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How COVID-19 Has Impacted Business Insurance

Posted on February 10, 2021 by Mike Kushner in Blog, Local Market, Trends No Comments

The world is still responding and adjusting to the ripple effects that the COVID-19 impact had on every business, industry, and person. Where will it stop? No one knows, but we do know that where impact occurred, so did change. This rings true for the commercial insurance industry which suddenly found itself faced with a ton of unique circumstances. As businesses changed their services and practices to adjust to COVID-19 shutdowns, limitations, and new protocols, many also found themselves reviewing their commercial insurance policies to see where they might be covered for losses.

To help answer some of the unknown on this topic, we looked to a local professional. Alan Hostetler of Alan Hostetler Insurance Agents and Brokers, Inc. has provided us with his insight on the topic of how COVID-19 has impacted business insurance policies here in Central Pennsylvania. Since 1974, Alan Hostetler Insurance Agents and Brokers, Inc. has been providing insurance coverage for Central Pennsylvania. With experience providing personal, commercial, health, and life insurance, Alan brings extensive knowledge and insight to this topic. Keep reading for our Q&A with Alan.

Omni: How has COVID-19 impacted business insurance policies?

Alan: Surprisingly, COVID-19 has had only a minor impact on business insurance policies. This is mostly because the exposure to potential losses incurred during a global pandemic is excluded either by intent or by specific exclusion. Unfortunately for most businesses looking for insurance to cover the cost of various losses incurred due to COVID-19, their business insurance policy was not designed to provide protection from a pandemic.

Omni: What changes do you anticipate being made to insurance policies in light of the global pandemic?

Alan: This is an exposure that cannot be easily measured or assessed, therefore insurance companies will likely avoid even offering “pandemic” coverage. There may be a few specialty companies that may offer a limited policy (in scope and limits) at a very high premium which will discourage any potential customer. Though (hopefully) a global pandemic of this proportion is not likely to reoccur any time soon, insurance is simply not likely to provide businesses with any sort of protection from such losses in the future.

Omni: What are your thoughts on the UK Supreme Court unanimously ruling in favor of the policyholders regarding the non-damage insurance policy clauses — which cover disease and denial of access to business premises?

Alan: Though I am not familiar with the ruling, I would suggest that the coverage offered in the UK is totally different than offered in the US. Our coverage in the U.S. can vary by state so it is difficult to comment on the structure of insurance in the UK. There have been several instances in the U.S. that the Business Income coverage has been tested but the courts ruled in favor of the insurance companies. The is no ambiguity in the policy language.

Omni: Do you feel that a similar case may make its way to the US? Share your thoughts on what this might look like.

Alan: There have been several in the U.S. and one namely in New Jersey which was shot down.

Omni: What advice do you have for local business owners regarding how they are insured and how they may protect themselves in the future from something like a global pandemic?

Alan: The last Pandemic in the U.S. was the Spanish Flu at the end of World War I. The insurance industry will not be the answer. If a company does offer the coverage it will be with a specific limit of insurance, large deductible, and high premium – so overall, a very undesirable product.

Omni Realty Group thanks Alan for sharing such insightful and candid information. While most businesses would be hopeful that there could be an insurance policy that could act as a magic wand and protect them from all risks and losses, that will never be the case for several compelling reasons. Fortunately, there are plenty of other insurance options to protect other assets that are of value to a business. As for the impact of COVID-19, businesses would do best to remain attentive to ways they can shift their processes to remain an accessible and convenient option to customers until we can work our way through this pandemic.

Do you have a question related to COVID-19 and commercial insurance policies, or an experience to share? Join in the conversation by leaving a comment below.

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Central PA’s Top Commercial Real Estate Sales in 2020

Posted on January 15, 2021 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Retail, Trends No Comments

2020 was quite the year, but even a global pandemic did not halt the exchanging of commercial real estate. In Central Pennsylvania, the sale of commercial real estate continued well through the end of the year with hundreds of millions of square-feet being bought and sold. As to be expected, the largest commercial real estate transactions in both square feet and price was industrial space. More than 3.5 million SF of industrial space exchanged hands in 2020 with the most taking place in York and Carlisle which are major distribution destinations along the I-81 corridor.

The top 5 multifamily sales in Central PA ranged in price in location, from 160 Class A units in one transaction and 663 Class C units in a Manufactured Housing/Mobile Home Park in another. The largest exchange of space in a single transaction was 339,612 SF in a townhouse complex in Marietta.

Three of the top five office sales exchanged hands between the same two parties. AR Global purchased 50,800 SF of office space, primarily occupied by health centers, from RVG Management and Development Company. In retail sales, the Blackstone Group L.P. sold 274,764 SF of York retail space to a joint venture between Triple Crown Corporation and J.C. Bar Properties, Inc. in three separate transactions.

Keeping reading for a full list of the top 5 commercial real estate transactions, for office, retail, industrial, and multifamily, that took place throughout Central Pennsylvania in 2020.

Top 5 Office Sales

#1 – 1171 S Cameron Street, Harrisburg, PA 17104

Olcam Corporation sold the 121,518 SF Class C Office Building built in 1989

to Boyd Watterson Asset Management on July 22, 2020 for $20,500,000 ($168.70/SF). At the time of sale, the property was 100% occupied by the Pennsylvania Department of Labor & Industry.

#2 – 300 Corporate Center Drive – Camp Hill Corporate Center, Camp Hill, PA 17011

LNR Partners LLC sold the 173,296 SF Class A Office Building built in 1989 (renovated in 2005) to Linlo Properties on July 6, 2020 for $14,394,731 ($83.06/SF). At the time of sale, the property was 62.5% occupied by Deloitte and Pennsylvania Health & Wellness, Inc.

#3 – 805 Sir Thomas Court – Arlington Place – Old English Gap Professional Park, Harrisburg, PA 17109

RVG Management and Development Company sold the 24,800 SF Class B Medical Building built in 1994 to AR Global Investments, LLC on January 16, 2020 for $7,812,000 ($315.00/SF). At the time of sale, the property was 100% occupied by Pennsylvania Spine Institute and PinnacleHealth Express.

#4 – 2140 Fisher Road, Mechanicsburg, PA 17055

RVG Management and Development Company sold the 15,000 SF Class C Office Building built in 1990 (renovated in 2016) on January 16, 2020 to AR Global Investments, LLC for $5,394,000 ($359.60/SF). At the time of sale, the property was 100% occupied by PinnacleHealth Shepherdstown Family Practice.

#5 – 5400 Chambers Hill Road – Swatara Medical Center, Harrisburg, PA 17111

RVG Management and Development Company sold the 11,000 SF Class B Office Building built in 1988 (renovated in 1993) to AR Global Investments, LLC on January 16, 2020 for $5,394,000 ($490.36/SF). At the time of sale, the property was 100% occupied by Chambers Hill Family Med Center and Select Physical Therapy.

Top 5 Retail Sales

#1 – 2449 E Market Street – Lowe’s – York Marketplace, York, PA 17402

The Blackstone Group L.P. sold the 125,353 SF Retail Freestanding (Community Center) Building built in 1955 (renovated in 2004) to Triple Crown Bar York Marketplace, LLC on November 3, 2020 for $13,916,926 ($111.02/SF). At the time of sale, the property was 100% occupied by Lowe’s.

#2 – 2415 E Market Street – Giant Food – York Marketplace, York, PA 17402

The Blackstone Group L.P. sold the 74,541 SF Retail Supermarket (Community Center) Building built in 1994 to Triple Crown Bar York Marketplace, LLC on November 3, 2020 for $11,939,079 ($160.17/SF). At the time of sale, this property was 100% occupied by GIANT.

#3 – 2501-2555 East Market Street – York Marketplace, York, PA 17402

The Blackstone Group L.P. sold the 74,870 SF Retail Storefront (Community Center) Building built in 1994 to Triple Crown Bar York Marketplace, LLC on November 3, 2020 for $11,407,972 ($152.37/SF). At the time of sale, this property was 95.2% occupied by 13 tenants: Firehouse Subs; Gamestop; Kids First Swim School; Market Street Viet Thai Cafe; MyEyeDr.; Oreck; Pet Valu; PLCB Wine & Spirits Store; Red Lobster; Starbucks; Super Shoes; Verizon Wireless; VIP Nail & Spa.

#4 – 1360 Columbia Avenue – Stone Mill Plaza, Lancaster, PA 17603

Brixmor sold the 76,056 SF Retail Supermarket (Community Center) Building built in 1988 (renovated in 2007) to Tristate Ventures, LP on March 13, 2020 for $10,772,036 ($141.63/SF). At the time of sale, the property was 88.5% occupied by GIANT and Great Clips.

#5 – 1278 S Market Street – GIANT – Elizabethtown Shopping Center, Elizabethtown, PA 17022

Frist City Company sold the 65,146 SF Retail Supermarket (Neighborhood Center) Building built in 1982 to James Gibson on November 30, 2020 for $7,338,000 ($112.64/SF). At the time of sale, the property was 100% occupied by Citizens Bank, GIANT Food Stores of Carlisle, and Starbucks.

Top 5 Industrial Sales

#1 – 3419 Ritner Highway – Ritner Logistics Center, Newville, PA 17241

Artemis Real Estate Partners sold the 1,215,240 SF Class A Distribution Building built in October 2019 to Exeter Property Group on October 1, 2020 for $85,000,000 ($69.95/SF). At the time of sale, the property was unoccupied.

#2 – 4875 Susquehanna Trail – ES3 LLC Bldg 1, York, PA 17406

C&S Wholesale Grocers, Inc sold the 790,000 SF Class B Distribution Building built in 2002 to Ahold Delhaize on February 11, 2020 for $75,665,684 ($95.78/SF) as a sale leaseback. At the time of sale, the property was 100% occupied by ES3 (also the seller).

#3 – 4875 Susquehanna Trail – ES3 LLC Tower 2, York, PA 17406

C&S Wholesale Grocers, Inc sold the 705,000 SF Class B Distribution Building built in September 2009 to Ahold Delhaize on February 11, 2020 for $64,234,316 ($91.11/SF) as a sale leaseback. At the time of sale, the property was 100% occupied by ES3 (also the seller).

#4 – 192 Kost Road – Silver Springs Distribution Center, Carlisle, PA 17015

Black Creek Group sold the 422,400 SF Class A Warehouse Building built in June 2016

to Prologis, Inc. on January 8, 2020 for $30,218,510 ($71.54/SF). At the time of sale, the property was 100% occupied by Acme.

#5 – 100 Louis Parkway – Carlisle Distribution Center, Carlisle, PA 17015

Black Creek Group sold the 400,596 SF Class A Warehouse Building Built in 2006 to Prologis, Inc. on January 8, 2020 for $28,658,651 ($71.54/SF). At the time of sale, the property was 100% occupied by Overstock.

Top 5 Multifamily Sales

#1 – 2035 Patriot Street – The View at Mackenzi, York, PA 17408

Morgan Communities sold the 224 Unit, 242,323 SF Class B Apartments Building built in 2006 to Larken Associates on March 2, 2020 for $28,058,244 ($115.79/SF; $125,260/Unit). At the time of sale, units were 90.6% occupied.

#2 – 310 Honeysuckle Drive – The Villas of Castleton, Marietta, PA 17547

Keystone Custom Homes sold the 160 Unit, 339,612 SF Class A Apartments Building built in 2009 to Steinman Real Estate LLC on February 28, 2020 for $25,191,760 ($74.18/SF; $157,448/Unit). At the time of sale, units were 96% occupied.

#3 – Fox Run Road – Chesapeake Estates of Grantville, Grantville, PA 17028

David Sherrill sold the 663 Unit Class C Manufactured Housing/Mobile Home Park built in 1987 to RHP Properties on October 29, 2020 for $21,040,000 ($18,785.71/SF; $60,634/Unit).

#4 – 1 Chesapeake Estate – Chesapeake Estates of Thomasville, Thomasville, PA 17364

David Sherrill sold the 663 Unit Class C Manufactured Housing/Mobile Home Park built in 1986 to RHP Properties on October 29, 2020 for $19,800,000 ($19,800.00/SF; $62,658/Unit).

#5 – 200 South Court Street – Mulberry Station Apartments, Harrisburg, PA 17104

AION Partners sold the 100 Unit, 116,667 SF Class B Apartments Building built in 1987 (renovated in 2020) to Post Road Management on January 16, 2020 for $12,100,000 ($103.71/SF; $121,000/Unit). At the time of sale, the property was 100% leased.

In the coming months and years, it will be important to keep an eye on the top commercial real estate sales in the region. As office, retail, industrial, and multifamily real estate exchanges hands, the businesses who own this space, and their tenants stand to have a great impact on the local, and global economy moving forward.

Among all the top transactions that took place in 2020, which 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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COVID-19 Prompts Manufacturing Companies to Make Long-Term Changes

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

According to a new study, more than 90% of companies expect the disruption of global supply chains caused by the pandemic to have long-term effects on their businesses. This has caused manufacturers to closely examine various aspects of their businesses and consider what may need to change, possibly permanently, to adjust to the new COVID-19 reality we are living in.

Furthermore, businesses have begun to realize the importance of continuously monitoring their suppliers, especially those overseas, for risks and disruptions as they try to accommodate many personnel issues, supply chain disruptions, and uncertainty in general.

Keep reading to learn what this new survey and other news sources are reporting about the change to manufacturing and supply chain businesses as the result of the pandemic, and how these changes stand to impact the commercial real estate market.

Widespread Impact in a Variety of Areas

Respondents to the survey estimated that on average about 43% of their entire supply chain suffered some kind of interruption. For the majority of respondents, this was due to fluctuation in supplier pricing and safety restrictions causing orders to be paused or slow to fill. The next most common interruption was the need to find suppliers in other geographic regions due to import/export restrictions, followed by the challenge of suppliers going bankrupt. Many manufacturing businesses didn’t experience just one of these interruptions, but a combination of several which made for an exceptionally chaotic time when COVID-19 first hit. Now that the world has gone on to accept where we are the new reality, at least for the foreseeable future, manufacturing and supply chain industries are shifting from short-term considerations to long-term changes that will make them more stable in the future to sustain a global event in the future.

What this means for commercial real estate: As businesses are reacting to the widespread impact of COVID-19 on manufacturing and supply chain operations, there is a valuable opportunity for commercial real estate owners and investors here in the United States to position their properties as solutions for addressing these changing needs. Businesses may need more space, or a different configuration of space to accommodate their new systems and processes. The more flexible CRE professionals can be with their space, the more they will be able to attract new tenants and even expand their portfolio.

Shift to Reshoring and Nearshoring

In an effort to learn from what this pandemic has already taught us, manufacturing businesses have shifted their focus toward solutions that stand to reduce risk and protect against future shocks as of the likes of COVID-19. Many businesses are taking steps toward retooling their supply chain, and one major shift in mindset is reshoring or nearshoring manufacturing that was once offshore. Reshoring is the process of bringing back overseas supply chain operations to the country of origin and nearshoring is the process of bringing supply vendors closer to the point of origin, from farther overseas destinations. Reshoring and nearshoring an operation’s most vital materials reduces the risk of being held hostage by offshore suppliers.

In that same survey, 97% of respondents said they agree that better visibility into their suppliers is imperative. When various components of a business are broken up and distributed all across the globe, it can be nearly impossible to keep your thumb on all aspects of operations and it can make it harder for these points of operations to communicate effectively with one another. Now more than ever, businesses are seeing the value of keeping their operations within the same country, if and when it’s possible.

What this means for commercial real estate: For commercial real estate owners and investors, this means the demand for industrial space is going to rise. As businesses look to retool their supply chain and bring components back to the United States, they will inevitably seek more warehousing and manufacturing space to accommodate their growing needs.

The Smartest Businesses Are Acting Now

In such a challenging environment, the most forward-thinking businesses are not wasting time addressing vulnerabilities in their supply chains. Many respondents (98%) are planning to take some kind of action to build resilience against future disruptions – and the top courses of action are identifying and employing alternative suppliers, continuous monitoring, and increasing reshoring capabilities. Additionally, diversifying or localizing supply chains are a way to reduce costs, as well as better prepare for future economic disturbances.

What this means for commercial real estate: Now is the time to position your CRE assets as solutions for manufacturing and supply chain businesses. If your space is a fit for such needs, you should market it as such. Be direct in the unique benefits your space can provide a business. For industrial businesses, this means a large and functional space located conveniently for transportation. The Central Pennsylvania region is accessible to major cities and transportation hubs on the East Coast. Commercial real estate space along the I-81 and I-83 corridors will benefit from any beefing up of supply chains and logistics in this area.

With the impact of COVID-19 causing many manufacturing businesses’ to change how and where they make, store, and transport goods, the silver lining is that the Central Pennsylvania is likely to experience an increase in demand for industrial and manufacturing space. This will in turn drive new construction, bring more jobs to the area, and strengthen the overall economy. This is not to overlook the many significant challenges the pandemic has caused to all industries, but it’s at least one path that is headed in the right direction, particularly for industrial real estate in Central PA.

Do you have a question or idea related to manufacturing, commercial real estate, and COVID-19? Join the conversation by leaving a comment below.

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The Millworks Shares How COVID-19 Has Impacted the Restaurant Industry

Posted on August 23, 2020 by Mike Kushner in Blog, Local Market No Comments

Like most industries, the restaurant industry has faced a sudden and unavoidable need to adapt to the changes amidst COVID-19. Nationwide, restaurants that could typically pack their tables during mealtimes, happy hours, and late night gatherings were forced to shutter their locations for weeks, even months on end. And now, even though restaurants in Pennsylvania were allowed to again open their doors, it’s far from business as usual.

Although this was a huge blow to our restaurants, one thing is certain: people always need to eat. This means that so long as restaurants can find a way to safely prepare and serve food, there is demand for their services. Restaurants have adapted by expanding their outdoor seating, limiting tables in use, offering contactless, curb-side pickup, frequently sanitizing common spaces, and of course requiring face masks for both staff and guests. The question now is how sustainable is this model? And can restaurants anticipate their revenue to pick back up?

To provide a local perspective as to what’s going on here in Central Pennsylvania and how the restaurant industry has had to make rapid and drastic changes to the way they do business, Omni Realty Group reached out to a Harrisburg restauranteur. Josh Kesler, owner of The Millworks located in downtown Harrisburg, joins us to weigh in on how his business has been impacted by COVID-19 and how he has adapted to changing circumstances.

Omni: Describe how The Millworks has been impacted by COVID-19 and your decision to temporarily close.

JK: After being closed for several months during the initial shutdown, we were excited to get back open, even at a more limited capacity of 50% in Pennsylvania. But several weeks after reopening, we had a staff member test positive for COVID-19. We immediately closed again pending test results. Because of testing delays, several days turned into several weeks, and I ultimately made the decision that we wouldn’t be able to function by closing every time an employee tested positive. So for that reason we are closing operations until there is at least one of the following: sustained down swing in new case numbers, a COVID-19 treatment that greatly reduces the death rate, or a vaccine.

But the circumstances are vastly different for many restaurants. Ones that were positioned pre-COVID-19 with a robust take-out business have been better able to transition into the new environment. Others, such as The Millworks, is a destination business that has built its core from experiential dining and shopping. So there’s no ‘one size fits all’ approach to how to react to the situation. It’s really dependent on the market positioning before the pandemic. Some restaurants are also struggling with converting to a take-out model because of the adjustment in office work. For years take-out was really location driven, i.e. grab a bite to-go on your way home from the office. But with most people working from home, traffic trajectories have changed greatly. Proximity to residences, not offices, is the key. And that factor may continue to play out after the pandemic if businesses decide not to carry the expense of office space.

Omni: Looking to the future when and how do you plan to resume business? What factors will play into this decision?

JK: Our handling of the virus will ultimately decide when the best time to reopen is. If new infections decrease, I think we all hope that the Governor will loosen the capacity restrictions on bars and restaurants. At the current 25% capacity restriction and colder weather approaching (losing outdoor dining), it doesn’t seem viable for most restaurants to weather that sort of downturn. Remember, most dine-in restaurants survive to a large degree on alcohol sales, and with bar service limited and general capacity reduced, the economics become difficult.

The timing of losing outdoor dining is also coupled with the end of the PPP for most restaurants, and I believe staffing and overhead will become too great for many to continue forward. Fortunately for The Millworks, I have built a solid war chest that will be able to sustain us for an extended shutdown, but I do worry that many of my colleagues won’t be able to, and I really feel for them right now.

Omni: How are you using the adjustments due to COVID-19 to reinvest in your business, such as renovations, changes, or improvements?

JK: I’ve really limited expenditures on improvements to pivot to the new COVID-19 reality, for no other reason than that the reality is changing rapidly, sometimes daily.

Omni: Of the staff you have retained during this time, how have their roles and duties shifted?

JK: At the current time, all but two of my 85 employees are laid off. It is by far the single greatest feeling of defeat, having had to lay off staff that have been the foundation and fabric of my business. But in the end, by making the decisions I have and by years of positioning before the crisis, I can guarantee all of them a job on the other side of this. I’m sure there are varying political views, but I strongly urge the support of extended unemployment insurance for restaurant workers until we get past this crisis. The looming income shortfalls will force millions of talented people to seek careers in other industries. That is already happening to some degree.

Omni: Is there any silver lining you have found through all of this?

JK: As dire as all of this sounds, I do think those who survive the crisis will flourish on the other side. It may take some time for all of us to readjust our habits, but let’s face it, restaurants are critical in how we enjoy time with our friends, family, and co-workers. It’s like going to church, or the baseball game, or the backyard barbeque. It’s just who we are and what we do as people, and there will never be a shortage of that over the long term.

***

Omni Realty Group thanks Josh Kesler for sharing his insight and experiences adapting to COVID-19. Each restaurant has taken a unique approach to adapting to COVID-19, and it’s very interesting to learn the thought behind the changes and future adjustments that may still be yet to come.

As it relates to commercial real estate, one of the biggest obstacles is making the best use of whatever space you have, whether that’s looking to add outdoor seating, reconfigure your indoor seating to accommodate social distancing, or choosing to downsize if business demand is down. For restaurants owners, what’s most important is to remain flexible creative with your business solutions so that you are in the best position to safely remain open during COVID-19.

Have you patronized a restaurant since COVID-19 hit? Did you dine inside, outside, or get takeout? And what was your basis for this decision? We’d love to hear your perspective on restaurant dining and COVID-19 concerns. 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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Commercial Spaces Likely to See New Requirements for HVAC Due to COVID-19

Posted on June 1, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

COVID-19 has changed life as we know it. The home office became the new workspace, video conferencing replaced in-person meetings, events shifted to virtual delivery, and parents became homeschool teachers while trying to balance career demands. It’s safe to say that the majority of people are looking forward to a time when they can return to work and feel a sense of normalcy again. One of the most important elements of this being possible in the near future is the ability for businesses to create a safe and sanitary work environment while adhering to CDC guidelines. The sooner this can be accomplished, the sooner commercial spaces can begin to reopen.

Some of the most important considerations are how to effectively filtrate, circulate and sanitize the air in shared and common spaces to reduce the spread of viruses. What options exist to improve air filtration and sanitization in shared office, retail, or industrial work spaces? And what new requirements might we expect commercial spaces will need to adhere to in order to ensure a safe work environment for their employees?

To lend some expertise on this topic, Omni Realty Group turned to John Gunning, who is the Senior Mechanical Engineer at McClure Company, based in Harrisburg, PA. Working within the Engineered Services division, he is responsible for the design of building mechanical systems for the commercial, educational and industrial markets. He is a licensed Professional Engineer in Pennsylvania and a LEED Green Associate. John is McClure Company’s in-house expert on the subject of ventilation and dehumidification and is frequently asked to speak at both technical and non-technical seminars regarding these subjects.

We asked John a series of questions related to how office, retail, and industrial spaces may need to adjust the functionality of their air filtration and sanitization in light of COVID-19. Keep reading to learn what he predicts to be the “new normal” of commercial HVAC requirements in Pennsylvania and beyond.

Omni: Prior to COVID-19, what was considered the standard level of air filtration in most office spaces?

JG: Pre-COVID we would expect to see 1-2” thick filters with a MERV 6 to MERV 8 rating. However, some systems may use lesser rated 1” filters, MERV 4 or less, with mesh or washable media.

Omni: As people return back to physical office spaces after stay-at-home orders are lifted, what changes do you anticipate businesses making to their office spaces to be more sanitary for their workers, particularly as it relates to HVAC and air-filtration considerations?

JG: With much of the discussion of the transmission of COVID revolving around the virus in aerosol form, we can anticipate businesses thinking of their HVAC system as more than just a tool to keep the space at the correct temperature. Building codes require outside ventilation air to be introduced into the building to dilute contaminants. Over time, outside air dampers may have been closed for reduced energy usage or for service and there may not be sufficient ventilation air being provided to the building. The American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) has also issued this position document which includes recommendations for building owners. Among the recommendations are upgrades to a minimum MERV 13 filter and use of ultraviolet (UV) lights in the airstream. Previous studies have also shown that optimal humidity range for human health and reduced infection rates of seasonal Influenza and other viruses is 40-60% relative humidity.

Omni: What are the options available for a higher standard of air-filtration in commercial spaces?

JG: Most commercial HVAC equipment will except a 2” filter. A 2” filter can be manufactured with an efficiency rating up to MERV 13. However, there is a trade-off in both cost and in energy usage as the more efficient filter will have a higher air pressure drop. This higher pressure drop requires greater fan horsepower to move the same amount of air through the filter as compared to a lower efficiency filter.

Omni: In your opinion, what industries most need to make such improvements to air-filtration?

JG: At present, healthcare facilities and some manufacturing businesses are the industries whose filter requirements must meet or exceed the latest ASHRAE recommendations related to preventing the dissemination of airborne pathogens. Office, Retail, Education and Hospitality business are candidates for filtration upgrades as more people return to utilizing these spaces.

Omni: In addition to HVAC and air-filtration changes, what other improvements might you suggest to business owners to increase the cleanliness of their air quality?

JG: Active dehumidification is strongly recommended in order to keep the space’s relative humidity below 60 %. Limiting cooling season humidity can also reduce the risk of mold growth which can be a source of respiratory issues. On the other end of the spectrum, maintaining humidity levels above 40% is of equal importance. To that end, we expect more owners to consider the use of humidification in the heating season. Incorporating UV lights, in the supply air stream, is documented by ASHRAE as an effective method to deactivate genetic building blocks of viruses. While newer, bi-polar ionization shows potential as a technology capable of deactivating airborne viruses, it has yet to be recommended by ASHRAE. When outdoor conditions permit, increasing the use of outdoor air to dilute indoor contaminants is beneficial.

Omni Realty Group thanks John Gunning for sharing this valuable information and helping us to better understand the changes that may need to take place to improve air filtration and sanitization in commercial spaces as the result of COVID-19. During this unprecedented era in all of our lives –and the history of the world – it’s so important to arm yourself with knowledge and options that exist to continue to improve the health and safety of our communities where we live, work, and play. John’s insight and explanation of enhanced HVAC filtration requirements for commercial spaces should be helpful to all Central Pennsylvania businesses who are looking for additional health measures they can put in place for the safety of their workers.

Do you work in a commercial space – office, retail, or industrial? How do you feel like impact of COVID-19 will require changes be made to the air filtration and sanitization in your space? We welcome you to share your questions or reflections in the comment section below.

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

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

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

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

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

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

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

Typical Commission

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

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

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

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

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

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

Advantages of Working with a Tenant Representative

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

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

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

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

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Cannabis-Friendly States Get Major Boost in Commercial Real Estate

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

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

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

Increased Demand for Both Commercial and Residential

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

A Double Edge Sword for Residential Real Estate

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

CRE Investors See This as a Big Opportunity

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

The Economic Impact in Pennsylvania

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

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

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

What’s next for marijuana in Pennsylvania?

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

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

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

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

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