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Census Data: National and Local Trends You Need to Watch

Posted on June 3, 2019 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

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

Census data provides a fascinating look into population growth trends that stand to have a profound impact on our economy, both locally and nationally. More than just being “interesting” data to study, population growth and decline points us to important trends that will reshape supply and demand in various industries, one of the most prominent being real estate.

Just last month, the US Census Bureau released new population estimates. These estimates account for and compare the resident population for counties between the dates of April 1, 2010 to July 1, 2018. The outcome? There are shifts in population taking place across the nation that may differ from what you might assume. Let’s take a look at some of the highlights from this data from a national and local level.

At a National Level

South and West Lead Population Growth

The census data confirmed that counties with the largest numeric growth are located in the south and the west regions. In fact, Texas claimed four out of the top 10 spots. Looking at population growth by metropolitan area, Dallas-Fort Worth-Arlington, Texas, had the largest numeric growth with a gain of 131,767 people, or 1.8 percent taking place in 2018. Second was Phoenix-Mesa-Scottsdale, Arizona which had an increase of 96,268 people, or 2.0 percent. The cause of growth in these areas is the result of migration, both domestic and international, as well as natural increase. In Dallas, it was natural increase which served as the largest source of population growth, whereas in Phoenix I was migration.

Fastest Growth Occurred Outside of Metropolitan Areas

Surprisingly, no new metro areas moved into the top 10 largest areas. Of the 390 metro areas within the US (including the District of Columbia and Puerto Rico), 102 of these areas, or 26.2 percent experienced population decline in 2018. The five fastest-decreasing metro areas (excluding PR) were Charleston, West Virginia (-1.6 percent); Pine Bluff, Arkansas. (-1.5 percent); Farmington, New Mexico (-1.5 percent); Danville, Illinois (-1.2 percent); and Watertown-Fort Drum, New York (-1.2 percent). The population decreases were primarily due to negative net domestic migration.

North Dakota Claims Fastest Growing County

Among counties with a population of 20,000 or more, Williams County, North Dakota claimed the top spot as the fastest-growing county by percentage. This county increased by 5.9 percent between 2017 and 2018 (from 33,395 to 35,350 people). The rapid growth Williams County experienced was due mainly to net domestic migration, 1,471 people, in 2018. The county also experienced growth between 2017 and 2018 by both natural increase of 427 people, and international migration of 52 people.

More Growth than Decline

Out of 3,142 counties, 1,739 (or 55.3 percent) gained population between 2017 and 2018. Twelve counties (0.4 percent) experienced no change in population, and the remaining 1,391 (or 44.3 percent) lost population. Between 2010 and 2018, a total of 1,481 (or 47.1 percent) counties gained population and 1,661 (or 52.9 percent) lost population. Though there has been more growth than decline overall, the numbers indicate that this can easily shift year over year.

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

The most notable trend to take place between 2010 and 2018 in Central PA is that these counties all experienced consistent growth year-over-year. Moreover the growth occurred fairly evenly over the last 8 years. This provides consistency and enables the economy to respond to the growth over a reasonable amount of time.

Counties Also Maintain Same Order of Ranking in Population

Another trend worth noting is that the counties have maintained the same order of ranking based upon population for 8+ years. For example, in 2010 these counties in order of smallest population to largest population was Cumberland, Dauphin, York, Lancaster. This is the same ranking we see in 2018, and every year in between. No county surpassed another at any point.

Lancaster Remains Largest and Fastest Growing County

Lancaster County has a major lead in population over the others. At 984 square miles, it is also the largest of the 4 counties. Between 2010 and 2018 it also experienced the largest numeric growth at 24,112 people. Number two in numeric growth was actually the smallest of the four counties, Cumberland County, which grew by 16,017 people. York County grew by 13,301 people and Dauphin County grew by 8,997 people.

Overall, the latest US Census offers valuable and insightful information related to population growth between 2010 and 2018. Understanding the cause of either growth or decline provides framework for how these shifts may continue on their course, or change in the future.

A deeper dive into the census data reveals several demographic changes impacting commercial real estate development: household formations, aging baby boomers, growing millennials, women in the workforce, and migration toward the South.

Today’s demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands.

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Commercial Real Estate Appraisals in Central PA: Q&A with JSR Appraisal Group, Inc.

Posted on May 6, 2019 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

Appraising commercial real estate is a particularly unique process, and one that if not done carefully and correctly can have a profound impact on the value of a commercial property for many years to come. To dive deeper into the topic of commercial appraising, including the industry trends and challenges, Omni Realty Group enlisted the expertise of Judy Striewig and M. Shane Rorke, Certified General Appraisers and Co-Founders of JSR Appraisal Group, Inc.

JSR Appraisal Group, Inc. is a commercial appraisal firm located in Camp Hill, Pennsylvania, which serves the South Central Pennsylvania market. Together, Judy and Shane opened the firm on January 1, 2015. With 25 years of appraisal experience, Shane has appraised most all types of commercial real estate. In recent years he has focused on land subdivision appraisal work and has tracked many Central Pennsylvania markets for in-depth absorption analysis. Judy’s 15 years of appraisal experience began in 2004 when she entered the industry as an apprentice in the residential appraisal arena. In 2008 she made the move to appraise commercial real estate.

With Judy and Shane’s wealth of knowledge, Omni asked them to weigh in on the most essential questions surrounding the commercial appraisal industry. Here are their answers.

Omni: What do you view as the strengths of your commercial appraisal firm?

JSR: We track most all commercial sales in several markets in South Central Pennsylvania. This data is entered and tracked in our commercial sale database that provides both a detailed and summary picture of sale transactions. This enables us to analyze market transactions and keep an eye on what is happening in the market.

Second, while we are not a large firm, we have four staff members that work together sharing data and ideas on property types, trends, and other real estate issues. We regularly talk to brokers, developers and business owners to gain a pulse on market nuances and business trends.

Omni: How will automated valuation models impact the commercial appraisal process?

JSR: The commercial appraisal process has not been as impacted by automated valuation models as the residential appraisal process for several reasons. First, the quantity of data is much smaller than residential sales. Second, commercial properties are often bought based on the income they produce. This information is typically not available through public sources and is often confidential. And third, a valuation model may be appropriate for certain types of commercial properties like office buildings or warehouse facilities, assuming rental rates are ‘at market’. However the commercial real estate market has such a varied type of product with many specialized buildings, there may not be sufficient amount of data for a valuation model to be effective.

While my thoughts on using a packaged valuation model for commercial (and even residential) real estate are leery, I do believe analysis of large data sets would be helpful to the profession. The use of regression testing to provide rules of thumb to assist in making adjustments and decisions on comparing properties would be helpful. For example, we often consider making an adjustment for properties of different sizes (based on the economies of scale principle). I see a true benefit in models that use regression analysis to provide guidelines for different pricing based on size of a property and other similar property characteristics.

Omni: What are some of the recent regulatory changes on valuation rules and do you foresee this impacting your profession?

JSR: There have been two recent regulatory changes on valuation rules, but we don’t see either of these as having a significant impact. In June of 2018, Pennsylvania passed into legislation a law that allows State Real Estate Brokers, Associate Brokers and salespeople to provide Broker Price Opinions (BPO). Brokers are limited to performing BPO’s for financial institutions in conjunction with properties owned by the institutions that meet certain criteria. They remain prohibited from providing valuation services for mortgage financing, eminent domain, tax appeals and valuation scenarios. Additionally, the FDIC is contemplating raising the appraisal threshold from $250,000 to $500,000 for commercial real estate transactions, and $250,000 to $400,000 for residential real estate transactions.

Omni: What are some of the biggest challenges you face as a commercial appraiser?

JSR: Appraisals are often viewed as a necessary step or hurdle to obtain financing. (Yes, we know this.) And because of this the borrower often picks the ‘cheapest’ bid provided. The borrower has no idea how much experience the appraiser has with the specific property type or what due diligence will be performed in developing an opinion of value.

A second challenge is that the only part of the appraisal report that gets any attention from the borrower is typically the final value. The support and analysis that went into developing the value opinion are often not considered or read by the borrower. And, if a buyer really takes the time to review the report, there is a lot of pertinent information about the property within the report, other than the value opinion. In today’s busy times, I am not sure this will change anytime soon. However I would like to see the borrower use the document as a source of information about the property as well as an objective viewpoint in value.

Omni: What most often causes a disconnect between an appraiser’s and an owner’s opinion of value?

JSR: Often, a buyer’s business is interwoven with a commercial building. Take a well performing restaurant with good management and a well-known reputation. Most commonly when we appraise the property we are appraising the real estate only and not the business value. Our value opinion must isolate the real estate, and exclude any value attributed to the business which includes the reputation and operation. This sometimes results in a real estate value opinion lower than the opinion of the owner of the thriving business. We must look at a property as if that management and reputation were taken away, what would the real estate sell for on the open market.

There have been times when we are asked why we need leases or historical income and expenses to appraise a building. “Isn’t the value, the value?” we are asked. As mentioned earlier, commercial real estate is often valued by the income it produces and long-term leases have significant impact on value. Would you pay the same price for a building that produces leased income of $100,000 annually for the next 20 years or an identical building that produces leased income of $50,000 annually for the next 20 years?. While this may sound obvious, it often is not taken into consideration when a value differs from what an owner has in mind.

Omni: Is there anything else you wish to add that could offer insight into Central PA’s commercial real estate market right now?

JSR: While we do not have any earth shattering observations, we can share some of the trends we see, of which some are obvious.

Retail that can be purchased on-line is struggling, while retail that requires ‘hands on’ shopping is prospering.
The retail restaurant business has grown at a rapid pace in the last few years. Younger generations eat out much more frequently than previous generations, and this sector of retail is strong.
Because of our central location and access to highway systems, the South Central Pennsylvania Industrial Market is our strongest real estate market.
The apartment market in the City of Harrisburg continues to grow with new apartments being quickly absorbed as they come on-line. Rental rates for nicely renovated apartments are $700 to $800 for studios, $800 to $1,000 for 1-bedroom units and $950 to $1,250 for 2-bedroom units. Based on the rental rates and occupancy rates, these properties are yielding high values. However there has been no recent sales of these newly renovated apartments to truly gauge how investors look at renovated apartments in the City as pure investments.
There has been significant price appreciation in the professional office market for good quality, stabilized assets. Cap rates are below 8.00% with some recent transactions in the low 7.00% range that have long-term, credit rated tenants in place. Cap rates for single-tenant medical office buildings are sub 7.00%.

When working with a commercial real estate appraiser, there are several important things to keep in mind. Look for one who is experienced and reputable in your local market and who can demonstrate on-going, extensive research of market sales and lease activity. You also want to work with someone who encourages open dialogue and discussion to ensure the scope of work and appraisal assignment meets your expectations and needs. Omni Realty Group thanks Judy and Shane of JSR Appraisal Group, Inc. for sharing their insight and expertise in this blog. You can learn more about JSR Appraisal Group, Inc. at www.jsrappraisal.com.

Judy Striewig

M. Shane Rorke

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Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part II

Posted on December 12, 2017 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Trends No Comments

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

Continuing with part II from our series on the health and future of the U.S. economy, we again welcome the knowledge and insight of Robert Calhoun. Robert is the Northeast Regional Economist for CoStar Group where he manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Let’s now dive into what real estate market participants should be keeping a watchful eye on in 2018 – Be sure to also take a look back at part I from this series which focuses on the U.S. economy as a whole!

Omni: Debt drives real estate markets and there’s a flood of capital in the market right now. Is this a shoe waiting to drop?

I say that all the time: debt drives real estate markets. What you worry about from a capital markets standpoint is that a flood of capital leads to declining underwriting standards, and so far we aren’t seeing anything overly alarming on that front.

There has been some gradual loosening of underwriting standards in the CMBS space, but this has generally been met with demands of higher credit support by the rating agencies. Investors are still doing a good job of differentiating collateral and demanding higher yields for riskier deals. We are seeing a resurgence of CRE CLOs during this cycle, but the structure of these deals are much better than the previous cycle (simpler and easier to understand, more capital in the deals, etc.).

Omni: What is contributing to the widening gap between bid and ask prices in the commercial real estate market right now?

We’ve been watching the staring contest between buyers with dry powder and owners with big gains for some time. While many owners would probably like to take advantage of current valuations and harvest gains at low cap rates, they run the risk of having to redeploy that capital back out into the same market.

Many buyers, despite being flush with cash, are balking at current prices. And the deeper we get into this cycle, the harder it is to make deals pencil by assuming higher rents and higher occupancy into an uncertain future. I would say the widening of bid/ask spreads right now is a healthy thing, further evidence that market participants are staying somewhat disciplined.

A CRE investor has a couple of different dials he can toggle when making investment decisions: risk profile, return requirement, pace of investment. They are choosing to slow their investment pace instead of loosen their risk profile or lower their return requirements.

Omni: From a commercial real estate perspective, what are the most dramatic potential effects that we should brace ourselves for? In terms of the commercial real estate market, what will you be keeping a close eye on in 2018? What will be driving the volatility in 2018?

I’ll echo my comments from before: CRE fundamentals appear solid with no glaring red flags at the national level. The biggest risk to the commercial real estate market would be a sharp rise in interest rates, likely driven by an unforeseen pickup in inflation that causes the Fed to worry that it’s behind the curve. So far, inflation has been very well behaved.

I’ll be keeping a close eye on the unemployment rate and corresponding wage growth. At this stage in the cycle, with labor markets relatively tight, we’ve typically seen wage pressures materialize. As of the Fed’s most recent statement of economic projections, the Committee expects the unemployment rate to be 4.1% at the end of 2018. We are already at 4.1% as of October 2017. If the unemployment rate were to dip below 4.0% and inflation were to begin moving more quickly back toward the Fed’s 2.0% target, that could elicit a faster pace of rate hikes than is currently expected.

Omni: Do you think market participants are factoring the threat from technology into their investment decisions?

Technology is an interesting topic when it comes to commercial real estate. I think many market participants see CRE as an area of the economy that won’t be as easily “disrupted” by technology, but we’re already experiencing disruption! So much ink has been spilled over the Amazon effect on retail that I don’t need to say much here. WeWork and its $20B valuation, whatever you may think of it, is shaking up the office market. Even if a company doesn’t actually use WeWork space when they want to expand, couldn’t they take a page from their playbook and demand a shorter/more flexible lease in a traditional office building? How would that impact office valuations?

Technology like driverless cars won’t change people’s need to live SOMEWHERE, but it might change the shape of cities and neighborhoods, creating winners and losers. Technology is also changing the way investors think about real estate as an asset class. Priceline is currently valued at $84B while Marriott has a market cap of $46B. In that light, which his more valuable: owning the real estate or owning the customer relationship?

I’m hearing more chatter about how artificial intelligence and machine learning can begin to disrupt the CRE lending market, with algorithms taking the place of human underwriters. It’s easy to envision a company like Zillow disintermediating traditional real estate brokers by facilitating peer-to-peer home sales, and that same model could be extended into the commercial real estate market.

To answer your question (finally), I think it’s important for market participants to consider technological threats…but at the same time, nobody does a very good job of predicting an uncertain future! Picking winners and losers will be as challenging as always.

What appears to be most promising for 2018’s commercial real estate market? What is most concerning? Start a conversation by leaving a comment below!

In case you missed it, be sure to check out part I from our interview series with Robert Calhoun. In our first article, Robert shares insights into the health and future of the United States’ economy as a whole.

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

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Central Pennsylvania CRE Market Reports Q4 2016

Posted on March 2, 2017 by Mike Kushner in Commercial Real Estate, Local Market, Trends No Comments

The Cost of Commercial Real Estate in Central PA Rises Across All Sectors: Office, Retail and Industrial

2016 wrapped up with quite an interesting quarter for Central PA’s commercial real estate market. Out of all the sectors, office space was the weakest performer. However, even though it dropped to a negative net absorption, its rental rate continued to rise. Retail and Industrial space were the stronger performers. Both finished out the quarter with the highest sales price per square foot that the market has seen for at least four years. In all sectors, new space is rapidly being delivered to the market, which should make it interesting to see how this impacts absorption in future quarters. Take a look at the breakdown of each sector of commercial real estate in Central PA and how it performed in Q4 2016, according to CoStar.

OFFICE

In Q4 2016, Central PA’s office real estate market saw an increase in vacancy, rising to 6.1%. It also dipped into a negative net absorption of -14,026 square feet. Only one building, located at 300 Winding Creek Boulevard in Mechanicsburg (20,000 sqft), was delivered this quarter while four more remain under construction. Once they deliver, they will add a combined 133,590 square feet of new space to the market. Interestingly, the quoted rental rate rose this quarter to $17.38 per square foot, an increase of $0.09 from last quarter and an overall record high from prior to 2013.

RETAIL

In Central PA’s retail real estate market this quarter, a total of 12 new buildings were delivered. Combined, these added 126,296 square feet of new space to the market. Additionally, 12 buildings remain under construction, but once completed will add a combined 272,338 square feet of additional retail space. All of this added space barely impacted vacancy, and in fact, moved the needle in the opposite direction than what might be expected. The percentage of vacant space available dropped down by 0.1% to 4.1%. This is the lowest vacancy has been since prior to 2013. The quoted rental rate jumped up $0.32 to a total of $12.47 per square foot. This is the highest price we have seen also since prior to 2013. Though net absorption decreased by 108,583 square feet, it remains in the black at 262,060 square feet.

Two properties in Central PA made it to CoStar’s list of Select Year-to-Date Deliveries. They are located at I8-1 and Walker Road (109,239 sqft) and 700 West Main Street, Annville (33,000 sqft). Among the 15 Select Top Under Construction Properties featured by CoStar, only one from Central PA made the list and this is the project located at 101 Wilson Avenue in Hanover (136,193 sqft).

INDUSTRIAL

Central Pennsylvania’s industrial market gained four new buildings this quarter with a combined RBA of 1,114,800 square feet. Another 14 buildings still remain under construction and are projected to deliver 6,630,117 square feet of space, once complete. Despite the influx of new space, vacancy has not budged from last quarter and remains at 5.4%. The quoted rental rate even increased by $0.07 from last quarter to $4.37 per space foot. This is the highest rental rate we have seen since prior to 2013. Although net absorption did decrease, it remains in the black at 987,110 square feet.

Of the Select Year-to-Date Deliveries, Central PA made the list three times for the following buildings: Lebanon Valley Distribution Center (874,126 sqft), Trade Center 44 (620,000 sqft) and Gateway Logistics Park – Building B (500,000 sqft). Central PA also had a strong presence on the list of Select Top Sales with 3 of the top 9 properties located in Carlisle and Mechanicsburg.

What trend from Q4 2016 did you find most interesting or impact to the Central Pennsylvania Economy? Share your insights by leaving a comment below.

Learn more from past market reports:

Central Pennsylvania’s Retail Real Estate Market Experiences Record-Setting Quarter

Central PA’s Office Market Sets Recent Records for Vacancy, RBA and Rental Rates!

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

[Online Resources] Real Estate, 2016, central pennsylvania, Commercial Real Estate, costar, expert, fourth quarter, industrial, investment, investor, local market, Mike Kushner, office, Omni Realty Group, q4, report, retail, trends

Giving Thanks: 10 Good Things that Happened in Central PA’s Real Estate Market in 2016

Posted on November 21, 2016 by Mike Kushner in Blog, Local Market, Trends No Comments

With Thanksgiving just days away, we thought it fitting to apply our gratitude toward recognizing some positive events that have taken place in Central Pennsylvania’s real estate market in 2016. These trends and milestones indicate a growing economy, healthy businesses and more jobs on the horizon. Take a look at the top 10 good things that have taken place in the local market so far this year!

1. The Central Pennsylvania office market achieved the lowest vac a ncy rate in over eight years, proving that the demand for office space is on the rise as existing businesses grow and new businesses move into the area.

2. U.S. House Transportation and Infrastructure Committee has authorized full funding f or construction and design of the federal courthous e project in Midtown Harrisburg. This will put potentially $168.4 million back into the economy with work related to this project. Plus, the new courthouse complex will be a nice upgrade for the city.

3. Members of the local community stepped forward and made an effort to fight back against unfair or outdated property assessments that were resulting in high property taxes. This an important step toward achieving fair and updated laws.

4. Single family rental properties remained a strong investment in Central Pennsylvania. U.S. homeownership rates are on the decline, meaning single families are also renting their homes and need more options than just one and two bedroom apartments.

5. Central Pennsylvania’s warehouse industry is growing by as much as 3.2 million square-feet. Four proposed warehouses will bring more jobs to the area, adding to the 71,282 warehouse jobs that have already increased by 25% in just five years.

6. Median household incomes are on the rise throughout Central Pennsylvania with the majority of counties posting gains all across the board. This increase in income will help to offset inflation and cost-of-living increases, potentially helping families to gain a bit more disposable income as well.

7. A growing demand for retail real estate indicates stores are growing and new businesses are entering the market. Additionally, the healthy retail industry continues to lease space despite the highest quoted rental rate since prior to Q3 2012.

8. Harrisburg office buildings received a major upgrade that will save tenants about $1.5 million per year in energy costs. The energy efficient upgrades earned a $1.2 million rebate from the utility company that will be reinvested into future projects in the city.

9. Hundreds of thousands of square-feet of new office space was delivered to the Central Pennsylvania market this year, attracting new business and more jobs.

10. Brokers that exclusively represent tenants continued to make the search for commercial real estate a fair and positive experience. By working with a tenant representative, businesses were more likely to find the ideal space and negotiate more favorable lease terms.

In the spirit of Thanksgiving, what other things took place in the real estate market or economy that have you feeling grateful? Share your thoughts by commenting below!

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How Will New Office Space Construction in Central PA Impact the Market?

Posted on November 18, 2015 by Mike Kushner in Blog, CPBJ Articles, Local Market, Trends No Comments

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

business, building, paperwork and people concept - happy builder in hardhat with clipboard and pencil over group of builders at construction site

Photo Credit: Dollar Photo Club

2015 has brought a boost in office space construction to Central Pennsylvania and there is even more space to come! While this may be exciting news for businesses looking to expand into the local market, we need to watch this trend closely and cautiously because the potential impact may not be so favorable for landlords and sellers of commercial office space.

The good news is we have four projects under construction that will deliver more than 400,000 square-feet to the market within the coming year, with a majority of this space already preleased. However, this promising news for the market is tempered by the fact that many tenants will vacate other office space nearby to occupy these newly constructed office buildings.

Once delivered, this square footage will most certainly impact net absorption and vacancy rates in the Central Pennsylvania submarket. What can we do to prepare and attempt to reduce any negative impact? Let’s first take a look at what’s going on in the market and then analyze what will likely result from these trends.

Third Quarter 2015: Select Top Under Construction Properties

Currently four different commercial office properties are under construction in the Central Pennsylvania submarket. The Cornwall Health Center, located in Harrisburg Area East, broke ground in fourth quarter 2014 and is scheduled to be delivered in fourth quarter 2015. It has an RBA of 54,234 square-feet and is 100% preleased. The TecPort Business Campus – Building A broke ground this quarter and is scheduled to be delivered in third quarter 2016. It has an RBA of 7,590 square-feet. It is not preleased and its quoted rental rate is listed as negotiable.

Additionally, a Class A office space project is under construction at the intersection of Carlisle Pike and Hogestown Road. The two buildings that make up this project have a combined 259,000 square-feet of space are expected to be completed in spring 2016. Finally, there is Class B office space at 1250 Camp Hill Bypass that is under construction. Its 82,000 square-feet of space is 100% preleased.

Third Quarter 2015 Rental Rates & Vacancy

This quarter, rental rates rose to $17.14 per square-foot. This is the highest rate we have seen since prior to 2011. The vacancy rate decreased from 7.8% to 7.5%. The vacant square-footage also decreased from 4,120,331 square-feet to 3,962,599 square-feet.

Third Quarter 2015 Absorption and Demand

The total RBA in Q3 2015 increased to 52,581,663 square-feet. Net absorption also experienced a substantial increase, more than tripling last quarter’s 50,466 square-feet to the 190,232 square-feet that closed out third quarter 2015. But take note, both net absorption and vacancy rates will soon be greatly impacted by the 400,000+ square-feet that will be delivered to the market in the next year!

Future Trends and Their Impact

New construction certainly has its benefits, and for the time being, the Central Pennsylvania office submarket is receiving a positive boost from the activity. But as this new square-footage is delivered in the next 12 months, causing businesses to vacate other space within the region, we can expect to see some new trends emerge.

Let’s take a look at a highlight of predictions we expect to see in the coming quarters:

Inconsistent Net Absorption: The only real pattern in net absorption of office space over the last 15 quarters has been inconsistency. Year-to-date for 2015 we are at 630,738 square-feet; 2014 totaled negative 311,827 square-feet; 2013 was 909,658 square-feet; and 2012 was negative 226,424 square-feet.
Increased Vacancy Rate: The addition of 340,000 square-feet of new construction in the Harrisburg West market that is being occupied by Hewlett-Packard (HP) and Deloitte will result in an increased vacancy rate in 2016 due to the occupants relocating from existing space. In addition, the Walgreens- Rite Aid merger will contribute to the market’s increased vacant space as the two companies integrate corporate back-office functions.
Decreased Employee Square-Footage: Square-feet per employee have been in a long term decline and will continue on this trend. E-commerce, telecommuting, and the desire for open and collaborative work spaces are squeezing the office space sector given that square footage per office employee is diminishing.
Increased Demand for Medical Office Space: The one bright spot in the office market segment is the increasing demand for medical office space. Orthopedic Associates of Lancaster is constructing a 73,529 square foot facility in North Cornwall Township. Good Samaritan Hospital is opening a new 22,000 square foot center at 840 Tuck Street in Lebanon. And Pinnacle Health is opening an 80,000 square foot Advanced Care Center in a former retail shopping center located at 1251 East Main Street in Annville.

These predictions are not going to be music to the ears of landlords and sellers, but this market provides some prime opportunities for new and growing businesses to expand within Central Pennsylvania. Increasing vacancy rates and inconsistent net absorption creates a competitive market in which the buyer or renter has the upper-hand. So businesses take note. If you were thinking of moving to or expanding within Central Pennsylvania, 2016 is the prime time to do so!

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

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Q2 Shows Why Central PA’s Industrial Real Estate is a Premiere ‘Big Box’ Market

Posted on August 18, 2015 by Mike Kushner in Blog, Local Market, Trends No Comments

To the hundreds of thousands of people who call Central Pennsylvania home, we have found countless reasons to fall in love with the area from our beautiful blend of distinct cultures to the Capital city and Hershey’s Chocolate World.

But to industrial businesses that rely upon the ease and affordability of shipping their products to make a living, Central Pennsylvania has an entirely unique list of reasons why planting roots in this area makes sense.

Looking at how our industrial real estate market performed in Q2 2015 provides us with some clear insights into why Central PA is such an attractive location for “Big Box” warehouse and multi-tenant logistics users around the world – and growing! Let’s take a look at what the numbers tell us.

Select Top Under-Construction Properties

Four of the top five Select Under-Construction Properties this quarter are located in the Central PA submarket. Combined, ProLogis Shippensburg, Nordstrom Distribution Center, ProLogis Carlisle – Building 1 and LogistiCenter Carlisle – Building 2 total more than 4 million square feet of new industrial space that will be delivered to the market between next quarter and Q2 2016. These high profile projects are an exciting sign of a growing and thriving industrial market here in Central PA.

Select Year-to-Date Deliveries:

Year-to-date, the Central Pennsylvania submarket has delivered over 1.7 million square feet of new industrial space. The property delivered specifically this quarter is located at 561 S. Muddy Creek Road in East Cocalico Township, Lancaster. This is the new location of Pet Food Experts’ $12 million, 197,000 square foot facility that is 100% occupied.

Vacancy:

In Q2, we experienced a substantial decrease in vacancy that resulted in a vacancy rate of 4.7%. Having fallen from 5.2% last quarter, this dip is the first we have been below 5% since 2008. In fact, back through 2011 we have most commonly seen vacancy rates in the high 7% and low 8%. This trend is sure to have impact in other areas of the market as well.

Absorption and Demand:

The net absorption decreased from last quarter’s 2,908,709 square feet to 1,423,990 square feet this quarter. Given last quarter delivered three new buildings and this quarter delivered just one, this is an appropriate net absorption for the quarter that does not signal a red flag

Rental Rates:

For the first time since Q4 2009, the quoted rental rate has exceeded $4.00 a square-foot, coming in at $4.07 for Q2 2015. This $0.13 increase to last quarter’s quoted rental rate of $3.94 is certainly connected to the decrease in vacancy that is also at a recent record low.

Our Summary/Analysis:

Central PA is considered one of the premier “Big Box” industrial and multi-tenant logistics markets because of the area’s affordable cost of living, raw land and non-union labor. Additionally, the governmental approvals required for warehousing and distribution are comparatively easy and straightforward compared to other states or regions

As far as location, it is a central hub where products can be easily distributed throughout the northeast United States (via I-81, I-83, and I-78) and has seen significant capital invested for expansion of its intermodal system. Central PA also offers easy access to Port of Baltimore, MD and Port of Elizabeth, NJ and is within a one-day drive to 40% of the nation’s population

Now having gained an understanding of just why Central PA makes such an attractive spot for industrial businesses, we can connect the dots as to what the market growth and demand we experienced in the second quarter means for our overall economic health.

Most importantly, this data means that businesses are continuing to move into the area, particularly “Big Box” businesses that rely heavily on distribution. With over 4 million square-feet currently under construction and the highest rental rate in six years, this trend has lasting power. These growing businesses will likely fuel the local area with jobs, spending and an increase in transportation along our highways. Overall, we should feel excited and hopeful about these market trends. Any cons to industrial growth will most certainly be outweighed by the pros!

How will the growth of the local industrial real estate market impact you or your business? Share your personal insights – or ask a question by commenting below!

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How Major Healthcare Mergers are Impacting Commercial Real Estate

Posted on March 23, 2015 by mike.kushner in Blog, Commercial Real Estate, Healthcare, Trends No Comments

It goes without saying that major changes are taking place in the healthcare industry nationwide. The Affordable Care Act otherwise known as “Obamacare” became effective January 1, 2014. This legislation represents the most significant overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965. For real estate investors, the big question is what impact this regulatory overhaul of mandates, subsidies and insurance exchanges will have on commercial real estate.

growing mismatch between hospital supply and demand

Here is a quick glance at some of the most compelling trends taking place in hospital supply and demand. It illustrates the struggles healthcare systems are facing to stay in business.

There is no doubt a wave of consolidations is reshaping the U.S. healthcare industry. Generally, in a merger, the smaller hospital is looking to increase its financial stability and gain access to capital. The larger one is looking to increase market share and the number of patient referrals it gets from doctors.

As a result, we’re starting to see more and more mergers between healthcare systems who want to team up to remain competitive. In Central Pennsylvania alone there are four main examples of mergers taking place, each for unique reasons, but with the same goal in mind – to rein in costs and expand access. Let’s take a closer look at each one.

1. PinnacleHealth (JC Blair Health System) and Penn State Hershey (St Joseph Regional Health Network)

In January 2015, the same time in which the Penn State Board of Trustees announced its approval of the propose acquisition of St. Joseph Regional Health Network, the Board also announced its approval of the proposed merger with PinnacleHealth. From Penn State’s perspective, the benefits are obvious. This merger will allow them to grow a long-term patient and revenue base to better support its academic and research missions.

Additionally, the merger will allow Penn State Hershey to have lower-acuity patients treated at one of Pinnacle’s three hospitals, freeing more beds at the medical center for higher-complexity cases that a teaching hospital can best serve. As a result, this will help to increase hospital occupancy rates at both PinnacleHealth and Penn State Hershey.

Possibly the most compelling reason for this merger is the projected economic savings. The first five years should create at least $260 million in savings for both entities through avoided capital and operating costs. The recurring long-term savings is estimated to be at least $86 million annually. It was agreed upon that Penn State University will be the parent entity in this merger. Final action is tentatively scheduled for later this month.

2. Holy Spirit and Geisinger (Atlanticare Community Medical Center Healthcare System, Shamokin Area Community Hospital, Bloomsburg (PA) Health System, and Lewistown (PA) Hospital)

In this merger (more appropriately referred to as an “affiliation”), a small Catholic health system formally joins with a large, technologically-advanced system in an effort to continue to make healthcare accessible and affordable to the most people. Now as a Geisinger Affiliate, Holy Spirit will undergo some major upgrades including an expanded emergency room, improved electronic infrastructure (with an emphasis on electronic medical records) and use of technology to deliver evidenced-based treatments.

In return, Geisinger receives an entry into the highly competitive Harrisburg healthcare market. PinnacleHelath just recently opened a $100 million hospital within a few miles of Holy Spirit in Cumberland County. While there are currently no major plans to downsize, the Holy Spirit-Geisinger union maintains that this aspect of the hospital will be continually monitored and adjusted as needed.

3. Lancaster General and University of Pennsylvania Health System

Earlier this month, Lancaster General Health and University of Pennsylvania Health System signed a non-binding letter of intent to negotiate a definitive agreement for their merger. Each organization brings a unique size, focus and geography that differs from the other. One of the largest benefits of this merger, aside from their entry into a new market, is the ability for patients to receive treatment at one facility and follow-up at another.

LG Health President and CEO Tom Beeman identified healthcare reform as the driving force behind this merger (and many of the other mergers we are presently seeing). To survive, Beeman said, it’s pretty clear nonprofit systems are “going to have to have a critical mass in the $5 billion to $10 billion range.”

The terms of the proposed deal between Lancaster General Health and University of Pennsylvania Health System will remain confidential until both parties approve it, but things are expected to move forward in the coming weeks.

4. WellSpan (Good Samaritan, Ephrata Community Hospital and Philhaven)

In October 2014, Wellspan (which was in the process of taking control of Lebanon’s Good Samaritan Health System) announced that it was also exploring a partnership with Philhaven behavioral services. Much like many of the other mergers, they said the purpose is to allow all organizations to work more efficiently and better manage costs to improve health outcomes and the patient experience.

In this particular merger, each healthcare system brings a slightly different focus. Wellspan/Good Samaritan is primarily focused on physical health while Philhaven specializes in behavioral conditions and mental health. Combined, these organizations will be better equipped to serve a broad range of patients at a fraction of the cost of trying to add these specialties independently. In addition, Ephrata Community Hospital became an affiliate of WellSpan in 2013.

The Impact on Commercial Real Estate

The velocity at which the healthcare industry is changing cannot be overestimated. While we are already experiencing disruption and change resulting from healthcare reform, technology, big data, regulatory and other impactful forces in the healthcare industry, it is simply too soon to accurately predict the full impact these changes will have on the commercial real estate industry.

Despite the uncertainty, we are seeing a number of trends such as an increasing demand for MOBs and heightened activity in this asset class, both of which reflect the healthcare industry’s changing real estate needs. The demand for primary and urgent care facilities is already strong, with so many changes underway and record-breaking medical practice consolidations and mergers, as well as acquisitions of medical practices by large facilities also taking place.

While many changes may reflect the cyclical nature of real estate, the questions remain to what extent the cycle will be guided by outside forces and how investors will respond.

What is your prediction for the future of healthcare real estate? Join in the conversation by commenting below!

[Online Resources] Real Estate, assets, blog, camp hill, central pennsylvania, commercial, cumberland county, dauphin county, facility, harrisburg, health, healthcare, hershey, insight, local market, medical, Mike Kushner, monetization, Omni Realty, opinion, pa, penn, penn state, pinnaclehealth, prediction, trends, writing

Fourth Quarter 2013 Shows Slow Recovery of Central Pennsylvania’s Retail Real Estate Market

Posted on May 9, 2014 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

Fourth quarter 2013 is an important time to take a look at the CoStar Retail Report for Central Pennsylvania. Historically, retail spaces experience some of their heaviest traffic this time of year as a result of holiday shopping. However, we continue to trend toward more and more shopping being done online. How has the concern of retail stores choosing to move from a brick and mortar storefront to e-commerce affected the retail real estate market? Let’s take a look.

Fourth quarter 2013 ended with a 6.5 percent vacancy rate for total retail market in Central Pennsylvania. These rates have seen a consistent decrease throughout the year and are the lowest they have been since second quarter 2011. Additionally, vacant square footage is the lowest it has been since third quarter 2011.

Interestingly, the total Rentable Building Area (RBA) has jumped to over 77 million square feet, meaning there is more retail space than ever. Yet, declining vacancy rates show that this space continues to be in high demand. Quoted rates are also the highest they have been all year, finishing at $11.39. This is the highest rate we have seen since second quarter 2012.

As for existing inventory, fourth quarter 2013 ended with 4,568 buildings, a number that has been slowly but steadily increasing since first quarter 2010. It’s also worth noting that the largest lease signing in 2013 in the Central Pennsylvania Submarket was the 66,472 square foot deal signed by Giant Food at the Ephrata Market Place, Lancaster County.

Net absorption is the lowest it has been all year at 25,019 square feet which is a notable drop compared to the second quarter’s net absorption of 173,125 square feet.

When we take a combined look at this data, we gain a clear picture of the health of the retail real estate market in Central Pennsylvania. I conclude that the economy is experiencing an anemic recovery and along with the conservative nature of Central Pennsylvania, is only adding enough new inventory to be absorbed.

What this data also suggests is that retailers face the risk of higher rent rates, driven by the demand of the market. This quarter’s quoted rates are the highest we have seen in over a year and may continue to increase in correlation with demand. While landlords may be happy to hear about this trend, they should proceed with caution when raising rental rates or risk creating a new pricing bubble.

What do you feel is the most important trend to note from fourth quarter 2013? Share your thoughts by commenting below!

[Online Resources] Real Estate, central pennsylvania, commercial, costar, data, harrisburg, lease, local market, market, rates, rental, report, retail, trends, vacancy

Central Pennsylvania Office Space Vacancy Drops to 8.2% in 4th Quarter 2013

Posted on April 16, 2014 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

The fourth quarter 2013 was a big year for the Central Pennsylvania office market. New and existing businesses filled up even more space across the area. As a result, the total vacancy rate saw a substantial decrease from where it was just one year ago and the net absorption totals surged well into the positive numbers, reaching an all-time in high in nearly four years.

This activity was a boost to the Central Pennsylvania commercial real estate market. Just one example in the area was listed as the Select Top 10 Office Leases of the year by CoStar. This deal took place in Harrisburg Area East when Comcast took over a 110,000 square foot facility located a 2801 Valley Road.

To better understand this shift in trends, and what it could mean for the future of the commercial real estate market in the area, let’s take a closer look at how the numbers stack up for both the vacancy rates, net absorption and rental rates

vacant space

Vacancy Rates

The Central Pennsylvania Office market ended the year with a vacancy rate of 8.2%. The vacancy rate was down over the rate one year ago at this time which was 10.0% in fourth quarter 2012. More specifically, Harrisburg Area East ended the year with a vacancy rate of 9.3% and Harrisburg Area West with 7.0%.

This is the first time vacancy rates have dipped below 9.0% in more than four years, most commonly averaging around 9.2% during that time.

Net Absorption

Complimenting the trend of decreasing vacancy rates, fourth quarter 2013’s net absorption increased to a positive 277,713 square feet. This is a sizeable jump compared to fourth quarter 2012’s which was a negative 189,586 square feet.

In first quarter 2013, net absorption rates were at a positive 219,789 square feet before dropping to 200,051 square feet in the second quarter. The third quarter dropped even further, dipping below 200,000, to 191, 956 square feet. The fourth quarter 2013 ended with the largest positive net absorption since fourth quarter 2010.

Rental Rates

The average quoted asking rental rate for available office space was $16.44 per square foot at the end of the fourth quarter 2013. This represented a 0.4% increase in quoted rental rates from the end of the third quarter 2013 when rents were reported at $16.38 per square foot.

So what does this mean for the Central Pennsylvania commercial real estate market and the supply and demand of office space? The commercial office leasing market continues to recover from the deep contraction brought on by the great recession. The key economic indicators that affect office leasing activity (e.g. GDP, employment data, and manufacturing activity) continue to experience improvement. We anticipate that this slow steady trend will continue for the balance of 2014.

How have you felt the impact of these changes in the market? Share your ideas and opinions by commenting below!

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