JUMPING THE CHASM: PHILADELPHIA'S COMMERCIAL OFFICE SECTOR IN TRANSITION

JUMPING THE CHASM: PHILADELPHIA'S COMMERCIAL OFFICE SECTOR IN TRANSITION

BY BENJAMIN J. CONNORS, ESQ. CAE, PRESIDENT & CEO | GENERAL BUILDING CONTRACTORS ASSOCIATION

Philadelphia's commercial office sector stands at a crossroads, influenced by evolving work patterns and economic shifts. In response to these changes, the General Building Contractors Association (GBCA), in collaboration with IBEW Local 98, commissioned Econsult Solutions to analyze the upcoming decade's construction trends.

The collaboration resulted in the report, "Philadelphia Construction Forecasts 2023-2033," which is backed by industry insights and provides a comprehensive view of both the current state and future prospects of the construction industry.

Post-Pandemic Commercial Office Sector

Philadelphia's commercial office market is experiencing the beginning stages of what could be a significant transformation and departure from the historical status quo. The adoption of remote and hybrid work models during the pandemic resulted in an oversupply of office spaces, with national estimates suggesting a 10-20% excess of available office spaces.

This excess leads to heightened vacancy rates and an imbalance in supply and demand, specifically in larger office spaces that offer 50,000 square feet of office space. The "Philadelphia Construction Forecasts 2023-2033" report predicts a notable downturn in the commercial office sector between 2024 and 2026, resembling a recession within the commercial real estate market.

This downturn is driven by the substantial decrease in demand due to a collective shift in workplace culture due to the pandemic. As companies and their employees adopt a more remote or hybrid culture, less office space is needed by companies to provide their employees. Combining increasing interest rates and a corresponding increase in the cost of capital, office space is economically less appealing to companies. This makes the cost to acquire or renovate real estate more difficult in general.

The "Philadelphia Construction Forecasts 2023-2033" report anticipates a stabilization in demand for office space after 2026, with demand expected to eventually reach about 7080% of pre-pandemic levels. However, due to a significant slow in office space demand from 2024 to 2026, the overall demand for new office construction is expected to only reach 60% of what was seen in the previous decade.

Filling The Gap

In light of the supply-demand gap, the market for commercial properties is predicted to undergo a significant repricing period. This adjustment could be mitigated in part by implementing a new strategy to repurpose commercial office spaces to match and anticipate future industry trends.

As demand dwindles, an opportunity to transform these spaces for alternative uses like residential, retail, or mixeduse developments emerges. This transition presents a partial solution and opportunity to mitigate the oversupply of office space but introduces its own set of hurdles.

Repurposing results in considerable architectural and infrastructural changes to consider. Changes can range from redesigning layouts to updating essential systems and aesthetics while still meeting the requirements of new uses. Converting office buildings to residential standards involves complexities and expenses that often surpass those of new constructions, which makes the opportunity less appealing financially for the industry to adopt.

Despite these obstacles, repurposing offers a unique opportunity to rejuvenate urban areas, tackle housing shortages, and create dynamic and multifunctional environments within the landscape of the city. As the industry evolves, opportunities arise for construction to evolve alongside the industry.

Municipalities throughout the country are now focused on incentivizing the process of repurposing commercial office space. With the realization that commercial vacancies create tax revenue voids, cities are quickly recognizing that proactive policies to increase space utilization can help minimize those future voids.

Another way to fill the gap left by commercial office decline is the anticipated surge in publicly funded projects. Pennsylvania is expected to receive substantial federal funds, and as a result, the latter part of the decade is forecasted to be ripe with public project activity.

This surge presents an opportunity to compensate for the commercial office construction decline. However, challenges in public sector projects like slow payments and outdated delivery methods like multi-prime bidding create obstacles to success. Without addressing systemic issues, the risk of fewer project completions and underutilization of funds persists due to sunset clauses in federal legislation.

Successfully capitalizing on this opportunity requires overcoming hurdles that arise with publicly funded commercial projects. Moving past these hurdles, in combination with office space repurposing, can help bridge the industry's upcoming divide.

The Future for Philly

The commercial office sector in Philadelphia is at a crucial juncture. As it faces a decline in traditional office space demand, a unique opportunity for reinvention arises.

The sector’s future hinges on the industry’s ability to rise to the challenge and navigate potential problems with innovative, flexible, and strategic solutions. Embracing change, and prioritizing quality and sustainability, while at the same time exploring new functions for existing spaces is crucial for overcoming current barriers. This period of transformation offers a chance for the commercial office sector to emerge more robust, adaptable, and aligned with the evolving needs of Philadelphia's urban landscape.