2025 will be a year of reckoning for Philadelphia’s office market

For the venerated Philadelphia law firm Dilworth Paxson, this December brought a flashback to 2020.

The company has gone fully remote again for at least the next four weeks, as it moves offices from its home of 15 years at troubled Centre Square to smaller, but more expensive, accommodations at One Liberty Place.

“In the old days, you would have to do this move over a long weekend and have people working literally around the clock,” said Lawrence McMichael, the law firm’s chairman. “In today’s world, we don’t need to do that. We like being in the office, but we don’t need to be in the office.”

The COVID-19 pandemic and the proliferation of remote work brought seismic changes to American workplaces. Nearly five years later, the region’s office landscape is smaller than it was and may shrink further amid a tide of expiring leases in 2025. On average, when companies have renewed or sought new leases, they have been downsizing by over 20%, according to real estate consultancy JLL.

Office leases tend to be executed on long timelines, so plenty of companies are still renting space that was locked in pre-pandemic. But next year, downtown Philadelphia will see the highest number of expiring leases between now and 2030, covering 1.6 million square feet, according to JLL and business advocacy group Center City District.

“There’s a higher than average share of leases coming up for renewal,” said Clint Randall, vice president of economic development at Center City District. “It’s a good time to focus on what choices these tenants are making, and what those choices can tell us about broader office trends.”

Many employers have downsized their offices as they require workers to come in fewer than five days a week, and many in-office mandates are often less than rigorously enforced. Foot traffic from nonresident workers downtown in 2024 is 73% of what it was in 2019, while in the Market Street office district west of City Hall, it is only 62%.

As a result, aging structures like Centre Square face staggering levels of vacancy, and their owners are awash in bad debt. A handful of such buildings have been sold for conversion to residential or hospitality, with the 1.4 million-square-foot Wanamaker building the latest slated for apartments, according to the Philadelphia Business Journal.

Even if demand for office space has permanently shrunk, building owners able to invest in quality space, and thus attract tenants, can still maintain healthy occupancy.

The region’s predominant office owner, Brandywine Realty Trust, reports larger average leases than it did before the pandemic and rising rents.

“We’re going through an obsolescence phase for some of the office inventory, but for good landlords with good product … it’s going to be a very, very positive landscape for the next several years,” said Jerry Sweeney, CEO of Brandywine. “The really good buildings have lower vacancy, so we are able to get the rent … we want.”

The trend toward less office space encompasses many employment sectors, but law firms are among the most aggressive downsizers.

The pandemic and its aftermath hastened space reduction in a sector that once boasted amenities like in-house law libraries. These are now being shed, along with other traditional accoutrements.

The international firm Morgan Lewis signed a 21-year lease on a new office building at 23rd and Market Streets just before the pandemic. It now inhabits 305,000 square feet, down from a previous 430,000 split across two buildings. The firm’s former headquarters at 1701 Market St. is being converted to residential.

It can also be easier for law firms to shrink because lawyers are not expected to be in the office all the time. They are often out meeting clients, traveling, or in court.

Dilworth Paxson requires many of its employees to be in-office three or four days a week, depending on their profession. For example, receptionists have to be in every day, whereas IT professionals are given generous leeway. But the lawyers have no such requirements. One person in Dilworth Paxson’s municipal finance department works entirely remotely from Israel.

The firm’s new home, as a result, saves space by eliminating individual offices for lawyers.

“We don’t need separate offices for five lawyers that are working from home,” McMichael said. “We need one office for the five lawyers who are working from home, and they can share it.”

He did note that the firm’s hybrid work policies remain under consideration and could change.

“We will settle into One Liberty first and see how things go before making any changes,” McMichael said in a follow-up email.

According to Center City District, large law firms have reduced their office footprint by an average of roughly 40% since the pandemic. But the downsizing trend isn’t true only of law firms.

“In terms of total share, there’s more law firms [shrinking], but it’s across industries,” Randall said. “It’s undeniable that the vast majority of industries are continuing to seek efficiencies when they renew their leases. They’re continuing to favor less space overall, so the total occupancy is continuing to go down.”

Consider a mainstay of Philadelphia’s employment market like Temple University. Many of the health-care and higher education jobs require being in person, but other roles are largely administrative.

“What it’s enabled us to do is … rethink priorities,” said Ken Kaiser, Temple’s chief operating officer. “Do we need to have new administrative space? The answer to that is probably no. If you would have asked me before remote work, I would have said yes, it’s something we’re definitely going to need.”

Office vacancy rates are still very high by historical standards, in both the city and the suburbs. A third-quarter report from real estate brokerage Colliers noted that vacancy in Center City increased to 20.4%, and in the suburbs to 19.8%.

The Colliers report noted that tenants of all kinds are leasing less than they used to: “a ‘large deal’ now typically means one or two floors rather than an entire building,” the authors said.

That doesn’t mean industry experts are prophesying doom. If anything, given some of the projections during the pandemic about the future office market, the situation looks better than it could have been.

“The good news is that as companies have realigned; they all still want an office,” said John Susanin, senior managing director with Colliers. “What we’re seeing is that the downsizing trend is really starting to wind down. A significant percentage of companies are saying we want our people back.”

The real estate analytics firm CoStar projects that 2024 will be the first year since 2018 that the Philadelphia region or Center City’s West Market Street corridor has seen more space leased than vacated.

Among office owners, the winners tend to be those at the top of the market. Brandywine’s Sweeney says the average lease with his company is substantially larger today than it was before the pandemic: 12,000 square feet vs. 8,000 pre-pandemic. (According to Center City District, however, the average Center City lease is almost 7,000 square feet, while in 2019 it was over 9,300.)

Although some of Brandywine’s new tenants may be downsizing, they are doing so by relocating from struggling buildings or submarkets to areas like Center City’s West Market Street, Conshohocken, or Radnor. The company has been able to raise rents over the last two years, he says, and kept occupancy above 90% in the city.

Sweeney is also bullish on employers requiring more in-office days, noting that smaller tenants with under 50,000 square feet have been more aggressive about reducing hybrid work. He believes bigger companies could still follow, noting the recent example of Amazon, which will require five days in-office beginning in January.

“Some tenants have downsized, clearly, but overall our expansions have outweighed our contractions,” Sweeney said. “You have to look beyond the headlines about this building having high vacancy or that building selling for this. The reality is the really good quality inventory is going to do very well.”