Studies see potential lift for metro Philly’s office market in post-virus boost for life sciences

The Philadelphia region’s office market may recover more smoothly from the coronavirus than other metros’, thanks to the major role played by its health-care industries, according to a report by national real estate services firm Newmark Knight Frank.

While office leasing is likely to take an immediate hit from the plummeting economic activity that has accompanied efforts to contain the pandemic, the region’s “health-care concentration is a prescription for office-market resiliency,” Lisa DeNight, research manager at the NKF’s Philadelphia office, wrote in the report published late last week.

“Our office market may be more resilient than others around the country," she wrote. “The recession-resistant health-care industry is the backbone of the Greater Philadelphia market,” while the retail and hospitality industries, "the hardest hit by the crisis, have a smaller-scale local impact on office leasing.”

NKF’s findings are consistent with those of a separate report released last week by another commercial real estate firm, Colliers International, which also forecast increased activity in health-care and the life sciences in the wake of the virus.

“Investment in the life sciences will likely be buoyed, even accelerated, by the impact of this pandemic,” Joseph Fetterman, the Philadelphia-based head of Colliers’ life-sciences practice, wrote in that report. “Funding and investment will be directed at emerging drug development companies to accelerate the pace of delivering cures.”

The Colliers study broadly addresses the expected growth of the nation’s life-science industries, without specifically discussing the impact for Philadelphia. But NKF’s report identifies metro Philadelphia as a chief beneficiary of that growth, due to the health sectors’ existing dominance in the region.

Health care accounts for more than 18% of the region’s jobs, a greater percentage than in any other major metropolitan area in the country, according to the NKF study. Employment in that sector “has grown every year by the thousands during recessions and boom times alike since at least 1990,” NKF’s DeNight wrote.

Health-care tenants in Philadelphia and its suburbs leased 800,000 square feet of office space last year, the second highest amount after law firms, which got an atypical boost from Morgan Lewis’s short-term lease renewal ahead of its move into its planned new Market Street tower in 2023, according to NKF.

The largest current construction project in Philadelphia and its four surrounding Southeastern Pennsylvania counties, meanwhile, is University of Pennsylvania Health System’s 1.25 million-square-foot patient tower, scheduled to open next year along the Schuylkill close to South Street, DeNight noted. Work on the project has been permitted to continue under a waiver granted by the state, sparing it from the ban on non-essential business.

Still, NKF and Colliers both see a life-sciences slowdown in the pandemic’s immediate aftermath, as companies downsize or delay planned expansions to keep themselves solvent.

“The uncertainties of the future [have] caused rapid-growth drug companies to pump the brakes, at least temporarily, on proposed expansions," Colliers’ Fetterman wrote.

“It is unlikely that this will alter the overall demand for ... lab and manufacturing space in the long run,” Fetterman continued. But "it will create short-term apprehension among users, owners, lenders and developers.”