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As Your Needs for Office Space Change, Understand the Role of a Tenant Representative

Posted on April 7, 2020 by Mike Kushner in Blog, Commercial Real Estate, Tenant Representative/Buyer Agent No Comments

The outbreak of COVID-19 hitting the United States has brought with it a tidal wave of challenges and uncertainties. This has been a wakeup call for so many businesses and individuals who must now struggle to adjust. Particularly for business owners who either own or lease commercial real estate such as a retail location, industrial space, or offices, the order to work from home and stay at home has drastically changed their need for brick and mortar space.

Whether it’s right now or once COVID-19 has passed, it’s highly likely that businesses in Pennsylvania and across our nation will have a drastic shift in their commercial real estate needs. In such times, business owners should be reminded that having a tenant representative on your side to represent you and negotiate for you as you reduce the amount of space you currently occupy, move to new office space, or change the terms of your lease is highly beneficial.

In an effort to help business owners understand how a tenant representative can be a benefit to them, and how this relationship works, we want to help answer some of the most common questions surrounding a tenant representative’s role. This first of which is “How do tenant representatives get paid?” Too often, the answer is confused with or lumped into the same category as how listing agents, who represent the landlord or seller, are compensated. But this is not necessarily the case.

What’s important to note is that exclusive tenant representatives, also called buyer’s agents, are unique in that they exclusively represent those looking to rent or buy commercial real estate. They never represent the landlord or seller, and for good reason. As you can imagine, that creates a conflict of interest which you can read more about here.

To answer the question regarding how a tenant representative/buyer agent is paid, here is a breakdown of important points to provide a clear explanation.

Typical Commission

The amount a commercial real estate agent receives on a commission is calculated as a percentage of the total commercial property sale price or lease value. The percentages are negotiated in the listing agreement. It’s important to note that it is illegal due to anti-trust laws to set a market or industry-wide standard for commission percentages, but on average most commissions range from 4% to 8%.

The variance in commission rates is due to a number of factors. In areas that have a surplus of office space, brokers may receive higher commission to entice tenants to particular properties. Brokers may also get varying commissions for office, retail and industrial spaces.

Co-Broke Commission – No Cost to the Tenant or Buyer

While tenant representatives/buyer agents provide their clients with incredible benefits, it’s important to note that the tenant/buyer is not responsible for a tenant representative’s/buyer agent’s fees. Properties for sale or lease that are listed with a broker specify a commission to be paid to the listing broker and shared with the broker representing the buyer/tenant. Landlords are the ones responsible for paying the fees. Most landlords have budgeted for the payment of commissions.

Although tenant reps/buyer agents are incredibly helpful for tenants/buyers looking for commercial real estate, their services also benefit landlords or their listing agent, as they help fill vacancies. Because tenant representatives/buyer agents allow listing agents to quickly turn over empty space, they are often willing to pay for their services. As a result, a buyer/renter can usually enjoy the services of a tenant representative without having to pay anything.

One caveat is that in very rare circumstances, landlords or listing agents may refuse to pay the tenant representative’s fees. Normally, this only happens when the tenant representative was not engaged from the very beginning of the tenant or buyer looking for space which can muddy the waters. This makes it all the more important to begin any commercial real estate search with a tenant representative on your team.

Advantages of Working with a Tenant Representative

If a real estate broker representing the landlord/seller encourages you to do a direct deal without a involving a tenant representative/buyer agent, proceed with extreme caution. The landlord’s/seller’s broker will likely tell you that you will save money by eliminating the tenant representative’s/buyer agent’s fees, but the truth is that the landlord/seller is likely to pay the same amount to their own representative even if you forgo a tenant rep/buyer agent. Plus, not having an agent to advocate for you during the negotiation process could mean ending up with a higher rent rate and less than favorable lease terms.

It’s important to have the knowledge and expertise of a tenant representative/buyer agent to guide you through the leasing/buying process and represent your best interests. A tenant representative/buyer agent can also make your property search less time consuming by showing you only properties that they know fit your criteria. Think of them as your tenant/buyer “concierge.”

Despite the fact that the landlord is responsible for paying the tenant rep/buyer agent, you should rest assured that the tenant representative/buyer agent is working for your best interests. This is because they don’t get paid until you find a great deal!

Has the impact of COVID-19 caused you to rethink the use of your commercial real estate spaces? If you need to downsize or renegotiate the terms of your lease, keep in mind how a tenant representative can be an advocate for your best interests.

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Cannabis-Friendly States Get Major Boost in Commercial Real Estate

Posted on February 25, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

Already there are 33 states and the District of Columbia that have legalized marijuana use in some form. Many of these states, like Pennsylvania, allow for limited medical use. According to a recent article, dispensaries in Pennsylvania have sold more than seven hundred million dollars of medical marijuana since the Commonwealth implemented the program, just under two years ago. In that time, nearly 150,000 Pennsylvanians are now certified to buy weed.

While the debate of whether to legalize marijuana – medicinal or recreational – is heated, there is one aspect of this topic that is clear. The demand for the production and sale of medical marijuana is evident, both locally and nationwide. And for cannabis-friendly states, the demand for commercial real estate is on the rise. What does this mean for commercial real estate here in PA? Let’s take a look at a few key points.

Increased Demand for Both Commercial and Residential

States where medical and recreational marijuana are legal have seen increased property demand in both the commercial and residential sectors, according to a new study by the National Association of Realtors. The study also revealed that more than a third of real estate professionals polled said they saw an increase in requests for warehouses and other properties used for storage. In the same states, up to a quarter of members said they saw a spike in demand for storefronts, and one-fifth said there was a greater demand for land. States where marijuana has been legal the longest have seen the largest impact on both commercial and residential real estate.

A Double Edge Sword for Residential Real Estate

However, the residential sector has not benefited as much as the commercial sector; in fact there have actually been a few drawbacks as buyers assess the “new normal” of living near a grow house or dispensary. While between 7% and 12% of those polled said that they had seen increases in property values near dispensaries, between 8% and 27% said they’d seen property values fall. Homeowners are still adjusting to how they feel about purchasing property near areas of marijuana growth and consumption. In states where recreational marijuana is legal, 58 to 67 percent of residential property managers have seen addendums added to leases which restrict smoking on properties. The most common issue was the smell, followed by moisture issues.

CRE Investors See This as a Big Opportunity

Cannabis investors are buying up commercial property, particularly warehouses, in states where recreational and/or medicinal cannabis use has been legalized for more than three years, which was revealed in the same NAR study referenced above. Investors realize it is important to understand the supply and demand, and the regulatory dynamic in each state. Focusing on states with higher barriers to entry makes a license more valuable and makes that real estate more valuable. In 2018, warehouse demand in states with only medical use outpaced demand in states with recreational use, 34% to 27%, respectively, according to the NAR study.

The Economic Impact in Pennsylvania

Sales and participation have ramped up significantly since the program’s inaugural year. Last February, total sales had amounted to just $132 million, per the PA Department of Health. Fast forward twelve months, and the tally has risen to $711 million. That puts the Commonwealth at 439% sales jump from year one to year two. In a snap shot, Pennsylvania’s medical marijuana program has:

287,000 people registered
261,000 patients
1,800 registered doctors
1,300 approved doctors (practitioners)
168,000 active patients (2-2.5 visits a month)
4 million patient visits
$711 million in total sales
$288 million wholesale
$423 million in retail sales
$110 avg. purchase per visit
22 of 25 GPs are approved
15 of 25 GPs are shipping product
77 dispensaries are operational

Furthermore, dispensary operators don’t seem to think we’ve reached the saturation point yet. As more licenses are made available, and whatever lie ahead for further legalization of marijuana, one things is certain. As demand increases for marijuana, so will the demand increase for commercial estate.

What’s next for marijuana in Pennsylvania?

Back in October 2019, Governor Tom Wolf came out in favor of legalizing cannabis for recreational use. Last spring, a Franklin & Marshall College Poll showed that 59 percent, or nearly seven in 10 voters, support the idea of legalizing marijuana. But voter support alone is not enough. The legislation will have to pass both the House and the Senate, with much opposition particularly from the Republican Party.

While this doesn’t mean the possibility of someday legalizing recreational marijuana in Pennsylvania is off the table, it does mean there will be many hoops to jump through – just as there was for the legalization of medicinal use. Looking at the issue solely from an economic standpoint, there is much to be gained by continuing to open this market and remove barriers; however there are many other issues to consider.

Given the boost this has brought to commercial real estate, with the demand for more industrial and retail space, combined with more interest from CRE and cannabis investors, it’s wise to continue to watch for trends – both negative and positive. Looking to other states as examples also gives us insight into what to expect as the cannabis market in Pennsylvania grows, and how CRE professionals can continue to capitalize on the opportunity.

Do you agree with these trends and insights? Or do you have another viewpoint to share? Join in the conversation by leaving a comment below.

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Growing U.S. Economy Drives Demand for Commercial Real Estate

Posted on February 13, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

The current economic climate in the United States has been a bit of a roller coaster, and depending upon the industry you’re examining, you may find more ups than downs or vice versa. Trade wars, combined with a slowdown in the U.S. manufacturing sector and around the globe, shook up equity markets and businesses in 2019. But robust job growth has extended the spending power of American consumers, which is ultimately our nation’s economic engine, according to CoStar’s 2019 Year in Review of the U.S. Economy.

To put this into perspective, the United. States is currently experiencing the longest economic expansion since World War II. Additionally, key indicators point to the economy staying solid in 2020, which will extend the record bull run for U.S. commercial real estate. While there are some risks that could eventually move the nation toward a recession, as it stands, the growing U.S. economy is driving demand for commercial real estate, with many factors emerging as a result. Let’s take a look at what the most profound outcomes of this CRE growth.

The growing economy bodes well for demand for commercial and multifamily real estate.

What it means for CRE: Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.

Migration of workers from the Northeast and Midwest is growing the labor markets, which is fueling real estate demand, specifically in the South and U.S. West.

What it means for CRE: With the increase in labor as well as a growing demand for real estate in the South and U.S. West regions, CRE developers and investors should look to these markets as viable areas of growth. An increase in job creation also means a rising demand for office spaces and apartments. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

The answer to combat rising development costs and rental prices in urban areas may be micro-apartments.

What it means for CRE: Simply put, micro-apartments extract the most value from every square foot. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet.

Investing in industrial real estate, over retail, is the safer bet.

What it means for CRE: The industrial vacancy rate is extremely low, in many cities it’s below 5%, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique aspect of this changing market is the emergence of “click-to-brick” retailers, like Amazon, that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order. So for CRE investors and developers, industrial real estate carries more certainty and less risk than retail at this time.

Moving into the new decade, economists expect economic growth to slow somewhat as the labor market cools.

What it means for CRE: Consumer spending may lose some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment. For commercial real estate, 2020 should remain a solid year of growth, especially for the industrial market. Though real estate professionals should remain strategic and always be looking ahead to factors that could impact economic growth, and CRE growth as a result.

What is your view of the current state of the nation’s economy right now? How do you anticipate this changing in 2020? Share your thoughts and insights by leaving a comment below.

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Central PA’s Largest Commercial Real Estate Sales of 2019

Posted on January 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Office Leasing, Retail, Trends No Comments

There is much we can learn by analyzing a market’s largest commercial real estate sales in a given year. Looking at each the industrial, retail, and office sectors, it’s interesting to see the varying demand for size, price and class from sector-to-sector. This tells us a lot of about the direction of economic growth for a region; and for a real estate investor, it also showcases where the best investment opportunities for the future may lie.

Here is a look at the largest commercial real estate sales that took place in Central Pennsylvania in 2019, grouped by sector and sorted by highest sell price.

INDUSTRIAL

400-500 S. Muddy Creek Road – Albertsons Distribution Center (Lancaster County)

U.S. Realty Advisors purchased the Albertsons distribution facility for $117,050,000, or approximately $76 per foot for the 1,539,407-square-foot property on January 2, 2019. The subject Albertsons Industrial portfolio is comprised of a dry bulk/cold storage facilities in Denver, PA and in Melrose, IL. The sole tenant of the portfolio is Albertsons and they signed a 20-year lease with nine five-year extension options (and a one-year extension option) as part of the sale-leaseback transaction. Albertsons is under an Absolute Net lease paying $5/sf in base rent. Their lease requires that the tenant is responsible for operating expenses, real estate taxes, utilities, repairs, maintenance and capital expenditures, in addition to its obligation to pay base rent.

221 S. 10^th Street – (Cumberland County)

This 885,802 SF, class B industrial warehouse sold on September 26, 2019 to Blackstone Real Estate Income Trust for $84.8 million, or $96 per square foot. The sale is part of an industrial portfolio (see #4 below). At a total price of $18.7 billion, this sale of 179 million square feet of urban, infill logistics assets constitute the largest private real estate transaction in history. The portfolio includes high-quality logistics assets across 36 major U.S. markets that GLP aggregated over the past four years.

2601 River Road – Turkey Hill (Lancaster County)

W.P. Carey purchased the Turkey Hill food production and distribution facility for $70 million, or approximately $170 per foot for the 412,248-square-foot property on June 27, 2019. Built in 1980, Turkey Hill leased back the property for 25 years; the lease is triple net, with annual escalations. The buyer reported a weighted average cap rate of 7.1% for their acquisitions for the quarter, which totaled approximately $123.5 million, indicating this was probably priced in the 6s as the largest acquisition. The site was described as mission critical for the tenant, which has invested in many additions and improvements. It was noted that the site is powered through clean energy sources including wind turbines and hydroelectric energy. Turkey Hill had been a division of Kroger, but was sold earlier in the year to Peak Rock Capital.

21 Roadway Drive – (Cumberland County)

On September 26, 2019, Global Logistics Properties Ltd sold the class B industrial facility for $53.5 million, or $96 per square foot. The buyer was Blackstone Real Estate Income Trust. The 558,700 square-foot industrial facility was built on 36.16-acre site with an 8-acre pad site available to be developed into a 150,000 SF facility. The sale is comprised of an industrial portfolio totaling 64 million SF that Blackstone Real Estate Income Trust acquired located throughout the U.S. The sales price was reported at $5.3 billion. The portfolio was 95% leased at the time of the sale. The sale is part of a larger transaction in which Blackstone Real Estate Partners fund acquired 115 million SF for $13.4 billion; therefore, the overall sales price was reported at $18.7 billion for 179 million SF among two translations.

RETAIL

950 Walnut Bottom Road – Stonehedge Square Shopping Center (Cumberland County)

On November 25, 2019, this 88,657 square foot Giant anchored grocery center was sold for $30.7 million, or $346 per square foot to RW Partners, Inc.

2547 Brindle Drive – Shoppes At Susquehanna Marketplace (Dauphin County)

On April 1, 2019, The Shoppes at Susquehanna Marketplace in Harrisburg, PA were sold to an individual investor for $33.5 million, or $305 per square foot. The 110,000-square-foot shopping center was completed in 2004 and about 98% occupied by 25 tenants at the time of the sale. It was previously owned by a joint venture between Clarion Partners and Bayer Properties. The property was initially listed in January 2019 with an asking price of $38.17 million.

235-295 Cumberland Parkway – Parkway Plaza Shopping Center (Cumberland County)

On November 25, 2019, this 82,599 square foot Giant anchored grocery center was sold for $22.3 million or $270 per square foot. Parkway Plaza and Stonehedge Square (see #1) were part of a portfolio of Giant supermarket-anchored shopping centers in mid-to eastern Pennsylvania sold to RW Partners, Inc. for $127,000,000. The Giant grocery stores make up approximately 75% of this portfolio’s gross leasable area generate 80% of the portfolio’s revenue.

903-905 Loucks Road – Two Guys Commons (York County)

On August 19, 2019, Urban Edge Properties sold Two Guys Commons to Vastgood Properties, LLC for $13.15 million, or about $119 per square foot. At the time of the sale, the 110,980-square-foot retail property was fully leased to five tenants which included Crunch Fitness, Aldi, Ashley Furniture HomeStore, Tractor Supply, and Old Country Buffet. Based on in-place NOI, the transaction yielded a cap rate of about 7.5%.

OFFICE

100 Crystal A Drive – The Hershey Company (Dauphin County)

The three class B office buildings totaling 239,089 SF were sold on December 2, 2019 to the Penn State Medical Group for $28,445,835. Built in 1991, the buildings were sold by The Hershey Company for $118.98 per square foot. The seller was motivated to sell the property as they moved their operation into their corporate headquarters. The buildings will serve as Penn State Health headquarters and allow for moving some personnel from the Hershey Medical Center campus, creating space there to allow for expanded clinical services. Penn State Health leased office space in 2017 at that time The Hershey Company gave option purchase rights to the building. Penn State Health exercised their option to purchase the building.

425 N. 21^st Street – Plaza 21 (Cumberland County)

This 62,304 SF class B Office Building sold on September 16, 2019 to J & R Investments, Inc. for $9,300,000. Built in 1970 and renovated in 2009, this building was sold by Select Capital Commercial Properties for $149.27 per square foot. The building is leased to primarily to Geisinger System Services.

2400 Thea Drive – Synertech Building (Dauphin County)

On December 2nd, 2019, Istar Harrisburg LP sold the building in Harrisburg PA, to Real Capital Solutions, Inc for $9,100,000 or approximately $43.94 per square foot. The subject property is a 207,115, four-story class B office building located at 2400 Thea Dr in Harrisburg, PA 17110. The building sits on a 10.62-acre lot. It was constructed in 1999.

305 N. Front Street – (Dauphin County)

On July 17, 2019, this 120,000 SF office property was sold by Harrisburg Riverfront Development to Select Capital Commercial Properties for $7,950,000 or $65 per square foot. Built in 1989, this property sits on 1.2 acres

Closing Thoughts

In Central Pennsylvania and across the nation, it’s fair to say that the commercial real estate market delivered its fair share of ups and downs. Now that we’ve taken a closer look at the largest industrial, retail and office real estate sales of 2019, there are a few interesting points worth noting in each sector.

Industrial – Industrial real estate continues to lead all other real estate sectors with $1.2 billion in sales volume in 2019. The average price was $56.80 per square-foot, with the average property selling for $7.15 million.

Retail – A total of $200 million was invested in Central PA’s retail real estate market in 2019, a decrease from 2018. The average sale price was $142 per square foot.

Office – Annual volume levels for Central PA’s office real estate market stayed consistent with 2018 with $270 million in total sales. The average office property sold for $1.16 million. The average sales price was $102 per square foot.

What do you feel is the most important or interesting trend to emerge from the largest commercial real estate sales to take place in Central Pennsylvania in 2019? Share your thoughts by commenting below.

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Why Banks are Cutting Back on Commercial Real Estate Lending

Posted on January 17, 2020 by Mike Kushner in Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could further decrease in 2020. The cause is a combination of a few different factors – intense competition from non-bank lenders and rising delinquency rates to name a few. Mortgage lending is also predicted to be impacted by rising interest rates and tight housing supplies in many major markets.

This trend is not new, but rather has been slowly creeping in for years. In 2017, U.S. banks reported that demand for commercial real estate loans weakened in the second quarter, though foreign banks reported strengthened demand. Furthermore, loan growth slowed to 4.2 percent in 2018, down from 5.6 percent in 2017, according to bank call reports and Federal Deposit Insurance Corp. data.

Why exactly are banks cutting back on commercial real estate lending? And should this call for concern that a potential economic downturn is in the near future?

Rory Ritrievi, President and CEO of Mid Penn Bank

To lend some expertise on this topic, Omni Realty Group turned to Rory Ritrievi. Rory has more than three decades of experience in banking, specifically in Pennsylvania. For the last 11 years, Rory has served as President and CEO of Mid Penn Bank. Under his direction, the bank has grown from $550 million in assets and 14 retail locations to over $2 billion in assets and 39 retail locations.

Throughout his banking career, Rory has gained deep insight into when and why banks provide commercial real estate loans – and when they do not. Let’s learn what he thinks is going on in the current market, and the pending economic impact.

Omni Realty: How has commercial lending changed in the last 5 years?

RR: In the last 5-10 years, we have seen, for the most part, a return to credit fundamentals that seem to have been abandoned in the years leading up to the Great Recession. Back then it seemed like almost any deal made sense to Bankers. Now, the focus has been returned to analysis of absorption rates, discounted cash flows, borrower experience, reasonable cap rates, and strength of guarantors.

Omni Realty: In your opinion, what are the main causes of these changes?

RR: Losses. Loan losses of 2008-2012 gave a renewed focus to bankers on the true meaning of credit fundamentals.

Omni Realty: What changes would need to take place in the commercial estate market, or economy as a whole, to further improve commercial lending?

RR: Lenders need to evolve their underwriting and analytics to keep up with the evolving demographics. Baby Boomers are aging out so there is a need for more senior housing, multifamily rentals, luxury apartments, and assisted living. Additionally, high student loan balances are making the need for affordable housing in urban areas more prevalent. There is also a growing focus on renewable energy and green spaces. Finally, work from home is more prevalent which challenges the demand for traditional office space. When we look to retail, the shift toward online decreases the demand for mall space, while increasing demand for warehouse space. And we can’t overlook technology. Bankers need to not only know about emerging technology that stands to impact the market, but they must embrace it as a highly valuable tool to help them “keep up.”

Omni Realty: What do you anticipate the trend to be for commercial lending in 2020?

RR: In my opinion, 2020 will be a positive year in the lending business, particularly in Central Pennsylvania. We are in a good credit cycle and the interest rate yield curve is in decent shape compared to last year. There are geopolitical issues such as the impact of the general election, instability in the Middle East, and trade with China but I do not believe any of those issues will halt the progress of our local economy in 2020. Challenge it, yes and maybe slow it a bit, but not halt it entirely.

Omni Realty Group thanks Rory for sharing this valuable information and helping us to further understand the factors impacting how banks view commercial lending. Though banks are, for the most part, treading lightly in the market since the Great Recession, it’s encouraging to hear their renewed commitment to credit fundamentals, and helping both individuals and businesses make well-educated lending decisions.

Amidst a year that will no doubt bring change, it’s important we remain aware of the lasting impact factors such as elections and geopolitical issues may bring to our economy, both immediately and for years to come. Rory provides sound reason as to why we should not fear such changes, but rather maintain confidence in the banking economy, particularly here in Central Pennsylvania.

Do you agree with these insights, or have others to share? We welcome your feedback in the comments below!

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Central PA’s Growth in Commercial Construction Creating Workforce Challenges

Posted on December 19, 2019 by Mike Kushner in Blog, Construction, Local Market, Trends No Comments

With new commercial construction projects popping up all across Central Pennsylvania, it may appear as though it’s a great time to be in the industry. A demand for more commercial construction usually means businesses are growing or moving into the area, bringing with them jobs and economic growth. But there’s one looming challenge that stands in the way of this growth having only upside, and that’s the lack of commercial construction workers to take on this work.

According to Commercial Observer, this workforce challenge is not limited to the Central Pennsylvania region. Rather it’s a nationwide issue that could have wide-spread impact. A serious gap exists between the upcoming demand for labor and the number of available workers with the skills needed to fill those positions.

How does this gap in skilled laborers stand to impact the commercial real estate construction industry? And what, if any, solutions exist? For further input on this issue, Omni Realty Group turned to Dave Sload, President and CEO of ABC Keystone.

ABC Keystone was established in 1959 with the mission of advancing and defending the principles of free enterprise in the construction industry. Today, the organization is a powerhouse with 69 chapters and over 21,000 members. It is one of the leading organizations representing America’s business community and the construction industry.

“The construction industry is already in a critical state when it comes to finding skilled workers. They simply are not out there and it is forcing companies to pass on some projects,” says Sload.

Commercial construction companies being stretched so thin on labor that they decline work illustrates the severity of the labor shortage and the ominous threat it poses on the industry. The real struggle is construction spending is not predicted to subside. In fact, growth over the next two years is substantial.

According to FMI’s 2019 Industry Outlook, total construction spending in the Mid-Atlantic region, which includes Pennsylvania, New York and New Jersey, should increase 5 percent year over year, from $153.6 billion to $161.3 billion. It is predicted that this trend will hold in coming years, with anticipated spending increasing at a rate of 4.5 percent between now and 2022.

Combine this with the fact that the construction industry unemployment has dropped to an 18-year low, and you have the recipe for a sustained labor shortage that will lead to higher labor costs, longer project schedules, and inevitably quality and safety issues that will result from understaffed crew and under-qualified workers.

Sload adds, “Things will only get worse in the future. 40% of the construction workforce will retire over the next ten years. It will not be just the skilled workers we lose but also decades of institutional knowledge.”

Construction jobs are a cornerstone of our local economy, with thousands of well-paying jobs created every year. The latest job openings data from the Bureau of Labor Statistics suggests that since 2014, while the number of jobs openings has almost doubled, the number of hires has increased by just 14 percent. This underlines the fact that it is not a lack of jobs, but a lack of laborers to hire for such jobs.

Sload continues, “If that is not enough, this country is in desperate need of infrastructure legislation to update our highways, airports, wastewater treatment plants and water systems. Should an infrastructure bill pass in the range of what has been proposed, we would immediately be another 500,000 skilled workers short.”

All of this begs the question, “What is the solution?” Construction business owners and other hiring entities have started exploring all viable options for employing and retaining qualified workers. Possibilities include increasing and improving recruiting efforts; retaining qualified workers during periods of slow work so they are more readily available; investing in skills training and continued education programs; and working harder to nurture internal talent, especially to retain institutional knowledge.

While none of these solutions may be the “silver bullet” the industry needs right now, it’s evidence that the issue is not being ignored, and companies are willing to get creative and collaborative with whatever combination of solutions prove to move the needle.

Have you felt the impact of workforce challenges, either personally or within your business? Or do you have a different opinion as to how the commercial construction industry may address this issue?

Join in the conversation by leaving a comment below.

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4 Reasons Why 2019 Was a Great Year for Commercial Real Estate

Posted on December 8, 2019 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

For various reasons, 2019 proved to be a year of advancement and change. This was the year that the driverless revolution finally hit the road, China accomplished the first landing on the far side of the moon, and many other social and political issues advanced. We also lost legends like Doris Day and Karl Lagerfeld.

Beyond the tech, science, social, and political advancements, there were many other industries that were significantly shaped by 2019. Particularly for commercial real estate, there are four things that took place this year that changed the CRE industry for the better. Here’s why 2019 should be considered a great year for commercial real estate.

Low Interest Rates

An increased capital flow in the U.S. has helped to keep interest rates low despite an optimistic economic outlook. Additionally, the Federal Reserve issued three rate cuts in 2019, twice amid trade tensions with China. Economists predict that interest rates will remain low by historical standards for at least the near term. Additionally, multifamily originations are projected to hit an all-time high in 2020.

Despite the dip in mortgage rates, cap rates have stayed relatively flat, at 5.6% during the first half of 2019. Cap rates across all major segments, except for the retail sector, which has seen some cap rate expansion, have been largely unaffected by interest rate fluctuations and remain a favorable asset class. It’s expected that the hunt for yield will continue to drive more capital into real estate acquisitions in the near future.

Good GDP Growth

The United States kicked off 2019 with growth of 3.1% in the first quarter, the growth then slowed into second quarter. Ultimately GDP growth went on to exceed what was initially expected in the third quarter. The economy expanded by 2.1% between July and September, more than the initial reading of 1.9%, and more than the 2% growth rate in the second quarter. The last time it grew at a pace of less than 2% was in the final quarter of 2018.

Manufacturing, both in the U.S. and globally, was hit hard by the on-going trade war with China. On top of that, the positive effects from the 2017 tax reform (see below), which gave the economy a boost, also tapered off this year. Though economists are still expecting economic growth to slow further in the near-term, that slowdown appears to be more modest than initially expected

2017 Tax Reform*
It has been expressed that commercial real estate was the real “winner” of the tax reform of 2017. The new tax benefits these changes brought to commercial real estate investing include:

Individual tax rate – The tax changes made in 2017 included tax rate cuts across the board with corporate rates being slashed to 21% (which received most of the publicity). The individual rate reductions were not as dramatic, but do provide relief especially with the wider tax brackets.
Depreciation – The 2017 tax reform brought back 100% bonus depreciation through 2022, meaning the cost may be fully expensed in the year placed in service for qualifying property.
Interest expense limitation – As part of the 2017 tax reform, there is a new limitation that restricts the ability to deduct interest expense in certain situations. Fortunately, commercial real estate should not be impacted in most scenarios. The deduction for interest expense is limited to 30% of taxable income before interest, depreciation and amortization deductions.
Like-kind exchanges – Fortunately, the impact on like-kind exchanges on commercial real estate was minimal. Real property for real property exchanges are still allowed, meaning there is not a requirement to exchange into the same asset type. Meaning an apartment complex can be exchanged into a commercial property.
Tax-exempt Taxpayers – For tax years starting after January 1, 2018, losses from any CRE investment activity are only allowed to offset income or gains from that activity. Though this will likely accelerate tax liabilities for tax-exempt investors that have multiple investments generating unrelated business income, they can protect themselves by using an IRA to make additional investments in commercial real estate.

*The full details of the 2017 tax reformed are quite complex and beyond the scope of this article. As always, investors are encouraged to discuss the potential impact of this limitation with their tax advisor.

Low Unemployment

Historically low unemployment rates were an earmark of 2019. Contributing to this was a boom in CRE construction which created an increased demand for commercial construction workers. To put the current state of real estate growth into perspective, demand over the past five years has exceeded housing inventory by 1.4 million units, and vacancies are at their lowest levels since 1984. All of this demand for more real estate creates a demand for new construction, and more construction workers to complete it.

While (most) growth is a good thing, there’s a flip side to every coin. The nationwide shortage of construction workers posed significant challenges for the commercial construction industry, including struggles to meet deadlines, raised costs to complete projects, and firms having to ask their existing skilled laborers to do more work. While there is no quick solution to resolve this in the near-future, those in the field are making efforts to resolve the problem while keeping their CRE projects on deadline.

What Can We Expect In 2020?

The commercial real estate industry has benefited from the unusually long length of the current expansion cycle. But more than 10 years in, while growth in many fundamentals has slowed, the cycle marches on. Many experts believe we’ve entered a new kind of cycle marked by prolonged periods of low growth, low inflation, and low interest rates. Such an environment would prove favorable for continued stability in the commercial real estate sector for the foreseeable future.

Which of these four changes in 2019 do you believe to be most powerful? How will any of these also impact your industry? Join in the conversation by leaving a comment.

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How Central PA’s Growing Population Impacts Local Businesses

Posted on October 25, 2019 by Mike Kushner in Blog, Local Market, Trends No Comments

According to a 2018 report from the Pennsylvania Data Center, Pennsylvania’s population is expected to grow approximately 1% from the 2010 to the 2020 population, which is 1% better than no growth or a loss. What’s even more remarkable, is Pennsylvania’s growth is focused in about 16 counties, 14 of which are in Pennsylvania’s South Central Region, South East Region and Lehigh Valley, including Pennsylvania’s fastest growing county population in our own Cumberland County, here in South Central PA.

Furthermore, estimated population growth in those 14 counties is about 3.8%, which is driving Pennsylvania’s overall modest population growth, while counties in Pennsylvania’s West and Northern Tier are losing population with only Butler and Centre Counties showing expected population growth.

All of this data raises a very important question…

How does Central Pennsylvania’s changing population stand to impact the economic development of our local businesses?

To help answer this, we asked David Black, President and CEO of the Harrisburg Regional Chamber and CREDC, to weigh in from his perspective and the changes he is seeing taking place in Central Pennsylvania. Here is what he shared.

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Focusing on South Central Pennsylvania, which includes Adams, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Perry and York, it’s pretty good news for us. Population growth drives demands for products, services and community amenities – quality of life factors. The quality of life factors – everything from good restaurants, entertainment, quality public education, exceptional health care, transportation access and cost of living – are in part driven by more people paying more taxes and needing more services that feed into our positive economic cycle.

Given our region’s transportation advantage via highways, rail and air and other amenities, South Central Pennsylvania is a great place to live, raise a family and have fun, plus we are close enough that if large metros like Washington, Baltimore, Philadelphia or New York is your thing, just a few hours will get you there. Quality of life issues help to attract and retain workforce, which is the business community’s number one issue these days, due largely to the fact that 10,000 baby boomers nationwide are retiring each and every day, leaving workforce challenges in many industries.

People want to live in vibrant communities. Some people prefer urban lifestyles, some are suburbanites while still others prefer the more natural rural lifestyles. Guess what? South Central Pennsylvania has it all. You can live on your 10 acres in Perry County and be to work in 30 minutes in downtown Harrisburg or walk to your job in center city Harrisburg from your apartment downtown, or your own home in Midtown, or commute 10 or 15 minutes from your suburban community to your job.

Population growth helps to drive business growth, it helps to drive additional growth in our region. While we think of ourselves as Harrisburg or Lancaster or York, commuting patterns show us that people commute from county to county to work because they can. I have a theory, with no disrespect to Lebanon County, that everyone in the Palmyra area actually works in Dauphin County at someplace with Hershey in the name! Businesses provide jobs, but people with the ability to spend drive local economies while our strategic location and transportation advantage help to connect us to the global economy and make South Central Pennsylvania such a special place to call home.

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To offer additional insight, specifically on working age population growth in Pennsylvania, we asked Ben Atwood of CoStar, a national commercial real estate research firm.

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One of Costar’s recent articles entitled “Latest Census Data Shows Lehigh Valley Leading Pennsylvania in Working-Age Population Growth” stated that the latest data from the Census Bureau shows Pennsylvania continues struggling to lure in new industries and working age residents. The U.S. population aged 20-64 increased by 0.25% last year, but of Pennsylvania’s 67 counties, only seven surpassed this growth rate and 55 experienced net declines.

Harrisburg and its satellite markets are pretty underdeveloped (excepting Lancaster), relatively speaking. And the lack of modern office supply and relatively stagnant population growth means there likely won’t be major companies relocating into the area. Right now, that capital investment would have to be largely local, and how much are people locally willing to risk?

Central PA is in the position to grow in ways other areas in the state aren’t, but that doesn’t mean that growth will be rapid, or even guaranteed. The new developments will be riskier, hampering investor interest. This combined with stagnant, even waning growth in working age population can be cause for concern both near and long-term.

To some extent, the optimism about population growth is misplaced because it could just mean these areas will have a slightly easier go of it over the next few decades, as automation continues to eat away at blue collar jobs in retail, shipping, and professional services in the Commonwealth’s smaller markets.

Things change and evolve, and no one can predict the future, but a lot of growth in these areas is in transportation and manufacturing, industries with long term automation risks, and there’s plenty of reasons to believe automation will expand into white collar employment in the near future.

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Omni Realty Group is very grateful for David and Ben’s expertise and input. It’s fascinating, yet not surprising that population growth can have such a profound impact on quite literally everything else. Here in Central Pennsylvania we have a valuable opportunity to harness this growth and use it to fuel our economy. This further emphasizes the point that there are many unique benefits to live, work, and play in this region. Whether you call Central Pennsylvania home, are employed in the region, or simply enjoy visiting to experience its social offerings, you are playing an important role in the growth of our economy.

How else do you feel that our region’s changing population stands to impact local businesses? Join in the conversation by leaving a comment below.

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The Red Flags of an Unfavorable Commercial Real Estate Lease

Posted on September 9, 2019 by Mike Kushner in Blog, Commercial Real Estate, Tenant Representative/Buyer Agent No Comments

As a tenant needing commercial real estate space to run your business, it can be challenging to navigate the many twists and turns of finding the right space and entering into a favorable lease agreement. Your lease with your landlord can have a large impact on the success of your business, or it could cause many headaches. To ensure you’re entering into a fair and favorable agreement, let’s look at some of the most common red flags that can pop up in a commercial real estate lease.

Term of Lease – One of the most important pieces in a commercial real estate lease, short of the price, is the duration of the lease and how it’s structured. You want to be sure you fully understand when your lease begins and when it ends, especially when the landlord is making improvements to the space. A landlord may provide more favorable pricing or terms when entering into a lease that has a longer duration. While this is helpful from a budget perspective, be sure you feel confident that you will want to stay in this space for that amount of time.

Lease Renewal – Another possible red flag in a commercial real estate lease is when and how the lease will renew. When your current lease comes to an end, a landlord may desire the lease to auto-renew. As a tenant, you will want to be aware of this well in advance so that if you do not want to renew your lease you have options to exit the lease. Additionally, look to see if the lease specifies a change in price upon renewal. Sometimes there will be an increase that could hit you unexpectedly.

Lease Termination – Next, be sure you know the terms and penalties for breaking a lease. While it may not be your intentions to break the lease early, various factors impacting your need for the space could make it necessary. If the Lease imposes a steep monetary penalty for breaking the lease early, you may wish to negotiate that down to more favorable (and reasonable) terms.

Environmental Considerations – Some commercial real estate leases may specify that a tenant may not store any hazardous materials on the premises. This is not typically an issue; however, you will want to be sure that included in the lease is a warranty from the landlord that the premises are free of such hazardous materials. In a situation where you plan to use the commercial space (such as a warehouse) for storage of consumables (i.e., food and drinks), you may want assurance that your inventory is not likely to be contaminated.

Insurance – Be sure to check the required minimum coverages for a tenant’s liability insurance. Typical coverage minimums are $1 million per occurrence and $3 million in the aggregate. If the lease specifies higher minimums at a price that is concerning, you will want to make this part of your negotiations before signing the lease.

Maintenance – A commercial real estate lease should outline who is responsible for the repairs and maintenance of all building systems, including HVAC, electrical and plumbing. Should the lease place the responsibility on the tenant, you may wish to renegotiate this. In a situation where the tenant is only leasing a small percentage of the overall building space, it’s unusual for the tenant to assume the costs of repair and maintenance for things that impact more than their rented space.

Defaulting – Closely review the language in the lease regarding missed or delayed rent payments. It is reasonable to request at least one written notice during any 12-month period (to account for a reasonable mistake), as well as a 5-day grace period for rent payments.

Relocation – Some commercial real estate leases may include a section about relocation. Does this grant the landlord the right to relocate the tenant? Under what terms? Pay attention to this piece as it could greatly inconvenience you, if it ever takes place.

While this is by no means an exhaustive list of red flags of which you must be aware when entering a commercial real estate lease, this should provide a great starting point. What’s most important is to review every document closely, ask for clarification, and seek professional tenant representation early in the process. Having an exclusive tenant representative on your side will provide an added layer of knowledge, experience, and protection that will put you in the best position to negotiate a fair and favorable lease.

Do you have a question related to your commercial real estate lease? Reach out to Omni Realty today so we can help you find an answer!

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Legal Pitfalls That Could Impact Your Commercial Real Estate Deal

Posted on July 1, 2019 by Mike Kushner in Blog, Commercial Real Estate No Comments

Legal matters can arise just about anywhere and in any industry. Commercial real estate is no exception. In fact, commercial real estate transactions can be filled with legal pitfalls if you don’t take proper precautions or seek professional advice.

What legal challenges are common to commercial real estate? For the answers, we looked to an experienced real estate attorney who has helped many clients navigate through such challenges.

Hannah Dowd McPhelin is a partner with Pepper Hamilton LLP, resident in the Harrisburg and Philadelphia offices and vice chair of the firm’s Real Estate Practice Group. Attorney McPhelin concentrates her practice in real estate matters and other business transactions, including the acquisition, sale and financing of commercial real estate properties and leasing of office, retail, warehouse and industrial space, representing both landlords and tenants. She is an Accredited Professional and was named a member of The Counselors of Real Estate in 2017.

Omni Realty Group had the pleasure of interviewing Attorney McPhelin to further examine the legal pitfalls that could impact commercial real estate deals. Here’s what we learned.

Omni: Describe some of the most common legal challenges you’ve seen arise when working through a commercial real estate deal.

Hannah Dowd McPhelin: I’ve worked through a lot of different challenges on a variety of deals, but an enduring theme is that some level of trust between the parties is necessary to get a deal done efficiently. If there is no trust or trust erodes, it is extremely difficult to work through challenges and get to closing, and it makes the deal much more expensive for all parties.

Omni: What conflicts can arise between the LOI and the lease? How can this be avoided?

HDM: The issue I see most often is that, because LOIs are typically not binding, a party may not raise concerns at that stage and will believe those terms can be “re-negotiated” in the lease — this leads to mistrust and deal delays. It is better to raise material issues at the LOI stage so both parties do not waste time and resources when there is not a meeting of the minds. I also recommend that the LOI be a short and concise document containing only the most important terms. A long LOI slows down deals and makes it more likely that you will do a second round of negotiations on particular issues when you negotiate the lease.

Omni: How can an attorney help parties avoid legal pitfalls in commercial real estate transactions?

HDM: A good deal attorney should be creative and look to solve problems as they come up. Every deal has certain issues, but an attorney who only spots issues without offering useful and practical solutions to them is not helpful to the process and reduces the chance that the deal will get done. Frank and open discussions among the parties and their attorneys are the most useful tool in avoiding pitfalls and making sure that the deal is documented in such a way that each party understands its obligations and risks.

Omni: What are the benefits of using a commercial real estate broker?

HDM: Similar to a good attorney, a good broker can be very useful in moving a deal forward, particularly over any rough patches. A broker’s knowledge of the market and other options in the market is essential to understanding a party’s leverage, and a good broker has strong relationships in the relevant market that benefit his or her client.

Omni: For tenants/buyers, how will using an exclusive tenant representative help avoid conflict of interest in a CRE deal?

HDM: Exclusive tenant representatives are particularly helpful to companies that are not in the real estate industry but have real estate needs. The representative’s knowledge of the market, the tenant’s options, and the deal process helps set the tenant’s expectations and assists the tenant in making efficient decisions.

Omni: When entering a commercial real estate transaction, what is the best time in the process to engage outside professionals like attorneys and/or commercial real estate brokers?

HDM: As early as possible. A broker should be engaged when a tenant first considers a move in order to best understand the options in the market and to help the tenant make a considered decision. Ideally, an attorney is engaged in the LOI stage. As an attorney, I find it helpful if I can do a quick review of the LOI before it is signed, as I may see issues that will eventually become big problems in the lease if not addressed at the LOI stage. Often, what I am doing is asking a few follow-up questions to make sure the parties have considered how certain terms will play out in the lease.

Navigating commercial real estate transactions can come with many challenges. What’s most important to remember is that any successful deal must be built upon a foundation of trust. Additionally, seeking the input of an experienced commercial real estate broker, particularly one that is an exclusive tenant representative, will ensure your interests are represented. Finally, having the counsel of a real estate attorney on your side to review any documents and spot issues that could grow into bigger problems down the road can be invaluable to the success of your transaction.

To learn more about Attorney Hannah Dowd McPhelin or Pepper Hamilton LLP, please visit: www.pepperlaw.com.

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