Timothy Stephenson, Regional Manager, Marcus & Millichap

In an interview with Invest:, Timothy Stephenson, regional manager at Marcus & Millichap, discussed the market dynamics in the Greater Philadelphia commercial real estate sector, noted the shift in investor demand across submarkets, and highlighted key trends across life sciences expansion and adaptive reuse opportunities.

Over the past 12 months, what would you say have been the key milestones or achievements for Marcus & Millichap, particularly in Philadelphia?

Reflecting on the past year, one of the most notable achievements was the performance of our agents. Locally, in Philadelphia, 55% of our agents experienced their career-best year in terms of deals transacted and earnings. Additionally, 86% performed better than they had in the prior 12 months.

This success can be attributed to two primary factors. First, there has been a rebound in the market. Second, our agents doubled down on their efforts, whether through increased outreach, more meetings, or a commitment to skill development and training. Regarding market dynamics, I do not believe demand has shifted significantly. Rather, sellers have adjusted their expectations after recognizing they may have missed the peak of the market. This does not mean properties are not achieving strong valuations, but compared to 2021, when interest rates were at 3%, many owners received difficult news in late 2022 and early 2023 about declining values.

Property type has played a role in these trends. For example, office spaces have seen more significant value decreases, while retail and multifamily properties have maintained relatively stable values. Beyond market conditions, our agents’ dedication to improving their skills and expanding their networks has been instrumental in their success.

How would you describe your current positioning and competitive edge in the Greater Philadelphia commercial real estate market?

Our current positioning is strong. We have top-performing agents and teams across every asset class within the Philadelphia Metropolitan Statistical Area. I define our market focus as areas within a three-hour drive from our office, as these are the regions we prioritize serving.

What sets us apart is our approach: delivering Wall Street-level service to Main Street owners. Our core clientele consists of private owners, ranging from highly sophisticated investors to business owners who have held properties for 20 to 30 years. For many of these individuals, real estate was secondary to their primary business.

Our differentiation lies in our advisory approach. We prioritize the client’s long-term goals over immediate transactions. For instance, there have been multiple instances in the past 12 months where we advised clients against selling, even though it would have been financially beneficial for us. Our philosophy is that doing right by the client yields better long-term results.

Real estate ownership is often tied to broader life goals, whether it be funding education, supporting nonprofits, or securing financial stability. Our role is to align their real estate strategy with these objectives. This client-first approach, combined with our structured deployment across all asset classes, positions us to capture greater market share in the next five years than we have in the previous five.

What are some of the major trends shaping the commercial real estate landscape in Philadelphia, and how is Marcus & Millichap adapting its advisory approach in response?

Let me begin with notable trends, and I will incorporate some recent deals as examples. The life sciences and healthcare sectors have experienced significant expansion. Philadelphia has outpaced all other Northeast metros, adding 23,000 new jobs in this sector, which is a 4% increase.

One factor driving this growth is the relatively lower office rents in Philadelphia, which are approximately 30% below those in DC or Boston. This has helped keep office vacancies low. Despite national trends of declining office attendance, Philadelphia’s office occupancy remains strong. For example, the parking garage in my building frequently reaches capacity, and rates have increased due to demand.

Another advantage is Philadelphia’s talent pool, supported by renowned universities such as Drexel, Temple, Villanova, and Penn State. Many graduates choose to return to Philadelphia after studying elsewhere, drawn by the lower cost of living compared to New York or DC. This has spurred multifamily development, though it has also led to challenges.

The city previously offered 10-year tax abatements for new developments, but to curb excessive applications, they required projects to break ground to qualify. This resulted in a surge of new apartment deliveries within a short timeframe, creating a supply shock. While absorption remains strong, concessions have increased, and investors are scrutinizing effective rents more closely. For example, we recently sold a property at 2209 North Broad Street near Temple University. This new construction received its certificate of occupancy in late 2023 and leased up quickly, but concessions and delinquent rents required careful underwriting. We closed the deal at a 7.78% cap rate with minimal retrades. The buyer’s strategy focused on enhancing management to stabilize operations.

The office market is poised to strengthen in the latter half of this year, while multifamily investors remain cautious due to supply dynamics. Our advisory approach adapts by emphasizing thorough due diligence, realistic valuations, and aligning investment strategies with clients’ long-term objectives.

Are you seeing a rising appetite among investors for adaptive reuse and redevelopment opportunities in the Philadelphia area?

That is a more challenging question to answer. Investors are still interested, but the actual use cases vary significantly. Recently, I spoke with the owner of an industrial property in the city leased to a daycare. The daycare needed extra space but could not find it elsewhere. Industrial rents were lower than office rents, so they leased the space and built it out creatively. For example, instead of an outdoor playground, they installed one indoors. This demonstrates the flexibility in repurposing properties.

Regarding full redevelopments, the viability depends heavily on location. In Philadelphia, development activity persists, though there has been a slowdown. Prior to discussions about tariffs and political policy, the influx of new multifamily deliveries contributed to this deceleration. Developers are cautious about launching new projects at this moment, but this does not mean long-term opportunities have disappeared. In contrast, suburban markets remain robust.

For instance, we recently sold an approximately 18,000-square-foot industrial building in Penndel, located in Bucks County, which is a highly affluent area within the Philadelphia metropolitan statistical area. Initially, the agent was hesitant about the assignment, but after pricing it realistically, the response was overwhelming. The building, originally constructed in the 1930s, was in poor condition, with structural issues and even facing potential condemnation. Despite this, there were over 200 active leads, three dozen property tours, and multiple offers. Ultimately, it sold for 20% above the asking price. The challenge was coordinating with the out-of-state seller, as buyers moved quickly. Another example involves a former motel in South New Jersey that is being converted into micro-apartment units for veterans. These creative reuse cases highlight the evolving demand for adaptable spaces.

Are there any particular sectors, neighborhoods, or submarkets that stand out as especially promising?

Development remains strong in affluent areas such as Bucks County and the Main Line, which spans Montgomery and Delaware Counties. There is sustained demand for apartments and a notable uptick in office space demand. For example, the Villanova submarket has seen the strongest absorption of Class A office space in over a decade. Employers are prioritizing high-quality spaces to attract top talent.

Philadelphia’s population growth, driven by job availability and relative affordability, further fuels demand. Employers seek impressive workspaces to appeal to new residents. Meanwhile, South New Jersey is experiencing significant industrial development, with several million square feet under construction, though it has not garnered much attention. Bucks County is also seeing growth in industrial and multifamily projects.

An interesting trend is the heightened demand for smaller spaces. A client conducted a test by advertising two listings: one for 5,000 square feet of flex industrial space and another for 100,000 square feet. Over two weeks, the smaller space received over two dozen inquiries, while the larger space only attracted two. This disparity reflects the needs of small businesses, last-mile delivery services, and expanding enterprises.

What is your outlook for the Philadelphia CRE market over the next three to five years?

The primary focus is delivering advisory services to clients. While brokerage involves transactions, the current market’s uncertainty has been the highest I have witnessed in nearly a decade, necessitates a stronger emphasis on guidance. Factors such as COVID-19, tariff policies, and their ripple effects on industrial, office, retail, and multifamily sectors underscore the need for informed decision-making.

Nationally, our firm has increased investor webcasts, featuring insights from industry leaders like our CEO, Hessam Nadji, to keep clients updated on macroeconomic impacts. We are also enhancing technology integration, particularly between brokerage and capital markets teams, ensuring comprehensive discussions on debt and financing during sales consultations.

Our auction platform, launched two years ago, has grown remarkably, now ranking as the industry’s second-largest. With an average of 23 bidders per deal and sales exceeding 125% of reserve prices, it dispels the misconception that auctions are solely for distressed assets.

Locally, we aim to increase engagement with property owners through frequent market analyses as we shift from updates every two to three years to every six to twelve months. We also prioritize talent development, expanding training programs to maintain high service standards. Ultimately, our goal is to combine Wall Street-level expertise with Main Street-level client care.