarter of 2023, the vacancy rate in downtown Philadelphia’s trophy buildings inched above 10%. In the high-end suburban markets, vacancy climbed to almost 14.5%.

“We are seeing softening in the downtown trophy assets’ progress,” said Gibson. “But if deals are getting done, they tend to still go to those higher-end buildings, looking to amenities and quality space to get people back in the office.”

If even the trophy market is in a bind, that leaves many older or less recently renovated office buildings — known as Class B stock — in a desperate position. By mid-2021, the Wanamaker building faced a half-million square feet of vacancy, leaving more than half of its office space empty.

The sprawling Centre Square complex at 1500 Market St. has faced declining revenue and mounting vacancies for years. It suffered an outstanding loan balance worth at least 125% of the building’s value by the end of last year, forcing its loan into special servicing.

The Bourse building — renovated in 2018 — is struggling with occupancy rates of well below 50% too.

Philadelphia office market boosters say that the city’s travails pale in comparison to those of counterparts such as Chicago, San Francisco, and Washington, D.C. That’s because Philadelphia had fewer office jobs in the urban core before the pandemic, a weakness in 2019 that now means the remote work office crisis may not be as brutal for the city itself.

CoStar’s first-quarter report shows that Center City has substantially lower vacancy rates than Chicago’s Central Loop, New York City’s Financial District, Boston’s Financial District, and Washington, D.C.’s downtown — partially because of Philadelphia’s relatively few information and technology jobs.

“San Francisco or Washington, D.C., is in an absolute panic because these places had seen fast growth in single-use office districts,” said Paul Levy, head of the Center City District, which promotes downtown business. “These cities are dealing with very serious challenges. Being the tortoise here has helped us.”

Similarly, many Philadelphia offices were already converted into residential before the pandemic, boosting a Center City population that has already grown past its pre-pandemic peak.

With rising interest rates and construction costs, residential development is facing struggles of its own, so new conversions from offices to housing are on hold. But the appetite for residential and entertainment opportunities is still there, in a way that hasn’t been true for the return to in-person work.

“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,” said Gersbach. “But for whatever reason, not wanting to go into an office in the city.”