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Central PA’s Top Commercial Real Estate Leases in 2020

Posted on February 22, 2021 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Office Leasing, Trends No Comments

In spite of 2020’s black swan event (COVID-19), leasing activity in Central Pennsylvania continued with mixed results. Normally insulated from strong economic downturns, the coronavirus tested the Central Pennsylvania Region and there are reasons for both concern and optimism.

On the negative side: massive job losses in retail and a significant manufacturing base could cause serious disruption. Roughly 30,000 people were employed in the retail sector in March, and close to that number were also employed in manufacturing. Though manufacturing’s future remains less clear and the market could be buoyed by the region’s deep presence of food production, retail has been hard hit by the shutdown.

While being the state’s capital will provide some shelter in the coming months, Pennsylvania’s fiscal situation is a mess. Financial troubles could portend future government layoffs and by the third quarter, the state had already cut 2,500 government jobs.

There’s little chance the economy doesn’t cool in Central Pennsylvania but the market does have some factors working in its favor. BLS data shows the market has lost about 5% of its total non-farm employment levels since March. While this is obviously a significant reduction, it does compare well with nearby Lehigh Valley and Pittsburgh. While Harrisburg’s demographic gains won’t raise any eyebrows, the region does stand out in Pennsylvania. Cumberland County is one of the fastest-growing counties in the state, likely aided by the growing logistics and warehouse presence along the Carlisle Corridor.

The logistics sector is expected to hold up well and perhaps even grow as e-commerce continues its acceleration. An Adobe report from June showed that online spending was up 77% year over year, representing growth in e-commerce that experts were not forecasting the country to reach until 2026. Central Pennsylvania’s location is prime for shipping, and such a scenario could lead to more jobs and perhaps fuel additional growth in population.

Additionally, Central Pennsylvania is also trying to evolve into a knowledge-based economy and has adopted business-friendly incentives that have helped create nearly two dozen tech startups, which have generated 1,000 jobs. Education and health services jobs, which now track evenly with government jobs in the state’s capital, grew by more than 4% annually.

How does the ever-shifting economy impact the commercial real estate market, particularly as it pertains to commercial leases?

It comes as no surprise that industrial real estate leases in 2020 carried the largest square footage, with the top lease coming in at more than 1.1M SF to Lowes Distribution Center in Shippensburg. Additionally, Bob’s Discount Furniture will be moving into the former Best Buy in Lancaster, and Hershey will be getting a new Big Lots in the Hershey Square Shopping Center. The top five flex leases also provided businesses with hundreds of thousands of Class B Flex Space. Keep reading to view the top 5 leases from 2020 for office, retail, industrial, and flex space.

Top 5 Office Leases

#1 – 1929 Lasalle Ave – Bldg 134, Lancaster, PA 17601

High Associates Ltd. leased out the 29,000 SF Class C Office Building built in 1974 to Equipment Depot beginning in January of 2020 for a 1-year term. It had previously been vacant for 164 months.

#2 – 1803 Mt Rose Ave – Bldg B, York, PA 17403

Kinsley Properties leased out the 23,704 SF Class C Office Building built in 1988 to IDS, LLC beginning in February of 2021 for a 5-year term. It had previously been vacant for 13 months.

#3 – 990 Peiffers Ln – NRG Engine Services, Harrisburg, PA 17109

Campbell Commercial Real Estate leased out the 23,382 SF Class B Office Building built in 1987 to UPS Midstream Services Inc. beginning in February of 2020 for an unspecified term.

#4 – 1770 Hempstead Rd – Greenfield Corporate Center, Lancaster, PA 17601

High Associates Ltd. leased out the 16,088 SF Class B Office Building built in 1990 to an unnamed leasee beginning in November of 2020 for unspecified term. It had previously been vacant for 19 months.

#5 – 200 Corporate Center Dr – 200 Corporate Center Dr, Camp Hill, Camp Hill, PA 17011

Cushman & Wakefield leased out the 11,655 SF Class A Office Building built in 1986 to an unnamed leasee in August of 2020 for an unspecified term. It had previously been vacant for 52 months.

Top 5 Retail Leases

#1 – 3975 Columbia Ave, Columbia, PA 17512

The 86,100 SF Class B Retail Building built in 1992 was leased to U-Haul, as the single tenant, beginning in June of 2021.

#2 – 1801 Hempstead Rd – Former Best Buy, Lancaster, PA 17601

Bennett Williams Commercial and ShopCore Properties leased out the 45,915 SF Class B Retail Building built in 2009 to Bob’s Discount Furniture beginning in September of 2020 for a 10-year term. It had previously been vacant for 23 months.

#3 – 921 E Main St – Mount Joy Square Shopping Center, Mount Joy, PA 17552

Bennett Williams Commercial leased out the 44,761 SF Class B Retail Building built in 1989 to an unnamed business beginning in March of 2021. It had previously been vacant for 25 months.

#4 – 1130-1170 Mae St – Hershey Square Shopping Center, Hummelstown, PA 17036

Bennett Williams Commercial leased out the 38,202 SF Class B Retail Building built in 1994 to Big Lots beginning in June of 2020 for a 10-year term. It had previously been vacant for 12 months.

#5 – 4075 E. Market St – York, PA 17402

The Flynn Company leased 27,000 SF Class C Industrial/Manufacturing Building built in 1972 to No Piston, LLC beginning in October of 2020 for a 5-year term.

Top 5 Industrial Leases

#1 – 1 Walnut Bottom Rd – Shippensburg 81 Logistics Center, Shippensburg, PA 17257

Colliers International leased out the 1,100,500 SF Class A Industrial Building completed in 2020 to Lowes Distribution Center beginning in February of 2021. It had previously been a vacant shell space for 160 months.

#2 – 200 Goodman Dr – Building 2, Carlisle, PA 17013

CBRE leased out the 938,828 SF Class A Industrial Building built in 2017 to Syncreon beginning in December 2020. It had previously been vacant for 44 months.

#3 – 951 Centerville Rd – Penn Commerce Center – Building A, Newville, PA 17241

Cushman & Wakefield leased out the 807,998 SF Class A Industrial Building to an unnamed leasee. It had previously been vacant for 5 months.

#4 – 4875 Susquehanna Trl – ES3 LLC Bldg 1, York, PA 17406

The 790,042 SF Class B Industrial Building was leased to ES3, a Professional, Scientific, and Technical Services company, beginning in February 2020 for an unspecified term.

#5 – Centerville Rd – Penn Commerce Center – Building B, Newville, PA 17241

Cushman & Wakefield leased out the 753,000 SF Class B Industrial Building to an unnamed lease beginning on January 2021. It had previously been vacant for 3 months.

Top 5 Flex Leases

#1 – 60-64 Industrial Rd, Elizabethtown, PA 17022

Cushman & Wakefield leased out the 113,720 SF Class B Flex Space completed in 1992 to WillScot beginning in September of 2020. It had previously been a vacant shell space for 13 months.

#2 – 1740 Hempstead Rd – Building 380, Lancaster, PA 17601

High Associates, Ltd. leased out the 34,000 SF Class B Flex Space completed in 1964 to an unnamed business beginning in January of 2021. It had previously been a vacant shell space for 92 months.

#3 – 6400 Flank Dr, Harrisburg, PA 17112 – Harrisburg Area East Ind Submarket

NAI CIR leased out the 32,212 SF Class B Flex Space completed in 1987 to an unnamed business beginning in June of 2020. It had previously been a vacant shell space for 3 months.

#4 – 1000 Kreider Dr – Building A, Middletown, PA 17057

CBRE leased out the 12,030 SF Class B Flex Space completed in 2006 to an unnamed business beginning in August of 2020. It had previously been a vacant shell space for 8 months.

#5 – 3545 Marietta Ave – Silver Spring Center, Lancaster, PA 17601

Prospect Leasing & Management leased out the 7,192 SF Class B Flex Space completed in 1997 to an unnamed business beginning in January of 2021 for a 5-year term. It had previously been a vacant shell space for 6 months.

With so much square footage having exchanged hands in Central PA in 2020, it will be interesting and important to keep an eye on how these businesses impact the region. There were quite a few properties that made it to this list that had sat vacant for years. Now with new tenants, this will drive jobs and contribute to the local economy. And with some of these leasing terms for 5, even 10 years, these businesses have made a commitment to being here long-term.

Among all the top leasing deals that took place in 2020, which sector – office, retail, industrial, or flex – do you think will have the largest and most immediate impact on the Central PA region? Share your thoughts by leaving a comment below.

*Data of the top commercial real estate sales provided by CoStar.

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The Pandemic’s Uneven Effect on Consumer Spending

Posted on December 30, 2020 by Mike Kushner in Blog, Retail No Comments

When COVID-19 hit and the U.S. went into full lockdown, consumer spending took a sharp turn. Heading out to restaurants, bars, concerts, or the movies was no longer an option. Even now, nine months later, we are far from returning to how things were. The general public is wary or deterred by new policies like limited capacity, wearing face masks, and social distancing. This has all had a profound impact on how we’re spending our money, particularly on services or experiences. Instead, we’ve shifted our spending to physical goods to find other means of entertainment and enjoyment, and to make our homes more comfortable, because we’re spending considerably more time at home.

Considering all of this, plus the fact that 10+ million Americans are still jobless, the sluggish recovery of consumer spending on services is cause for concern. At the same time, retailers selling goods, especially online and through contact-free delivery, are in a position to grow their market share. Keep reading to learn how COVID-19 has had an uneven impact on spending, and what this might mean for our economy and commercial real estate long-term.

Spending Shifts from Services to Goods

Based on data from U.S. Bureau of Economic Analysis, spending on goods quickly recovered from the initial shock of the pandemic, returning to growth as early as June. But consumer spending on services is still more than 6 percent off pre-pandemic levels.

The reasoning behind these numbers is straightforward. As the pandemic severely limited people’s option to spend money on services such as dining out, traveling, and other leisurely activities, their spending shifted to physical goods because this was both more accessible and deemed the safer option for enjoyment and entertainment. People weren’t visiting public pools or taking vacations, so spending on items like swimming pools, bicycles, kayaks, etc. skyrocketed. For many retailers, these items were out of stock nearly all summer.

Furthermore, people began reallocating discretionary income formerly used for travel and entertainment to home improvements and renovations. We saw things like new appliances, cabinetry, and mattresses run out of stock while hotels, restaurants, casinos, and event venues sit vacant.

A Double-Edged Sword for Economic Recovery

While it’s certainly positive to see overall spending levels recover relatively quickly, the slow recovery of consumer spending on services is concerning for several reasons. First, the United States is a service economy, as the U.S. GDP reveals. In 2019, personal consumption expenditure on services accounted for 47 percent of the gross domestic product, making it by far the biggest contributor to the country’s economic output.

As the following chart shows, clothing and accessories stores experienced a 30 percent decline in sales compared to the same period of 2019. Similarly, food services and drinking places were hit with a 20 percent spending decline compared to last year’s total. Department stores and electronics experienced a 15 percent decline through three quarters of 2020.

At the other end of the spectrum, non-store retailers, building material and garden dealers, as well as grocery stores, have seen double-digit growth rates in the first nine months of 2020, as consumers shifted much of their spending online and outdoor activities boomed in face of the COVID-19 threat.

What This Means for Retail Locations

Some industries have found ways to safely reopen with limited capacity and new policies in place such as social distancing and mandating facemasks be worn. But even nine months after the start of the pandemic, things are far from “normal” and this includes bottom-line sales. Restaurants, bars, and hotels can only operate at 50% capacity or less which is a huge blow to the amount of business they can do in any given week or month. And shopping at retail locations is quickly being replaced by online shopping.

While some retailers have been able to accommodate customers online, many others, particularly small businesses and boutiques, were not equipped to make this shift. For businesses already on the brink of making ends meet, the pandemic was the straw, rather the wrecking ball, that broke the camel’s back. We see shopping centers with major vacancies and entire chains of corporate stores and restaurants bow out of business.

For commercial real estate, especially shopping centers and malls, the future is bleak. In contrast industrial real estate is rising in demand because of big online retailers needing to increase their storage and rapid distribution. People want their essentials (and even non-essentials) delivered quickly to their door-step. With businesses like Amazon offering free 2-day delivery for most items, ample and accessible storage facilities have never been more important.

And for consumers, the biggest takeaway from this major shift in spending is to be mindful and intentional about how and where you invest your resources. How we spend impacts the economy. Though you may hear phrases like “shop local” and think your individual spending is just a drop in the bucket, when all those drops are put together, it has a large impact. For those that don’t feel comfortable dining out, you can still support your local restaurants through takeout or delivery. And if you don’t desire shopping in-store, consider supporting small businesses through curbside pick-up or having items shipped to your home. Our collective spending habits today, even amidst a pandemic, are painting the picture of our economy well into the future.

Even after the impact of COVID-19 on the economy begins to correct itself, what do you think the impact on consumer spending will be long-term? Comments are welcome below!

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This Election Day will impact everything – including real estate

Posted on November 2, 2020 by Mike Kushner in Blog, Commercial Real Estate No Comments

Another reminder about the importance of the 2020 Presidential Election? Yes, but with good reason. We’ve been inundated with news, ads, and messages forcing very carefully crafted information upon us. There’s a lot we know about each candidate and their platform, but there is much more than we don’t know. This applies to all candidates and political parties. Tomorrow, the nation will vote for the candidate who represents the values and policies that best align with our own. However, I doubt anyone will say they agree 100% with any, one candidate. So instead, we’ll vote based upon the criteria that are most important to our own views. And if this happens to include the creation of new taxes, particularly on real estate, then there is something very important to consider.

Should Joe Biden become the next President of the United States, his plan includes a new probate real estate tax hidden in his platform that could cause a massive hit on capital gains.

Taxing Appreciation

As proposed by Biden, his new probate real estate tax would end the process of real estate heirs taking probated property on a stepped-up basis and instead require them to pay capital gains taxes on all appreciation that accrued on the property before their inheritance. This would put heirs on the hook for paying capital gains taxes on the appreciation of a property, plus any other profits earned above the current market value once the heir sells the asset.

Existing law is much more favorable to those who inherit real estate. For example, if someone purchased a property when it was valued at $100,000 and died when it had reached a fair market value of $1M, the owner’s heirs would inherit the property at a stepped-up basis of $1M. As a result, heirs under current law do not have to pay capital gains on the $900,000 in appreciation that accrued before the original owner’s death, and if they were to sell the property down the road, they would only pay capital gains taxes on any value above $1M.

Biden’s proposed tax changes as a whole would essentially add a fourth tax bracket to the capital gains schedule of 39.6% on income above $1M, meaning the top rate could reach 43.4% when we include the 3.8% net investment income tax.

How This Affects You!

When your parents pass and leave you the family house normally you inherit that property at what it is worth today. If you would sell that house, you would only pay taxes on what it is worth today and what it sells for. If Biden does away with the stepped-up basis you will inherit the property for what your parents paid for the property. If you decide to sell you will pay taxes on the difference between the original purchase price and what it sells for today.

In addition, a Biden presidency would greatly harm multigenerational ranches and farms by killing the next generation with taxes. Simply put, this election stands to drastically change the transfer of generational wealth as we know it.

It’s Not a Done Deal

First, nothing is known until after November 3 and the election results are tallied. Should Biden win, the change is far from a done deal as his plan could change or be voted down by the legislative branch.

Then there are some unknowns in Biden’s proposal, and how those are worked out could make the tax changes less of a blow, or even worse. For one, it’s unclear if death itself becomes a “taxable event” that forces heirs to pay capital gains taxes on all appreciated value at the time of their inheritance. It’s also possible the Biden plan may allow heirs to inherit real estate on a carry-over basis, so they only have to pay for the years of appreciation when they sell the asset, not at the time of inheritance. Another option is that heirs could spread their taxes out over time.

What is known is that if you care about these changes, and stand to be negatively impacted by them, casting a vote is the best way to voice your opinion on the matter. This is not to say any other candidate does not also plan to change other aspects of the tax structure, which will have a negative impact on at least one sector of the population. This is all the more reason to do your research before taking to your polling location.

The Big Takeaway

Regardless of candidate or political affiliation, the thing that matters most is that you cast a vote, and you do so being as well informed as possible. If you have chosen to vote in person, you still have ample time to do your own research and look for reliable sources. And when you do vote, consider what is most important to you and the candidate most likely to uphold this viewpoint when in office.

No matter the outcome – November 3, 2020 will be a historic day for the world!

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The Good, the Bad, and the Unbelievable: How the Pandemic Has Forever Changed Industrial Real Estate

Posted on October 13, 2020 by Mike Kushner in Blog, Industrial, Trends No Comments

Industrial real estate had been booming for the last five years, mostly propelled forward by e-commerce and changes in consumer behavior. If that wasn’t enough for industrial real estate owners to adapt to, a global pandemic hit and impacted the way just about everything worked previously. As we adjust to this new reality, there’s one looming question: can industrial success last in the age of COVID-19?

While every sector of the market has challenges right now, there’s good reason to think industrial will continue to thrive. But tenant demands will continue to shift under the mounting pressures of the pandemic. From understanding the current state of leasing activity and e-commerce to getting in front of emerging trends like grocery deliveries, there are a lot of things that need to be considered, monitored, and adjusted.

Here are the main areas impacted by COVID-19 and what industrial owners need to know to meet tenant demand now and into the future. Take a look!

Construction Delays

Construction delays caused by COVID-19 are becoming increasingly common and many industrial real estate owners are having trouble securing permits. That’s ultimately forcing a slowdown of expansion efforts, something that needs to be overcome considering the continued growth of e-commerce.

The industrial sector ended Q1 of this year at a high point with near record lows hovering below 6%, and rents growing 8.8% year-over-year while leasing velocity accelerated. There’s no doubt the pandemic has slowed markets down, but experts anticipate the trends supporting them to stay fundamentally intact.

That’s not to say the industrial sector isn’t experiencing headwinds. Across the market, industrial owners recognize that many tenants are still facing serious risks, and bankruptcies are expected. As a starting point to protecting themselves against risk, some owners are considering COVID-19 clauses in future leases to help them navigate these situations again in a possible future outbreak.

Accelerated E-commerce Growth

E-commerce is one of the few sectors of the market to actually benefit from COVID-19, and it’s well-positioned to lead the recovery. That’s according to JLL’s report COVID-19: Global Real Estate Implications, which said the pandemic will likely boost demand for manufacturing and logistics facilities that e-commerce needs to continue expanding. The report also said the pandemic will accelerate many existing trends, including the growth of online retail as more of the economy moves to online sales.

In our new economy, a retailer might not necessarily need a storefront to succeed anymore, but it does need a robust supply chain strategy. To meet the growth in demand, industrial owners in major metro areas will likely have to look further afield for suitable sites as demand outpaces local supply levels. This isn’t anything new for industrial markets, but the trend is only going to accelerate.

Increase in “Safety Stock”

It’s expected that e-commerce demand is growing given that people are looking for the safest and most convenient shopping options that allow for social distancing, but the pandemic has caused something else unexpected. Many occupiers of industrial spaces are planning a 3-5% increase in their safety stock levels to help safeguard against the rampant supply shortages experienced at the start of the pandemic. These measures will add additional demand for warehouse space to keep larger quantities of key items in storage.

Unprecedented Demand for Food Storage

While still a relatively foreign concept to much of America, COVID-19 is driving major demand growth for online grocery orders. In early May, CNBC reported that only 3-4% of grocery spending in the U.S. was online before the pandemic, but now online grocery orders have surged to account for between 10-15% of all grocery spending. While online grocery orders are expected to recede after the worst of the pandemic subsides, experts expect U.S. online grocery sales to stay between 5-10% moving forward.

This is a huge opportunity for industrial owners. But to really capitalize on the trend, owners need to invest big in cold storage. A challenge is that this niche is operationally complex and requires specialized knowledge to succeed. Because most first-generation facilities are designed, owned, and already in use by grocery and foodservice companies, second-generation spaces offer the biggest opportunities for industrial investors.

A Local Perspective

It comes as little to no surprise that Central Pennsylvania experienced a sharp drop-off in absorption, which is what we are seeing everywhere. According to CoStar, Harrisburg has a slight uptick in vacancies, but that’s not troubling because there was spec space coming online and leasing activity has slowed. See below for the local probability of leasing commercial space a few months from now, which helps to show how quickly properties are likely to lease in the region moving forward.

It’s also worth noting that there is no negative absorption in Harrisburg through 2020. This is a positive sign for the local commercial real estate market because it means major tenants have not left, or if they did leave, the vacated space was instantly filled. That’s not normally much of a win, but in Coronatimes is a big deal.

And then there’s construction. Specifically, in Central PA there has not been a surge in construction in the region, but there are still millions that broke ground after the pandemic began, which testifies to the level of confidence in the local shipping market because most elsewhere construction has flatlined.

Looking Ahead

The industrial real estate market has been a remarkable success story both in Central Pennsylvania and beyond. And while the near future is likely to carry its fair share of challenges as the market faces tenant bankruptcies and construction delays, this sector is well-positioned to emerge from the pandemic less unscathed than others in the commercial real estate industry. Owners and investors who successfully navigate these challenges while getting ahead of evolving tenant demands, like grocery delivery and cold storage, will be the strongest moving forward.

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How the Pandemic Stands to Impact Property Taxes in PA

Posted on July 22, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

School districts in Pennsylvania are working to set their budgets for the 2020-2021 school year, and are potentially facing a $1 billion loss in local revenue as a result of coronavirus, according to the Pennsylvania Association of School Board Officials (PASBO) study. Even if the economy recovers quickly, and there’s no predicting if it will, that still leaves schools with a predicted loss of $850 in revenue.

So how will they make up for the gap? Naturally, the focus shifts to property taxes. Raising property taxes is never a desired solution, but it’s among the most obvious and effective. While some school districts in the capital region are not considering a property tax increase, and instead choosing to cut programs, contract out services to reduce spending, or drawing upon reserves, many others say a tax increase is unavoidable.

Pennsylvania is not unique in this dilemma, just last month Nashville approved a 34% property tax increase to account for revenue loss as a result of COVID-19. For a property appraised at $250,000, that would mean an increase of about $666.25 per year. This tax increase, compounded by any other financial hardships property owners have faced this year is a significant stressor.

It’s important to note that in Pennsylvania that the Act 1 index caps how much school property tax rates can rise. It takes into account the average statewide weekly wage, which is likely to be lower in wake of this pandemic. To go above the index requires state or voter approval.

School districts across the Commonwealth are having their budgetary discussions now. As property owners, it’s important to stay aware of what’s being proposed in case it stands to impact the tax rate on your residential or commercial property. Let’s take a look at a few local school districts to see how they are addressing their budgetary issues and whether this could result in a property tax increase in your township.

Camp Hill School District

The Camp Hill School Board is recommending a 3% tax increase to support its preliminary $24.7 million budget for 2020-21. By going with a tax increase of that size, it left the district facing a $403,458 revenue shortfall as opposed to one that would be double that amount if the tax rate was frozen. The district anticipates a post-COVID-19 loss of nearly $431,000 in local and state revenue so it trimmed its proposed spending by $116,740 to adjust for that. It is looking to use some of its $6.2 million unassigned reserves to bring the budget into balance.

Central Dauphin School District

Central Dauphin School Board says they are looking at every possibility including cutting nearly $300,000 from their budget without giving up things that would pose difficulties for students. The board must next consider approving a preliminary $204.2 million budget that still has a $2.4 million revenue shortfall to close to bring it into balance. The options laid on the table for the board include a mix of ideas that range from no tax increase and dipping into reserves to raising property taxes by the 3.1% allowable tax increase under the Act 1 index.

Cumberland Valley School District

Cumberland Valley School Board feels that a property tax freeze is not feasible for the district. The district anticipates a $3.1 million loss in local revenue, $300,000 in lost interest earnings, and a projected budget deficit of $2.4 million. Without the additional $2.3 million in revenue the district would receive from an Act 1 index allowable property tax increase of 2.6%, the deficit grows to almost $5 million.

Derry Township School District

While no tax increase is expected in the Derry Township School District, it is going to be a challenging year. And Derry Township is in a particularly unique situation. The amusement tax brings in about $1.5 million annually, and with Hersheypark and its related venues being closed due to the coronavirus, that could be a big hit to their bottom line. How they plan to make up for the delta is still in discussion.

Lower Dauphin School District

Lower Dauphin School District has also been dealt a uniquely challenging hand. Not only are they dealing with the financial fallout of the coronavirus like everyone else, but they’re also the school district that’s home to Three Mile Island Nuclear Generation Station. The shutdown of TMI is a loss of roughly $300,000 in payments in addition to taxes that the plant once made. Despite the loss, the school board already approved a budget on Monday, and they were able to make ends meet without raising taxes by borrowing about $4 million from their reserve funds.

Northern York County School District

Northern York was already looking at a $1.5 million shortfall pre-CVOID, which had to do with health insurance increases, pension payments and other increases. Now with the expected loss of close to $1 million in earned income tax and less revenue from realty transfer taxes because of the hold put on real estate activity, that gap grows closer to $3.5 million. To bridge this gap, the district does not plan to increase property taxes, at least yet. Instead, they announced they would cut costs by moving to full day kindergarten which reduces midday transportation. They will also put a hold on any construction or renovation, and outsource its instructional aid duties to an educational agency.

West Shore School District

West Shore School District is anticipating a significant reduction in revenues related to earned income tax. As a result, a budget with a property-tax increase is currently on the table. For West Shore’s Cumberland County communities, it’s a 1.63 percent tax increase, and it’s an increase of 1.16 percent in York County. The budget also relies on $1 million from the school district’s reserves.

How would an increase in property taxes impact you? If you own commercial or residential real estate, this will affect you directly. And even if you don’t own real estate, there will still be a trickledown effect. If you rent your home or place of business, landlords may be forced to increase rent to pass off some of these costs. Or businesses may increase the cost of their goods or services to help balance their own books.

There are many unknowns in our community, government, and economy right now. What we do know is that everyone has endured change and hardship to some degree as the result of the pandemic. School districts, just like all of us, are looking hard for solutions that will keep them afloat while having the least negative impact on teachers, students, and the community.

What is your opinion on increasing property taxes to help school districts make up for financial losses due to COVID-19? Join in the conversation by leaving a comment below.

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How Commercial Tenants Can Negotiate Rent Relief During COVID-19

Posted on June 18, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Tenant Representative/Buyer Agent No Comments

Our world remains in a global pandemic and there is a long road to economic recovery. Seemingly overnight, our ways of working, living and playing drastically changed, and we were forced to sustain these changes for weeks and months on end. As a result, businesses closed their doors to the public, some temporarily and some permanently. This has led to the sudden need for these businesses to shed, or at least reduce, their commercial real estate overhead.

Think of it this way. When a business agrees to a rent amount, it does so with the expectation that it will have a certain level of income. All those expectations were upended with COVID-19, as many businesses have been forced to fully close for months or significantly reduce their use of their commercial space. Even though offices, restaurants, and stores are starting to reopen, their capacity for employees and customers — and, therefore, for revenue —remain diminished, making rent renegotiation necessary for staying afloat.

It’s important for commercial tenants who have lost the use of their spaces as a result COVID-19 to understand what options might exist for them to favorably negotiate some form of rent relief from their landlords. Take a look as we examine the key steps any commercial tenant or business owner should take when venturing down the path of lease negotiation.

Know the terms of your current lease.

Start with closely reviewing your current lease. What are the terms, conditions, and pricing you originally agreed to? What does it say about lease negotiations or early termination? Does it give conditions for if and when this would be considered? In order for your lease negotiation to be most effective, you must come armed with all the information related to your lease, and your leasing experience. Upon reviewing your lease, make note of the most important details and write or type those out on paper so that you can have it with you during your conversation. This will help to keep these details top of mind and easily accessible.

Seek representation and advice.

One of the most important things you can do is seek the representation and advice of a commercial tenant representative. This person is different than a real estate agent in that they exclusive represent the rights and interests of commercial tenants, not landlords. A tenant representative, like Omni Realty Group, would help review your current lease, advise you of your best plan for negotiating more favorable lease terms or even an early termination, and represent you at the meeting with your landlord. This not only provides peace of mind, but it gives you the best potential for a favorable outcome.

Be direct and professional with your request.

Schedule a meeting with your landlord and be direct that it’s to discuss your current lease terms. In your meeting, be clear and professional with your communication. Present your plan for new lease terms or early termination just like you would present a product or service to a client or customer. You want to sell your landlord on your plan; therefore, you need to make it clear why he or she should “buy” it.

Back your position with facts and data.

You can expect that your landlord will have questions and rebuttal. Why should he or she grant you new lease terms that are likely more favorable to you than they are to the landlord? Come armed with facts and data that support your plan. And also speak from a point of reason. Explain how your business was impacted by COVID-19. What were your losses or layoffs? How long were your doors closed to customers? And also look to other cities or states where possibly new laws are coming into place to offer rent relief for commercial real estate. This is taking place in California where a new bill, if it becomes law, allows businesses, particularly bars and restaurants, to terminate their lease agreements. While this may not be a law in your state, it’s worth discussing with your landlord how other places are approaching this difficult topic for perspective.

Finally, it’s worthwhile to research and consider how certain lease clauses could play in your favor and back up your position. Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, like COVID-19, takes place. There is also the frustration of purpose doctrine, which comes into play when an unforeseen event undermines a party’s principal purpose for entering into a contract, such as how COVID-19 left many businesses without the need or ability to use their commercial space. And these are just a few examples. Upon more research and seeking legal counsel, there may be additional clauses and doctrines that could protect you in this situation.

Present the benefits of both parties.

Sure, the benefit to your business is clear. Shortening your lease terms or negotiating lower rent for less space will help your business stay afloat financially and shed overhead that is no longer needed as a result of COVID-19. Be sure to also make it clear what could be in the deal for your landlord. Could you recommend a new tenant, such as another business you know? Could you negotiate taking less space rather than leaving the building completely? Or could you reduce the length of your lease, but not terminate it immediately? Another option, if it’s of value to your landlord, is leaving behind desks, chairs, and other office furniture so that the space can be offered as fully furnished to new tenants.

Prioritize what’s most important, and be flexible with the rest.

Go into your discussion with your landlord knowing what you absolutely must accomplish in order for your lease to be sustainable for your business. Maybe this must be lower rent costs, or maybe you need to downsize your space. Try to pick your one most important thing, and then be prepared to make some concessions in other areas. If your landlord is willing to terminate your lease early, he or she may ask to keep your security deposit, or charge for one more month of rent. Or maybe they’re willing to let you downsize your space, but they need you to move to a different floor or location because it makes it more feasible for them to rent out other space. Be willing to listen and to negotiate.

Remember that you have options and support.

Omni Realty Group is working hard to address the ever-changing needs of businesses that have been impacted by COVID-19 and now need to rethink their commercial real estate leases. We want to help be a part of the solution. With the right strategy and presentation of your proposed changes to your lease, it’s reasonable and possible to find a favorable outcome with your landlord. Keep in mind that landlords have also been impacted by COVID-19 in ways you might not imagine. The right tenant representative can help guide you through the complexities of negotiating rent relief, share the most current updates on how they and/or others are addressing similar challenges, and provide the necessary thought leadership to help you make informed decisions.

Has COVID-19 impacted your business’s need for and use of its commercial real estate space? Are you considering asking for new lease terms as a result? If you have a question or need assistance, don’t hesitate to contact Omni Realty Group, Central Pennsylvania’s exclusive commercial tenant representative today.

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What does the major shift to virtual offices mean for commercial real estate?

Posted on April 28, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

What does the major shift to virtual offices mean for commercial real estate?

All across our nation, businesses that once functioned from physical office space had to quickly transform their processes to function remotely as the government mandated stay-at-home orders to prevent the spread of the Coronavirus. This proved to be a strenuous and uncomfortable transition for most businesses, regardless of size or structure. Businesses with just a handful of employees, all the way up to organizations and institutions with thousands of employees scrambled to piece together the technologies and protocol that would allow them to remain functional, even when separated physically.

The typical boardroom meetings turned into Zoom calls, workshops and trainings that were to be conducted in-person, needed to mold into virtual delivery, and much more. As is to be expected, there was a steep learning curve and many technological challenges to overcome.

Now that Pennsylvania is more than a month into its statewide stay-at-home orders, many businesses have found new normal of working virtually. This is encouraging for those businesses who have managed to survive, and even thrive amidst such volatile times for our economy. However, it presents an uncertainty as to how businesses will choose to resume their traditional work environment, when they have permission to do so.

The Impact on Commercial Office Space – Nationally

Before COVID-19, around 43% of workers “occasionally” worked from home [versus 39% in 2012], 62% of workers said they could work remotely, and 80% of workers wanted to work from home at least “some of the time.” Working (remotely) through this pandemic will likely increase those percentages, spelling rough waters ahead for office landlords. Now during the stay-at-home and work-from-home orders, employers are seeing how they can operate with some or all their employees working remotely, and even do so as or more efficiently than when working from their traditional work environment.

As a result, it’s likely many employers will closely consider how they might leverage the cost-savings associated with reducing or completely eliminating the overhead of physical office space, which will result in increased office space vacancies, shorter leases, reduction of space needs from renewing tenants and less money available for tenant improvements. Vacancies will rise dramatically before they slowly decline. With approximately 8.1 billion square feet of office space nationally, the expected addition of another 335 million square feet through 2024 is very much in doubt.

The Impact on Commercial Office Space – Locally

Being the home of Pennsylvania’s capital will provide the Central PA region with some shelter, but there is little chance this market does not cool in the very near future. Employment gains have underperformed the national average for the duration of this cycle, and demographic trends are unfavorable. Residents are older, population growth is slow, and the state’s fiscal situation is, quite frankly, a mess.

Harrisburg is an underdeveloped capital compared to Columbus, Albany, and Annapolis; and the cultural epicenter of central Pennsylvania is in Lancaster. Harrisburg is trying to evolve into a knowledge-based economy and has adopted business-friendly incentives that have helped create nearly two dozen tech startups, which have generated 1,000 jobs. But the backbone of the economy still lies with Hershey and Rite Aid, which have headquarters in the region.

Fortunately, Central PA also has a strong education and medical economy that is reflective of statewide employment. Education and health services jobs, which now track evenly with government jobs in the state’s capital, grew by more than 4% annually. Expanding employment opportunities have increased demand for office space, and employment in office-using industries is well above pre-recession figures; but this remains, and likely will remain, a slow-growth market. Additionally, Pennsylvania as a whole will likely face significant financial problems after the virus subsides.

Vacancies currently sit at close to 6.6%, representing a year over year change of 0.0%, but are almost certain to spike in the very near future. While 12 month absorption figures (9,300 square-feet) can be negative, vacancies remain under control thanks to limited levels of new supply. The limited demand, and high number of small businesses operating here, could hamper the city for years if the quarantine carries on for months, as the federal government is estimating it will.

A New Work-From-Home Paradigm

When it comes to navigating the new work-from-home paradigm, we can expect “work-from-home” policies to be established to assure proper decorum, productivity standards, communication, and online protocols. Also watch for the adoption of four-day work weeks, shorter workdays, and greater reliance on technology for current employees. Extensions of sick leave “banking” and “healthy-to-come-to-work” standards are likely to become commonplace.

From the tech side of things, the use of platforms like Zoom, Go To Meeting and Blue Jeans video conferencing technology will become more popular alternatives than traditional in-person meetings. There will also be an increased expectation that these meetings will be as, or more productive than in-person meetings. Board management software and other secure online document management such as DocuSign, DropBox, and shared drives could electronically account for 70% – 75% of all “approval” transactions, for businesses who require such. Robust CRM (customer relationship management) platforms will be used increasingly to interact with customers and clients. Additionally, automation and outsourcing could replace 20% – 30% of employees who perform clerical, accounting, and administrative functions.

A Looming Recession

No matter how you look at things, the bottom line is that this pandemic will push the U.S. into a recession. There’s simply no way around it, at least immediately. Overall GDP growth in 2020 is expected to decline 10% – 13% which is the deepest recession on record. Some expect unemployment could rise to 10% – 15%, or higher, assuming a COVID-19 peak occurs by the 3Q.

The Central PA region has been significantly impacted by the Coronavirus. As of first quarter, the country closed up businesses and the federal government is estimating it will take months before there is a return to normalcy. There is no telling how long the shut out will occur, or what impact it could have on the Central PA office market, though it will likely be immense. Unemployment numbers are beginning to spike, and in the coming weeks, it is likely that hundreds of more businesses could fail, even with the Governor’s promise of reopening the Commonwealth on May 8. Additionally, rents will likely decline as vacancies skyrocket, and construction and investment activity will likely remain extraordinarily limited through the remainder of 2020.

The fundamentals of how Americans live, work, shop and play have changed and will not return to historical norms of behavior, consumption and lifestyles. The year 2020 will be analogous to the impacts of and transformative changes resulting from the Great Depression [1929 – 1932], which took more than 10 years to recover.

Where do we go from here?

Commercial real estate must look at this as an opportunity, just like every industry, to pause and pivot. The market prior to COVID-19 will not be the same market to which we will return. But we will return to something and we must learn to navigate this new landscape by remaining flexible, thoughtful, and strategic. Historically, Central PA has been able to withstand some of the most tumultuous economic storms on the past. Yes, gains are about to take a hard hit as the Coronavirus tears through the commercial real estate world, but this only means we need to bear down an be open to opportunities wherever they may arise.

One of the hardest hit areas of commercial real estate will be new construction. With little supply underway at second quarter, and the Coronavirus halting construction across the world, there is very little chance this market sees any notable projects deliver this year. Most projects since 2015 have either been build-to-suit efforts or significantly pre-leased prior to ground break.

With most new construction on hold, there could be the opportunity for existing office renovations. Many businesses may be looking to reconfigure their space to better isolate employees, adhere to whatever new social distancing protocols come from this, or install sanitary features like air purifying systems. Commercial real estate construction companies and developers would be wise to shift their focus to this type of work.

Another hard hit sector will be companies that provide shared and collaborative office space, like WeWork. In fact, society as a whole is likely to question the open office, collaborative work space, and creative office floor plans. Many businesses and sole proprietors chose to cancel their memberships to such services during the pandemic and it will be exceptionally challenging to regain all that was lost once the stay-at-home orders are lifted. For those who have found that they can effectively work from their own home office spaces, they may continue to do so in an effort to lighten overhead costs. Others may have been hit so hard by the pandemic that there is not a business to which they can return, further reducing their need for office space.

Again, the opportunity here is to reconfigure both the physical shared office spaces to be better isolated and sanitary, but also rethink the business model of how companies charge for space. Being flexible and fluid for business owners as they navigate the new normal is key right now.

To close on a positive not, the one clear winner in the office sector will be healthcare, medical office buildings, and biotech facilities. This sector is expected to grow 10% – 16% annually over the next decade as the entire local, county, state, and national healthcare facilities infrastructure and platform are reshaped, integrated and expanded as society mends and strengths as a result of a pandemic like the world has never seen.

If you are a commercial real estate professional, how have you been impacted thus far by COVID-19. Or if you are a business owner or employee who has transitioned to a virtual work environment, how do you anticipate this experience to transition your “new normal” once the stay-at-home order is lifted?

Join in the conversation by leaving a comment below.

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COVID-19 and the Economy: Changes Coming to Commercial Real Estate

Posted on March 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

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

No matter where you go to consume news, you will be bombarded by anything and everything related to COVID-19. The impact of this novel virus on our world is impossible to fully understand or appreciate at this time. The term “unchartered water” is being used quite frequently and it couldn’t be more accurate.

Every industry is wondering how this will impact their business, both immediately and long-term. The simple truth is that no one really knows right now. The best we can do is look to history to see how the world has reacted to similar pandemics, economic crisis, and panic. Though the world has not seen a virus causing a global shut down like we are seeing with COVID-19, we can anticipate the significant changes we may expect to see take right here in Pennsylvania. Here’s how commercial real estate is getting pulled into the fold.

Economic Uncertainty. With so much uncertainty in the stock market these last few days, people get nervous. Talk to anyone working in the financial services industry, and he or she will tell you that most of their time right now is spent talking people off the ledge of making panicked decisions. And their fear is not unfounded. After all, trillions of dollars in paper wealth have essentially evaporated.

As people watch their diminishing 401K balances, they feel rightfully uncertain. And if such uncertainty causes consumers to hit the pause button on spending, a ripple effect is bound to take place. When attendees avoid concerts, sporting events, movies, or restaurants, businesses suffer a decline in sales. Operations who supply these enterprises, such as the trucking, food, linens, security, novelties industries then feel the pinch as the ripples become waves of lost revenue. How does this relate back to commercial real estate? All of these businesses rent or own commercial real estate, meaning CRE gets pulled into the downward spiral.

Supply chain disruption. Here are the facts (changing daily), steel production is down 90% in China. Auto sales in Asia is down 95%. One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create an immense lag in product delivery which will ripple out to impact just about every other industry imaginable.

Whole industries have come to a sudden halt. Hotels, restaurants, construction businesses, retail stores – and this is hardly scratching the surface of the businesses across the Commonwealth mandated to shutter their businesses for at least two weeks – likely more. The ripple effect this will have immediately and well into the future is near impossible to quantify. It’s not unlikely that some businesses may fold as a result. If such businesses owned or rented commercial real estate, this is space that will be vacated. Additionally, a lull in new construction will decrease the amount of new space delivered to the market at least through 2020.

Interest rates. There is much conversation and reason to believe that we will soon see more favorable interest rates, making commercial real estate financing more affordable. The reason is that mass stock market sell offs will generate proceeds which must be invested. Typically, a safe harbor for this cash is short term instruments such as Treasuries. However, this needs to be taken with a grain of salt. On March 3rd, The Federal Reserve lowered the federal funds rate by ½ of one percent which was met with much applause. The truth is that this is irrelevant. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. The hard truth is that the federal funds rate has no impact on ten-year treasury yields.

The Silver Lining – Despite the doom and gloom being predicted for many industries as the result of the spread of COVID-19, there are (at least) three reasons why commercial real estate should look to the silver lining in all of this. Here’s what they are.

#1. Some stock market investors fleeing the equity markets may choose to start investing in real estate. Why wouldn’t they invest in CRE? After the rapid downturn that’s transpired in the last few weeks, it only seems logical that some would say enough is enough I’m going to pull my money out of the stock market and invest it in a lower risk type of investment.

#2. Treasury rates have hit historic lows. On March 9th, the ten-year treasury bottomed out at 0.569%, rising to 0.981% by Friday, March 13. For comparison, a year ago, the ten-year treasury closed at 2.592% so the decline has been dramatic to state the obvious. Those of us who have debt, whether it is a home loan or loans on our rental properties, are going to benefit by refinancing debt with significantly lower interest rates.

#3. If there is increased demand for CRE and interest rates remain low, the logical result will be that capitalization rates will continue to compress even further than they are right now. This means that even if a real estate investor doesn’t refinance his rental properties, the value of his real estate will still go up as cap rates continue to compress. So bottom line is that those of us who have invested in commercial real estate will inadvertently benefit from this black swan event.

#4. It’s now a tenant’s market. The speed at which the market shifted from a landlord’s market to a tenant’s market can hardly be overstated. COVID-19 has effectively caused a collapse of U.S. office demand, which ironically comes after the market set a post-recession record just last year. For tenants who are hunting for new office, retail, or industrial space, chances are you’re going to be able to negotiate favorable terms and pricing.

In trying and changing times like these, I am very glad I chose to be an exclusive tenant agent representative/buyer’s agent for commercial real estate. I can still be an asset to my clients, whereas other forms of brokerage are more greatly impacted by the COVID-19 pandemic. During this historic time, I can serve my clients through subleasing, lease restructuring, and negotiating better deals based on current market conditions.

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

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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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