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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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Beyond the Bio with Mark Disanto from Triple Crown

Posted on October 21, 2019 by Mike Kushner in Blog, Guest Blogger No Comments

For more than four decades, Triple Crown Corporation has shaped Pennsylvania real estate through construction, land acquisition, and residential and commercial property management. The company has built an impressive portfolio of properties ranging from warehouses, office and retail space, rental communities, and even vacant lots that can be developed into just about anything to need.

At the heart of Triple Crown Corporation is its people. As part of the senior leadership team, Mark Disanto, the company’s CEO offers valuable insight into the industry, and the vision for the company. Mark has built a successful career from a blend of hard work, knowledge, and experience. But beyond his professional resume, there is a lot we can learn from Mark on a more personal level.

Take a look as Omni Realty Group goes “beyond the bio” and asks Mark for answers to questions you’re not likely to read on his Linkedin profile.

Omni: Describe a “typical” work day for you.

Mark Disanto: A typical day for me starts around 5:30 or 6:00 AM. I either exercise at home or play tennis in the morning. I am usually at the office between 7:00 and 8:00 AM and very rarely leave before 6:00 PM. Throw in a couple nighttime meetings with municipalities and extra time on Saturdays and in the evenings and the work week is usually 60 to 70 hours.

Omni: What is the best part of your job?

Mark Disanto: I have great flexibility in my job. I have time in the office. I have time inspecting job sites and looking at new acquisitions. I like the flexibility. However, the best part of my job is watching the company grow and seeing the new leadership expand the company both in the property management and construction divisions as well as our geographical footprint.

Omni: What has been the most difficult part of your job?

Mark Disanto: The continued regulation of our industry is probably the most troublesome and difficult part of our business. There are so many regulations in the building codes, the land development and subdivision codes, other state permitting processes, as well as federal regulations. None of these take into account the reasonableness of the burdens placed upon the builder and developer, cost versus benefit and time delays. We continue to hear about a shortage of affordable housing and the reason for this is strictly due to the regulatory environment we live in today.

Omni: If your career never took you into real estate, what else would you likely be doing?

Mark Disanto: I would probably be on Wall Street running a hedge fund and giving Ray Dalio a run for his money.

Omni: What has been your favorite Triple Crown project, and why?

Mark Disanto: I think I have two. The first was done about 17 years ago in Silver Spring Township. Georgetown Crossing was our first large apartment community containing 400 townhome and flat stack apartments. It is a beautiful property off route 114 in Silver Spring Township and our premier community. We still own it and will probably never sell it.

More recently Blue Ridge Village tops the list. This is an exciting mixed use community in lower Paxton Township that combines retail, commercial, apartments, townhomes and single-family homes along with a 32 acre park. This is a true livable, walkable community. The approval process was collaborative and respectful of the community and the Township. It took a lot of effort on our part, but I can assure the residents that this will be a premiere community that will significantly enhance the township.

Omni: What project has been your biggest failure or disappointment?

Mark Disanto: We bought a property out of market about 20 years ago at an auction and did not have sufficient due diligence completed upon it. When we went to the township for the first time it was like walking into a hornets’ nest. We eventually decided to cut our losses and re-sold the ground at auction for a loss. Out of the hundreds of developments and projects that we have done, we’ve only lost money on two deals. We are pretty proud of this.

Omni: What motivates you?

Mark Disanto: I just like to be engaged and like to see the company and the employees succeed. We set our strategy for three-year time frames and have quarterly meetings with our strategy review team and make sure we are all rowing the ship in the same direction. When everybody has purpose and they are all heading to the same goal line and supporting one another along the way, it makes for a very fun journey. I don’t need to work as hard as I do, I just have too much enjoyment with it to slow down.

Omni: Do you have any pet peeves?

Mark Disanto: I don’t think so. I get very frustrated when my volleys are not crisp on the tennis court!

Omni: When you’re not in the office, where can you most likely be found?

Mark Disanto: When I am in Harrisburg, it is usually with the family which includes the five grandkids, or working around the house and in the garden in the summertime, or in a tree stand in the fall trying to find the elusive big buck, or on the tennis court 2 to 4 days a week. If out of Harrisburg it could be anywhere in the world!

Omni: And finally, what career advice would you give to your younger self?

Mark Disanto: I would say, do not doubt your abilities. If you have an idea you want to execute then write it down and write a plan on how to achieve it. Review the plan both upstream and downstream with your staff. If you don’t have a staff, take it to people you respect and really try to poke holes in it. Once it’s well vetted, then work diligently and hard at it. A lot of people say this person was “lucky.” That’s usually not the case; a lot of strategic thought and hard work creates what people call luck.

Omni Realty Group thanks Mark for such candid and thoughtful answers to these questions. There is a lot of inspiration that can be found “beyond the bio” and on a more personal level. You can learn more about Triple Crown Corporation and its services by visiting them at https://www.triplecrowncorp.com or on Facebook and Twitter @TripleCrownCorp.

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Central PA’s Largest Commercial Real Estate Sales of 2018

Posted on February 25, 2019 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Office Leasing, Trends No Comments

Central PA’s Largest Commercial Real Estate Sales of 2018

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 2018, grouped by sector and sorted by highest sell price.

INDUSTRIAL

1. 2 Ames Drive – Amazon (Carlisle)

This 700,000 SF, Class A industrial distribution building sold on December 20, 2018 to MetLife Real Estate Investments for $74,600,000. Built in 2012, this building was sold by American Realty Advisors for $106.57 per square foot. The price represents a 4.89% cap rate. American Realty Advisors had acquired the property in 2015 for $62.475 million.

2. 3700-3900 Industrial Rd – Supervalu (Harrisburg)

This 750,000 SF, Class B industrial building sold on May 1, 2018 to Fortress Investment Group LLC for $38,373,479. Built in 1985 and renovated in 1999, this building was sold by Supervalu Inc. for $51.16 per square foot. The lease agreements between Supervalu and the new landlord had an initial term for 20 years, with five five-year renewal options on a triple-net lease.

3. 6345 Brackbill Blvd – Exel Logistics (Mechanicsburg)

This 507,634 SF, Class B industrial warehouse sold on April 5, 2018 to Penwood Real Estate Investment Management, LLC for $33,100,000. Built in 1985, this building was sold by the Abu Dhabi Investment Authority for $66.20 per square foot. The price represents about a 6.15% cap rate on in-place income.

4. 102 Roadway Drive – Saia, Inc. (Carlisle)

This 61,658 SF, Class C, truck terminal along with 40 acres was sold in October 2018 to Saia for $32,000,000. The additional acreage pushed the sales price to over $518 per square foot. YRC, the seller, still owns and occupies the larger industrial building next to this property.

5. 571 Independence Ave – Upper Allen Business Park (Mechanicsburg)

This 378,000 SF, Class B industrial warehouse sold on August 22, 2018 to Prologis, Inc. for $24,971,824. Built in 1999, this building was part of a portfolio sold by DCT Industrial Trust for $66.06 per square foot. Prologis, Inc., a global leader in logistics real estate, acquired DCT in an all-stock acquisition of for $8.5 billion, including the assumption of debt.

RETAIL

1. 6416 Carlisle Pike – Silver Spring Square (Mechanicsburg)

This 342,603 SF power center anchored by Wegmans was sold on April 17, 2018 to The Wilder Companies for $88,810,000. Built in 2007, this building was sold by Silver Spring Square, LLC for $235.87 per square foot. The price represents an in-place cap rate of 7%.

2. 830-870 N. US Route 15 – The Dillsburg Shopping Center (Dillsburg)

This 162,783 SF neighborhood center was sold on September 24, 2018 to Vastgood Properties, LLC for $24,400,000. Built in 1994 and renovated in 2002, this property was sold by Brixmoor Property Group for $149.89 per square foot. The property traded at a 6.333% cap rate.

3. 5301 Simpson Ferry Rd – Giant (Mechanicsburg)

This 51,394 SF retail property sold on August 17, 2018 to Patriot Equity Partners, LLC for $17,540,000. Built in 2004, this property was sold by Exchange Right Real Estate, LLC for $341.28 per square foot.

4. 130 Kline Village – Kline Plaza (Harrisburg)

This 214,628 SF community center was sold to Nassimi Realty Corp. on December 12, 2018 for $8,700,000. Built in 1952, this property was sold by Brixmoor Property Group for $40.54 per square foot. The price represents a 10% in-place cap rate.

5. 1313 Kenneth Road – Dick’s Sporting Goods (York)

This 55,200 SF retail property was sold to the Stewart Companies on December 27, 2018 for $6,250,000. Built in 1988, this property was sold by First Capital Realty Inc. for $113.22 per square foot.

OFFICE

1. 1920 Technology Pky – Pennsylvania Department of Corrections (Mechanicsburg)

This 100,000 SF Class B Office Building sold on December 3, 2018 to Boyd Watterson Asset Management for $26,950,000. Built in 2010, this building was sold by Hudson Companies for $269.50 per square foot at a 7.5% cap rate. The building is fully leased to the PA Dept of Corrections.

2. 1250 Camp Hill Bypass (Camp Hill)

This 84,000 SF Class B Office Building sold on November 27, 2018 to Waterday Properties for $19,750,000. Built in 2015, this building was sold by Hoffer Properties for $235.12 per square foot. The building is leased to Hewlett Packard and Medical Mutual.

3. 1 Trinity Dr E – UPMC Pinnacle FamilyCare (Dillsburg)

This 43,212 SF Class B Medical Building sold on August 9, 2018 to Hammes Partners for $19,000,000. Built in 2008, this building was sold by Anchor Commercial Realty for $439.69 per square foot. The MOB is occupied by UPMC Pinnacle and Presbyterian Senior Living.

4. 909 Elmerton Ave – Pennsylvania DEP South Central Regional HQ (Harrisburg)

This 73,101 SF Class B Office Building sold on August 2, 2018 to Boyd Watterson Asset Management for $14,500,000. Built in 1998, this building was sold by Elmerton 909, LP for $198.36 per square foot. The building is fully occupied by the PA Dept of Environmental Protection.

5. 3801 Paxton Street (Harrisburg)

This 61,198 SF Class A Office Building sold on January 31, 2018 to Arthur L. Walters Co. for $8,425,000. Built in 2006 and updated in 2017, this building was sold by Thomas A. Salvaggio for $137.67 per square foot. The property traded at a 6.86% cap rate.

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 2018, there are a few interesting points worth noting in each sector.

Industrial – Industrial real estate continues to lead all other real estate sectors with $529 million in sales volume in 2018. The average price was $60 per square-foot, with the average property selling for $4.2 million with a 6.3% cap rate.

Retail – A total of $346 million was invested in Central PA’s retail real estate market in 2018, an increase over 2016 and 2017. The average sale price was $107per square-foot with a 7.5% cap rate.

Office – Annual volume levels for Central PA’s office real estate market were trending down for 3 years running, but 2018 rebounded with $266 million in total sales. The average office property sold for $1.4 million with 8.2% cap rate. Two of the top five largest office sales to take place in 2018 were buildings leased to the Commonwealth of Pennsylvania.

Given the largest and most notable commercial real estate sales that took place in Central PA in 2018, do you notice any other trends this might indicate? Share your insights below by leaving a comment.

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How Opportunity Zones Could Impact Central PA Real Estate

Posted on December 26, 2018 by Mike Kushner in Blog, Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Opportunity Zones are being referred to as “real estate’s most exciting new investment vehicle,” but what are they and can they really live up to this title?

How this type of investment works and why it stands to be so beneficial is essentially this: capital gains are invested in Opportunity Zones, taxes are deferred, the basis is lowered, taxes are then paid in 2026 (at the same nominal value as in 2018), and after 2028 the Opportunity Zone holding can be sold with no capital gains tax due.

Better yet, there are very few restrictions on the properties in which one can invest. It’s estimated that there are $2.3 trillion worth of unrealized capital gains in the U.S. Even if only 15 percent of this is invested in Opportunity Zones, this will exceed the 2017 corporate income tax revenue and almost match the Medicaid spend of that same year.

The potential benefits don’t stop there. Opportunity Zones can also provide a tax deferral on gain that investors invest in a fund, and the elimination of gain in the new Opportunity Zone investment if it is held for more than 10 years.

This should paint a clearer picture as to why Opportunity Zones have real estate investors abuzz. To answer the most essential questions related to Opportunity Zones, and specifically how they stand to impact Central Pennsylvania real estate, Omni Realty has asked Silas Chamberlin to share his expertise and insight on this topic.

Silas Chamberlin, PhD is the Vice President, Economic & Community Development at York County Economic Alliance. Prior to joining YCEA in fall of 2018, he served as CEO of Downtown Inc. Chamberlin has also served as executive director of the Schuylkill River National Heritage Area, an organization promoting economic revitalization in five counties of southeastern Pennsylvania. And he has held leadership positions in the non-profit sector and state government. Throughout his career, Chamberlin has focused on helping communities leverage their unique assets to create opportunities for economic development and a higher-quality of life.

Mike Kushner of Omni Realty and Silas Chamberlin jump right to the meat of things starting with the local impact of Opportunity Zones, using the Greater York Area as a sampling.

Omni: How many census tracts in York County were approved for the Opportunity Zone program? And where?

Silas Chamberlin: York County has five designated tracts. All tracts are located in the City of York and are the tracts which encompass most of the city’s brownfield sites. Tracts in Hanover and Wrightsville were eligible for designation, but were not selected by the state.

Omni: Specifically, how will this program benefit the Greater York Area and how soon do you expect to see an initial impact?

SC: Opportunity Zones will attract additional investment to qualified projects in our five opportunity zones. The tax break should help draw investors’ attention to projects that have not benefited from private investment in the past. YCEA is a working partner to help identify viable projects within the zones to market to Qualified Opportunity Fund investors. We are also vetting the creation of local and regional funds focused on the city’s zones.

In theory, we could see funds begin investing in qualified projects at any time. Opportunity Zones are intentionally driven by the free market and individual investment decisions, so it is difficult to tell how much investment will end up in York. Observers at the national level have noted that there may be more private capital available than viable projects, so York should certainly position itself to take full advantage.

Omni: Are the tax breaks provided through this program enough to incentivize private investors and spur activity?

SC: The short answer is yes. But it would be inaccurate to view Opportunity Zones as a panacea that will turn vacant buildings into viable investment opportunities overnight. The most competitive projects will be those that are already viable without Opportunity Zone funds, but would benefit from additional investment.

Unlike New Markets Tax Credits or other popular programs, Opportunity Fund investments are unlikely to subsidize a project because the project must be able to grow in value and return an investment to the fund. YCEA’s strategy is to identify viable projects within Opportunity Zones and then use the designation to attract investors’ attention. We see this as yet another tool in our economic development financing toolbox.

Omni: Are there any drawbacks to the Opportunity Zone program?

SC: Opportunity Zones rely on a self-certification process for creating a fund, which means that investors have lots of autonomy. This also means that economic development organizations and municipalities may not always be aware of investments being made in their zones. Because the zones are distressed areas by definition, there is a higher risk that outside investment could change neighborhoods and business districts without any local engagement or controls. There are potential controls that could help guide development in Opportunity Zones—such as zoning overlays—but these tools are not yet well developed, especially in smaller cities.

Finally, there is the risk for disappointment. Opportunity Zones absolutely provide another tool to attract investment, but there is a risk in promoting them as transformational and raising the hopes of residents and developers that untapped capital will begin flowing into the census tracts that need it the most. While there is reason to be hopeful, the reality of matching qualified investors to viable projects may narrow the scope and impact of the tax break.

The Bottom Line

Experts predict that after an initial wave of Opportunity Zone fund offerings in early 2019, there may be a pause that coincides with the issuance of additional regulations during which market participants will evaluate fund and project structures. After that, barring the rise of general economic headwinds, it should be full steam ahead for Opportunity Zone funds moving forward.

From a real estate perspective, Opportunity Zone projects need to be viewed as development projects because the requirement is to create new property or substantially improve property. To reemphasize Silas Chamberlin’s point, there is surely reason to be hopeful that Opportunity Zones will flow capital into census tracts that need it the most. But we must remain cautiously optimistic about how quickly and substantially this capital will come about. Much like anything related to real estate, and especially real estate investment, most outcomes remain at the mercy of the market and ever-changing government regulations.

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How Will Trump’s Tariffs on China Impact Commercial Real Estate?

Posted on August 8, 2018 by Mike Kushner in Blog, Commercial Real Estate 2 Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this summer, President Donald Trump approved tariffs on about $50 billion dollars in Chinese imports. Some fear this is certain to escalate a trade war between the world’s two largest economies. While others argue the short-term setbacks are outweighed by the long-term political and economic benefits. Which side will prove to be right? Only time will tell.

What we can expect, with a great deal of certainty, is that these tariffs will have a ripple effect on the United States’ commercial real estate industry. CRE professionals should be on high alert for several, short-term impacts that stand to reshape the investment decisions we make for the next five to ten years. Keep in mind, the tariffs must still undergo a review process, with hearings this month; however, should they be approved, here are the near-future impacts CRE professionals must be prepared to manage.

Higher Permanent Debt Costs and Construction Costs

CRE professionals should prepare for a 10-Year Treasury of about 3 ½ to 4%. Additionally, it’s reasonable to expect an increase in both permanent debt costs and construction costs. Higher prices for commodities, like steel, will hurt construction and infrastructure projects. The U.S. is already seeing more than 5% materials inflation in construction, and given these recent actions, it’s reasonable to predict this number could rise as high as 10%.

CRE Renovations Over New Construction

If the prices of construction materials increase as expected, this will change the landscape for how CRE professionals are investing in commercial real estate. An increase in raw material prices (aluminum and steel) would accelerate the trend for inflated construction cost that has already been going for years. Foremost, higher construction costs will make buying an enhancing existing commercial real estate the smarter investment over new construction.

Temporary Decrease in GDP

Even though the third quarter is normally the strongest quarter of the year, the addition of these tariffs could cause the GDP to fall below 3% this fall. However, this decrease in GDP will only be temporary if Trump prevails. It will take a patient economy to “ride the wave” until 2019 when it’s expected that GDP will reach 4% with exports rising.

Increased Inflation

In the short-term, these tariffs and counter-tariffs are predicted to add to the currently elevated 2.8% annual inflation. Let’s not forget that this inflation has already caused the Fed to raise rates in June and provides guidance for two more hikes in the second half of 2018.

What This Boils Down to for Commercial Real Estate

Commercial real estate (as well as residential real estate), is intricately linked to virtually every aspect of our nation’s economy; we often look to our construction and housing markets as a barometer to gauge current economic temperature, endurance, and vulnerability. The recent tariffs not only increase the costs of materials, but they may also ignite a global trade war, both of which can have a significant, negative impact on both local and national commercial real estate.

However there is one positive angle to consider. While much of the industry may feel the squeeze of elevated costs, the recent aluminum and steel tariffs don’t mean doom and gloom for the entire commercial real estate vertical. There is one sector that actually stands to benefit from the recent market flux: current property owners. Landlords of existing buildings won’t have to worry about increasing rents to cover new and unforeseen materials costs. These building owners can offer extremely competitive rent prices to potential tenants, ultimately undercutting the competition and stealing market share.

What other impacts do you anticipate Trump’s trade tariffs to have on the United States’ economy, within CRE or beyond? Do you feel short-term impacts outweigh long-term benefits or not?

Join in the conversation by leaving a comment below!

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Top Commercial Real Estate Projects to Impact Central PA

Posted on February 26, 2018 by Mike Kushner in Blog, Commercial Real Estate, Construction, Local Market No Comments

There is a lot of different commercial construction activity taking place in Central Pennsylvania. Looking at the top commercial real estate projects to be delivered in 2018, there are two retail projects and 4 Class A industrial projects that will enter the market, bringing with them new businesses, jobs and consumers. Let’s take a closer look at these top projects to better understand the likely impact they will have on Central Pennsylvania’s economy both now and into the future.

RETAIL

Lancaster County has two retail real estate projects under construction that are projected to have a significant impact on jobs and the economy. The anchor stores for each of the two projects are supermarket brands we have come to know and love – and ones that will surely attract consumers far and wide.

The smaller of the two projects is the Crossings at Conestoga Creek, located on U.S. Route 30 in Lancaster. The 90,000 square feet of retail space being developed will be anchored by Wegmans which will become the county’s second largest supermarket, trailing only Shady Maple Farm Market in East Earl, which is 150,000 square feet. With annual sales of $7.4 billion, Wegmans is the nation’s 32nd largest supermarket chain.

The Crossings, which sits on a 90-acre site between Toys R Us and the Lancaster Post Office, is being developed by High Real Estate Group. This new retail space will create a substantial number of jobs and attract shoppers from surrounding counties. The Wegmans store anticipates the creation of 500 to 550 new jobs, and they have already begun hiring for their grand opening in 2018.

Project at 206 Rohrerstown Road.

Lancaster’s Manheim Township has exciting news of its own as it prepares to welcome the grand opening of a Whole Foods market in 2018. The proposed $130 million Belmont housing and retail project includes the market, other retail stores and homes on farmland just south of Route 30.

Rendering of Belmont retail and housing project.

Anchoring the retail portion of the 110,508 square-foot project will be the 40,000-square-foot Whole Foods market. Additional tenants will be Two Farms, Inc. Panera Bread, Metro Diner, Fuddruckers, Citadel Federal Credit Union and Mod Pizza. The retail portion of Belmont will create nearly 1,000 jobs, while Belmont overall will generate millions of dollars in tax revenue for Lancaster.

INDUSTRIAL

Four new industrial real estate projects are also under construction in Central Pennsylvania. Though much larger in size, these spaces will have a slightly different impact on our local jobs and economy than Lancaster’s retails spaces.

The largest is the Class A industrial space located at 100 Goodman Drive in Carlisle. This is part of the Goodman Logistics Center Building 1. It was announced in August 2017 that the tenant for this 1,007,868 square-foot space will be syncreon, a global third-party logistics company headquartered in Michigan. From this prime industrial location, syncreon will have access to more than 40 percent of the population of the United States.

Project at 100 Goodman Drive.

Another Carlisle Class A industrial space soon to enter the market is the warehouse at 100 Carolina Way. This 805,600 square-foot space, currently not pre-leased, is located next to Keen Transport, U-Pack and ABF Freight. The third industrial construction project is the 738,720 square-foot space located at 112 Bordnersville Road in Jonestown (First Logistics Center – Building A). Situated in the heart of the I-78 and I-81 industrial distribution corridor, the industrial park is designed to accommodate two Class A distribution centers. The second space will be delivered in Q3 2018.

Project at 100 Carolina Way.

Project at 112 Bordnersville Road.

The final Class A industrial space which is under construction in Central PA is the Ace Hardware expansion located at 139 Fredericksburg Road, Fredericksburg. With 225,875 square-feet of space, this expansion will turn the building’s existing space into a combined 1.1 million square-feet of distribution space located at Lebanon Valley Distribution Center.

Rendering of the ACE Hardware expansion.

As Central Pennsylvania’s warehousing and distribution industry grows through the delivery of these new buildings, to what extent do you feel this will impact our local jobs and economy?

Also, which of Lancaster’s two new retail spaces do you feel will gain more traffic – short term but also long term?

Join in the conversation by leaving a comment below!

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Mega Warehouse Space Exploding in Central PA

Posted on December 4, 2017 by Mike Kushner in Blog, Local Market, Trends No Comments

Central Pennsylvania has gained 8 warehouses, each over 1 million square-feet, since 2010.

With today’s booming e-commerce market continuing to expand, the need for sufficient storage space to meet online consumer demands is at an all-time high. To keep pace with online consumer needs, retailers look towards extra-large storage warehouses exceeding 1 million square feet, also known as “Mega Warehouses.” These warehouses are a way to keep an edge over the competition. Between 2010 and 2017, 21 of these mega warehouses were constructed in the Philadelphia Submarket which includes Central PA.

As people continue to prefer ordering goods online with a click of a button or a tap via smartphone applications, over the traditional brick and mortar storefronts, the need for these mega warehouses continues to grow. Mega warehouses around the U.S. are strategically placed outside large metro areas allowing them to benefit from the abundance of space. By maintaining access to road, sea and rail transportation channels, mega warehouses do not sacrifice their ability to directly deliver goods to consumers in a timely manner.

Top 5 Largest Warehouses in Central PA Since 2010

# 1: At the top of the list is the warehouse occupied by Georgia Pacific. Located at 234 Walnut Bottom Road, Shippensburg, the property is 1,495,700 square-feet. CBRE Global Investors purchased this property from Prologis in 2015 for $83,000,000.

# 2: Unilever PLC, the company behind brands Dove, Lipton, Ben and Jerrys and many more, occupies 1,370,052 square-feet at 954 Centerville Road, Building 3, Newville. In 2013, this building was awarded LEED certification by the U.S. Green Building Council.

# 3: Developed by Hillwood and sold to GLP in 2016, this property is located at 1605 Bartlett Drive, Manchester. Starbucks occupies the entire 1,209,000 square-foot building.

# 4: The Urban Outfitters Distribution Center located at 766 Brackbill Rd, Gap, is 1,200,000 square-feet. Completed in 2015, this property is owned by Urban Outfitters.

# 5: The Nordstrom Fulfillment Center is located at 30 Distribution Dr., Elizabethtown. This 1,142,000 square-foot facility was constructed in 2015 and is located in a designated foreign trade zone (FTZ).

Take a look at all 8 warehouse properties in Central PA that are over 1 million square-feet.

Right Here In Central PA, We Are The Hub Of All The Action!

Central Pennsylvania remains a premiere market for industrial space and it’s easy to see why. To businesses that rely upon the ease and affordability of shipping their products to make a living, Central Pennsylvania possesses four main components that drive the decision – a great roadway system, an abundant work force, relatively inexpensive and available raw land, and the ability to reach 70 to 80 percent of the U.S. population in 24 hours. Additionally, our government regulations on warehousing and distribution are comparatively easy and straightforward compared to other states or regions.

Currently, there is one mega warehouse under construction in Central PA. The Goodman Logistics Center located in Carlisle. The property is fully leased and will be occupied by Syncreon, a third-party logistics company, in early 2018. In addition, there are five proposed buildings in excess of 1 million square-feet.

Central Pennsylvania is well poised to harness the economic boost from the e-commerce boom. We have a unique opportunity to serve this industry that we can’t afford to miss!

Learn more from past market reports:

Central Pennsylvania Industrial Real Estate Report for Q2 2017

Influx of New Construction Impacts Central PA’s Industrial Real Estate Market

Central Pennsylvania Industrial Real Estate Report for Q1 2017

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Amidst Massive Retail Closings, Central PA Commercial Real Estate Continues to Grow

Posted on June 26, 2017 by Mike Kushner in Blog, Local Market, Trends No Comments

We’ve watched it on the news, read about it in the papers and have seen it in person. Several large retailers in Central Pennsylvania have made the decision to close their doors, such as Sears, Kmart, and hh gregg, as well as a growing list of other retailers struggling to stay in the black.

The landscape of retail real estate is changing, and with that the market is reacting. While some retailers are looking to move out of brick-and-mortar locations, other mega brands like Amazon are looking to move in. What does this mean for the future of retail real estate, specifically here in Harrisburg, York and Lancaster? Let’s take a look at changes that have taken place and trends that have emerged over the last 12 months.

Harrisburg

The Harrisburg retail market has gained 162,000 square-feet of new space in the last 12 months. However, in this same amount of time, the market was only able to absorb 110,000 square-feet, causing the total net absorption for the quarter to drop to a negative 153,000 square-feet. The 4.2% vacancy rate is an increase from the recent low we saw in Q1 2017, when it dipped down to 3.7%. Though the market has 0.0% rent growth, there has been $82M in sales that is almost double the historical average of $52M. Harrisburg has just 1 under-construction retail property that will be delivered in 2017 and will add 12,000 square-feet of unleased space to the market. Though we have recently seen quite a few closings of retail locations, there remains more than 20 proposed projects for new retail space including general retail, community centers and strip malls.

York

The York retail market has gained 27,000 square-feet of new retail space over the last year, with a 12-month net absorption of 152,000 square-feet. The total net absorption for the current quarter is negative 10,000 square-feet. York’s vacancy rate is a bit higher than Harrisburg’s at 5.7%, but over the past 12 months, it has decreased by 0.6%. The market experienced a very small rent growth of 0.1% and did $19M in sales in 12 months’ time. York County has 4 under-construction retail properties that will be delivered in 2017-2018 and will add 264,217 square-feet of mostly unleased space to the market.

Lancaster

In Lancaster County, 34,000 square-feet of new retail space was delivered to the market in the last 12 months. The 12-month net absorption is 169,000 square-feet and the total net absorption for the current quarter is negative 13,000 square-feet. Lancaster’s vacancy rate is much lower than York and Harrisburg, coming in at 2.4%. In the last 12 months the vacancy rate has decreased by 0.6%, reaching its lowest point back in Q4 2016 when it was 2.3%. Like Harrisburg, Lancaster did not experience a rent growth in the last 12 months, but did do $39M in sales. Lancaster County has 5 under-construction retail properties that will be delivered in 2017-2018 and will add 159,500 square-feet of space to the market, more than half of which is preleased.

Trends & Overview

In the current market, each city has its strengths and weaknesses. Harrisburg has the highest 12-month sales of the three, but the lowest net absorption for the current quarter. Lancaster has the lowest vacancy rate of the three, but has relatively unimpressive new construction projects, sales and rental growth. York has the most new retail space scheduled to be delivered in the next few years, but has the lowest 12-month sales of the three.

All things considered, each market appears to be stable and poised for additional growth. Vacancy rates have remained mostly the same or experienced a decrease, the markets are demonstrating their ability to absorb most of the new space that is being delivered, and there continues to be under-construction projects and plan for new space. These indicators provide us with confidence that real estate investors, developers and retailers continue to see value in doing business in Central Pennsylvania.

Between Harrisburg, York and Lancaster, the area offers some unique benefits including more space and at a lower cost compared to big cities. We are also a main corridor for commuters and travelers going to New York, Philadelphia, Baltimore and Washington, D.C. Simply put, Central Pennsylvania has the right combination of resources and advantages to remain a vibrant location for retail growth.

Do you agree? What Central PA market is having the best year so far? Share your thoughts by commenting below!

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