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Central PA Retailer Shares Challenges and Strategies for Competing with Online Retailers

Posted on July 27, 2018 by Mike Kushner in Blog, Local Market No Comments

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

In June, the Supreme Court ruled that states can begin to collect sales tax on web purchases. Previously, online sellers who did not have a physical presence (or “nexus”) in a given state had a perceived advantage over sellers that did. This is because these online retailers did not have to collect and remit sales tax back to the state in which the buyer lived. Rather, it was the buyer who was supposed to, at the end of the year, take all the purchases he or she made online that were not collected, calculate the sales tax, tally up the total and remit it to the state at tax time.

If we’re all being honest with ourselves, we know that it’s no stretch to say that this method for collecting sales tax for online purchases was costing states up to $33.9 billion annually in payments that were simply never made. Now that states have been given control to collect sales tax on web purchases, how will this impact our retailers? Moreover, how will this impact the use of and need for commercial retail space?

For insights we went straight to the source. Omni Realty Group interviewed Central PA retailer and owner of World Cup Ski & Cycle in Camp Hill, Pennsylvania, Lee Gonder. Lee is a wealth of knowledge when it comes to running a successful a local retail store and competing against online retailers. Through the questions and answers below, you will gain a better understanding of challenges brick-and-mortar retailers are up against and how the smart ones are developing strategies to provide unique benefits to customers that online retailers simply cannot replicate.

Omni Realty: As a local, brick-and-mortar retailer, how have you been impacted by online retailers?

Lee Gonder: It’s difficult to quantify the impact of online retailers in dollars, but it’s easy to see their effects in day to day business. With online retailing, the consumer no longer has to compromise on their purchase; they will go find exactly what they want. As a small, local retailer it’s impossible to stock, service or even know about every conceivable product within your industry.

In the past, you could explain the choices you made in your inventory and why they were best suited for the local consumer. Most of those educational opportunities are gone with the internet. All research is done online and the retailer is no longer the expert. With the availability of virtually any product online, not only can the consumer research their purchase, but more than likely have a direct link to be able to make the purchase. We’ve been affected on both big ticket items like bikes and skis, but we also take an incremental hit on everything from ski wax to bike chains and other accessories.

Omni: If you had to pick one thing, what would you say is your biggest competition right now?

Lee: Online retailing would have to be our biggest competition right now. In the ski industry, there are a number of domestic companies that do a good job of providing consumers with numerous options for purchase. The ski industry does a reasonable job of requiring its dealers to maintain minimum advertised pricing (MAP). With the current MAP policies it allows my business to compete on price, just bringing inventory choice in as the major obstacle to making a sale.

However, in the bike industry it is quite different. There are numerous international companies that really make competing for the consumer very difficult. The international companies are not governed by the MAP policies that we U.S. retailers are asked to abide by. Therefore, not only can we not compete in the inventory game, but quite often they have pricing that is equal to or sometimes less than my wholesale. Add in two-day free shipping, and there go a lot of my incremental parts and accessory sales.

Omni: Given the recent supreme court ruling to allow states to tax online purchases, do you think this will drive more business back to local brick-and-mortar retailers?

Lee: Simply put, no. Many of the larger online retail services, like Amazon, already have nexus in the state of PA. They already had to collect and remit sales tax. It may help curb the purchasing of some bigger ticket items, but I think the effect will be minimal.

Speaking as a retailer, it will make me rethink how I handle my webpage, which is ecommerce enabled. Now I will have to collect and remit tax to other states if I sell something on my site to an out-of-state consumer. That becomes another hurdle for a small business, to track and remit sales tax to out of state government agencies. I think for a small, local business it may indeed just make things a bit more difficult. The larger companies that have the infrastructure to handle these changes will be able to continue with their online retailing with a few internal adjustments.

Omni: How have you had to adjust your business strategy to compete with online shopping?

Lee: Our focus over the past several years has been to invest in technology or services that can’t be bought on the internet. Precision ski tuning equipment, bike fitting equipment and ski boot fitting equipment and knowledge. Some services can’t be easily addressed online, so we’ve made investments in those areas. We’ve trained the staff to sell that service, use the equipment and that is what sets us apart from the online retailer.

Conclusion

Competing against online retailers is no easy task for our local, brick-and-mortar stores. Though the Supreme Court ruling to allow states to collect sales tax on web purchases was intended to level the playing field for retailers, it’s not exactly an immediate windfall for local retailers.

However, commercial real estate professionals could see a boost in demand for commercial retail space as both conventional and online retailers may put more stock in brick-and-mortar locations since there is no longer an advantage to not having a physical location in each state. In fact, being closer and more accessible to customers will become an even greater advantage for retailers.

For this reason, commercial real estate remains a critical aspect of any retailer’s business strategy. Location, visibility and flow of space has a profound impact on how customers find you and their customer service experience. Retailers who wish to remain competitive against online retailers, or even other brick-and-mortar retailers, should closely consider whether their commercial space is meeting the needs of the business and their customer base.

Through the insights shared in this article, it’s obvious that local retail businesses will continue to face some unique challenges, even after the Supreme Court ruling on online sales tax. Being strategic with the location and type of commercial retail space a business invests in can help deliver exceptional customer service, and in turn earn more business!

Do you agree or disagree that something more should be done to level the playing field between online retailers and local retailers? Share your ideas or ask a question by leaving a comment below!

behavior, brick and mortar, central pa, consumer, customer service, lee gonder, local, Mike Kushner, Omni Realty, online, online sales tax, pennsylvania, retail, retailer, sales tax, shopping, store, supreme court, tax, trends, world cup ski and cycle

How Omni Realty Uses Research, Skill and Experience to Benefit Our Commercial Real Estate Clients

Posted on June 4, 2018 by Mike Kushner in About Us, Blog, CCIM No Comments

When in search of a service or product, you’re likely to start with a Google search. These results will lead you to visiting some potential businesses’ websites and possibly their social media pages. You may feel like you’ve gathered enough information based on the quality of their online presence, reviews and word of mouth recommendations to choose the right business to fit your needs.

But how often do you consider a business’s mission statement in this decision making process? If you don’t, you should!

A business’s mission statement (or lack thereof) will tell you a lot about their focus, approach and how they treat their customers. A nice website, active social media and high ranking reviews only paint part of the picture of the quality of the company – and what they stand for.

For the benefit of our clients, whether they be past, present or future, we hope to give you deeper insight into our own mission so you can understand what we value and our commitment to serving you!

At Omni Realty, our mission is to secure the most effective space at the most favorable terms for our clients. We use research, skill and experience to offer unmatched, highly personalized service while carefully determining our clients’ needs and analyzing all possible solutions.

But our mission statement is more than just words on paper. The values it represents are closely woven into our daily client interactions as well as our long-term visioning. Here is how Omni Realty strives to live out our mission with everything we do.

Current and Consistent Research

We are strategic about maintaining access to the industry’s most comprehensive database of commercial real estate through our partnership with CoStar. Even though we specifically serve the Central Pennsylvania market, we have access to a combination of reliable tools, resources, and expert analysis on over 5 million commercial real estate properties in today’s market. This allows us to pull and compare market reports, keep a pulse on emerging trends and give our clients valuable advice even if it’s outside of our market.

Additionally, we have access to the most technologically advanced industry tools including:

Esri ArcGIS and Business Analyst – demographics and mapping
DataVu – business list data
Riskmeter Flood Maps – assess flood hazards and generate reports
RealNex MarketEdge – financial analysis

High-Level Skill

Mike Kushner is a graduate of University of Pennsylvania (Penn) with his degree in economics. This education is combined with Mike’s CCIM Designation, making him a uniquely qualified commercial real estate broker, developer and investor. CCIM stands for Certified Commercial Investment Member and requires advanced coursework in financial and market analysis. The CCIM designation demonstrates extensive experience in the commercial real estate industry. Furthermore, CCIM designees are recognized as leading experts in commercial investment real estate.

As part of Omni Realty’s mission, developing this high-level of skill is essential to offering our clients unmatched expertise backed by confidence. Just a few of our uncommon, but highly valuable skill areas include:

Property Management
Raw Land Development
Historic Rehab Property Development
Chairman of Local Zoning Hearing Board
Expert Witness Testimony

Diverse Experience

Skill can only be grown when it is applied. Over the last 25 years of being a licensed real estate broker, Omni Realty has grown a diverse portfolio of experience. We have served over 500 clients, brokered 1,250 commercial real estate deals and have helped businesses of all sizes and industries find the most effective space at the most favorable terms. Our diverse experience also includes extensive property management, both residential and commercial.

We love sharing our experience and applying it toward delivering favorable outcomes for our clients. Experience gives us negotiation power on behalf of our clients, a leg-up on emerging market trends and a vast network of contacts that we call upon to help our clients overcome any number of challenges, both inside and outside the scope of commercial real estate.

Unique Value Proposition

We understand that other businesses may tout that they are “different” and it can be confusing to cut through the clutter and determine which commercial real estate business truly offers a unique model. First, when we say we work with businesses of all sizes, we truly mean it. From a one-person startup looking for co-working space, to a Fortune 1,000 organization looking to develop a growing campus, we are excited to work at both ends of the spectrum because we are excited to see our locally-based businesses thrive.

Second, our skill and expertise comes at no cost to our clients. As an exclusive tenant representative/buyers agent, Omni Realty is compensated by the landlord or seller, not by our client. This also means we come to the table to represent only you and your interests. There is no conflict of interest like there might be if a single agent represented both the tenant and landlord in a commercial real estate transaction. Finally, our service is highly personalized and highly hands-on. You work with only the principals in our firm; and we are responsive and proactive in our communications.

With a better understanding of our mission, and the various pieces involved in bringing our mission to life, we hope you can see why Omni Realty is in a unique position to serve our commercial real estate tenants and buyers. And remember, a business’s mission should not be taken lightly. When looking to work with a commercial real estate broker in Central Pennsylvania, be sure to assess their mission and compare it to your own. The most successful partnerships come from businesses and clients who work together over a shared mission!

Have a comment or question? Join in the conversation by leaving a comment below.

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Major Trends Impacting Central PA’s Retail Real Estate Market in 2018

Posted on May 24, 2018 by Mike Kushner in Blog, Local Market, Trends No Comments

For Central Pennsylvania’s retail real estate market, things are off to a, well, interesting start. The market has seen its fair share of ups and downs in recent quarters, and 2018 is no exception. On one hand, major retailers continue to shutter brick and mortar locations across the Susquehanna Valley. At the same time, other retailers are making the move into new locations. It can be hard to grasp what’s really going on in the market. Does the good outweigh the bad? What will the next quarter bring? The next year? For the answers, we turn to an expert.

Senior Market Analyst with CoStar Group, Chris LeBarton covers commercial real estate data in markets stretching from Western Maryland, including the Baltimore metro area, up through Central Pennsylvania for CoStar’s Market Analytics platform. His insight and expertise are helpful for understanding not only where the market currently stands, but how it’s likely to move in the future.

Chris joins Mike Kushner of Omni Realty Group for a Q&A series where we specifically look at the current state of Central Pennsylvania’s retail real estate market – as well as trends and challenges that stand to reshape things in 2018 and beyond. Here’s how Chris answers our most pressing questions.

Omni: With a net absorption of almost 95,000 SF, the Harrisburg East Retail submarket had a great bounce back quarter in Q1 2018 after four consecutive featuring net move outs. Can you elaborate on the various factors contributing to this?

Chris LeBarton: Retail leasing on the east side of Harrisburg has been fairly whippy this cycle, and certainly since 2015. So, putting too much stock into it is unwise. Minus Hobby Lobby’s move into almost 70,000 SF at Colonial Commons, this looks like less of a win. With that said, there are some strong pockets of buying power (median household income x households) in this submarket, including parts surrounding Colonial Park. In fact, Dauphin County has been one of the faster-growing counties in Pennsylvania since 2010.

Omni: What were the largest lease deals that took place in Central PA’s (Harrisburg East and Harrisburg West) retail real estate market in Q1 2018?

Chris LeBarton: Hobby Lobby’s move-in was the standout for sure, but there were a couple other sizable deals in the region. There was 15,000 SF leased in Carlisle on Newville Road and Ideal Auto Body absorbed 11,000 SF in Hanover. Also, Generations of Furniture signed a three-year deal on roughly 8,100 SF in Lancaster.

Omni: Amidst recent, massive retail closings, how would you say Central PA has responded/rebounded? What factors contribute to your assessment?

Chris LeBarton: Few areas are immune to the wave of big-box retail closings; stores like Kmart, Sears, Boscov’s, Macy’s and Toys R Us were once ubiquitous across the country. But a review of the biggest names shows fairly limited exposure in Central PA. Simply based on population density, natural tourism corridors, and buying power, this region isn’t swimming in malls and power centers. A review of a dozen or so metro areas inside Central Pennsylvania shows that, overall, vacancies are largely where they were coming out of the crash and in some cases improved.

In addition, several retailers that did not have a presence in Central Pennsylvania have absorbed space vacated by some of the big box closings. Stein Mart, Home Goods, and Hobby Lobby moved into the former Kmart on the Carlisle Pike. In Lower Paxton Township, Hobby Lobby opened in the former Giant Foods location and Giant moved across the road to the space vacated by Gander Mountain. At the Capital City Mall, Field and Stream moved into the former Toys R Us location. Overall, Central PA should feel encouraged that the region was no by means hit the hardest, compared to others. In fact, some significant regrowth has occurred as a result of many of these retail closings.

Omni: In your opinion, what are some of the future trends you expect to see in the Central PA retail real estate market?

Chris LeBarton: Mixed-use projects offering at least live-play (work there, or nearby, is an added bonus) with smart ground floor retail are all the rage. If areas outside of the major urban centers want to grow their population, they need to think about approving these types of projects. Naturally occurring affordable housing is becoming a big draw for those who want a nice place to live, but don’t want the high price tag. Developers who are trying to overcome the challenges of rising land and labor costs are looking more and more at secondary and tertiary markets, and there’s no reason Harrisburg can’t accommodate small-to-midsized projects with local/authentic retailers.

Another trend on the rise is related to the last piece of the “last mile” industrial craze and e-commerce. Central Pennsylvania is booming with warehouse and distribution construction; as a result, the biggest population centers in the region may see retailers testing new concepts here. Amazon Key, a home delivery service, opened in close to 40 cities last fall, and Walmart is doing all it can to keep up with the biggest player in the space. It would be reasonable to think that such trends could make their way to the Central PA retail real estate market as well.

While technology and the shift in the way consumers prefer to shop and purchase goods has had a significant impact retail real estate, we can expect the market to react and adapt – just like any industry must to stay afloat. The key to survival is for retailers to stay in front of emerging trends, keep an eye on competitors, and be willing to evolve.

How do you feel Central PA is responding to the changes and challenges taking place in the local retail real estate market? Are you more hopeful or more concerned? Share your thoughts by leaving a comment below!

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How Commercial Real Estate Owners and Investors Can Capitalize on the Co-Working Movement

Posted on May 9, 2018 by Mike Kushner in Blog, Local Market, Office Leasing, Trends No Comments

To younger generations who are making up more and more of our work force every day, work is no longer a physical space, but rather an activity that, for better or worse, can be taken nearly everywhere we go. For this reason, the movement toward co-working spaces has emerged in virtually every city that has a business industry. Co-working is present here in Central Pennsylvania with spaces like the Park and St@rtUp in Harrisburg, the Candy Factory in Lancaster and the Techcelerator in Carlisle, to name just a few.

Even though co-working spaces are present in Central Pennsylvania, the majority of our workplaces are still modeled after the “old” economy assembly line, where workflow was linear and corporate structures were hierarchical. For commercial real estate owners and investors who want to capitalize on the growing demand for co-working spaces, here’s what you need to know.

Understand how the modern day “office” has changed

Foremost, we must take a step back to understand how the modern day “office” has vastly changed from what was desired decades ago. Simply put, stop thinking like a baby boomer! Nearly 10,000 baby boomers retire every year. It’s estimated that millennials will comprise the largest segment of our work force (75 percent to be precise) within the next decade.

If you’re a commercial real estate landlord or investor, you know the importance of understanding your clients’ wants and needs. So let’s examine what millennials want out of an office. First, the word “office” isn’t really appropriate anymore. What’s desired is a workspace that in one instance can provide quiet and solitude for “head-down” work, and the very next moment, provide an energizing and collaborative group work environment. Should it come as a surprise that millennials want it all without having to commit to one style of space? This brings us to the next important point, which is design.

Design spaces that quickly adapt to changing needs

Co-working spaces are high on function and that means being able to quickly adapt to a variety of work situations. In a single day, a business and its employees may need quiet, private work stations where people can work independently; open, collaborative space where people can work in groups; and traditional meeting space where people can meet with clients. Over time, growing businesses also desire the ability to easily accommodate more employees without having to uproot and find a bigger office every few months.

With traditional office space, businesses usually have to settle for dysfunctional work spaces that don’t quite fit the number of employees or their work styles. As a result, employees are less efficient, communication is disjointed and company culture suffers. For those who own or invest in commercial real estate, the focus needs to be on redesigning traditional office space to function more like a co-working space. This means large, open work areas where employees can interact and collaborate. Also, look for furniture that can be easily reconfigured as often as needed to provide more work spaces and private offices for independent work and meetings. These features will be huge selling points for businesses who want an office that will meet their immediate needs as well as grow with them.

Offer shared amenities to attract and retain tenants

The good news about co-working spaces is that people get used to sharing amenities. Multiple businesses working in the same building could all benefit from a shared conference room, snack bar, lounge or gym. While this would be far too much for any one of these businesses to individually afford in their own office, a building that provides all tenants with access to such amenities has quite a leg up over the competition.

Look at how Google and Apple have designed “campuses” for their employees. You can create the same effect out of your office building. Give businesses a place to interact with other businesses. Now you not only offer work space, you offer networking and business development opportunities for all!

Deliver a seamless experience – even if it comes at a premium

By adding luxury amenities to your office building, like mentioned above, you give businesses a seamless experience. Their employees will have incentive to do more at the office, even if that is relaxing, eating or exercising. Best of all, this higher level of employee engagement comes at a premium. Businesses will pay more for office spaces that keep employees happy, healthy and invested in their jobs. When you invest in adding luxury amenities to you work spaces, you will stand out among the competition and be able to charge more for your space.

Focus on building your own brand!

If you want to engage the growing millennial workforce, you need to pay attention to your brand. This demographic is used to polished and prominent branding. If you want to attract them to your office space, you need to present them with a brand worth buying into. Many co-working spaces brand themselves with a trendy name and logo. They have professional websites and a strong social media presence. How does your “brand” compare? Any effort put into properly branding your properties will bring exponential benefits as time goes on.

Which of these tips do you believe is most valuable to commercial real estate owners and investors capitalizing on the growing trend of co-working spaces?

Join in the conversation by leaving a comment below!

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10 Facts Any Commercial Real Estate Investor Should Know about Central PA’s Industrial Market

Posted on April 30, 2018 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market No Comments

10 Facts Any Commercial Real Estate Investor Should Know about Central PA’s Industrial Market

Central PA’s industrial real estate market is unique for a variety of different reasons. Taking into consideration its geographic, demographic and economic factors, we’ve compiled a list of what we feel are the most important facts worth knowing about our local industrial market.

If you are a commercial real estate investor, or simply someone who wants to know more about Central Pennsylvania’s commercial real estate market, you are sure to find this list of top 10 facts both valuable and interesting. Let’s take a look!

Harrisburg-York-Lebanon CSA is 3rd most populous in PA and 43rd most populous in U.S.

The Harrisburg-York-Lebanon Combined Statistical Area (CSA) is made up of six counties and includes four metropolitan areas in Central Pennsylvania. In 2010, the CSA’s population was 1,233,708 people, making it the 3^rd most populous CSA in PA and the 43rd most populous CSA in the U.S. The Harrisburg-York-Lebanon CSA includes the following Metropolitan Statistical Areas (MSAs): Harrisburg-Carlisle, Lebanon, Gettysburg and York-Hanover.

Harrisburg area puts up strong competition against Lehigh Valley.

Though Lehigh Valley is commonly recognized as Pennsylvania’s leader in warehousing and distribution, Harrisburg delivered only 600,000 SF less than Allentown in 2017, while also generating roughly the same rent growth. Additionally, companies such as Whirlpool, Amazon, Ace Hardware, FedEx, Kohler, and Lindt Chocolates have set up large-scale warehouse and distribution centers in Harrisburg – and those tenants account for just a portion of more than 16 million SF of net absorption.

Harrisburg-Carlisle and Lancaster Ranked Among Leaders in National Job Growth

Of the 25 metro areas with the fastest job growth, as of August 2017, both Harrisburg-Carlisle and Lancaster placed on this competitive list. Lancaster ranked number 24 for its steady growth as it diversifies its economy and renovates its downtown and industrial areas. In six months Lancaster added 3,100 new jobs, bringing its total employment to 252,400 and 2017 growth rate to 1.23%. Harrisburg-Carlisle ranked number 8 on the list with 6,200 new jobs added in the first two quarters of 2017, bringing total employment to 346,100 and 2017 growth rate to 1.82%. Noted was the area’s diverse group of healthcare, technology and biotechnology businesses.

Prime location for warehousing and distribution.

Central Pennsylvania is a premiere market for industrial space for several compelling reasons. For businesses who need easy and affordability storing and shipping of products, the areas offers a great roadway system, an abundant work force, relatively inexpensive and available raw land, and the ability to reach 70 to 80 percent of the U.S. population in 24 hours. Additionally, our government regulations on warehousing and distribution are comparatively easy and straightforward compared to other nearby states or regions.

Four of the 10 Select Top Industrial Leases in Q4 2017 took place in the Harrisburg market.

According to CoStar’s Q4 report for 2017, Harrisburg east and west markets represented the majority of top industrial leases signed that year. Prologis Carlisle (1,029,600 SF), Goodman Logistics Center Carlisle (1,007,868 SF), Prologis Harrisburg (623,143 SF) and Carlisle Distribution Center (575,000 SF) were all leased to different businesses who were looking to grow their industrial real estate space in Central Pennsylvania. This activity indicates economic growth and interest in Central PA’s industrial real estate market, both from businesses and real estate investors.

Lancaster market has the highest quoted rental rate for industrial space in Central PA at $4.69 per SF.

Even though Lancaster’s quoted rental rate for industrial space decreased by $0.45 per SF than where it was at the end of Q4 2016, it still comes in higher than Central PA’s other surrounding submarkets. At $4.69 per SF, Lancaster is $1.41 per SF higher than Lebanon, $0.03 per SF higher than Harrisburg/Carlisle, $0.08 per SF higher than Gettysburg and $0.67 per SF higher than York/Hanover based on Q4 2017.

Lancaster also has the lowest vacancy rate for industrial space in Central PA at just 2.0%.

Lancaster ended Q4 2017 with the lowest vacancy rate of all surrounding submarkets. Compared to Lancaster’s vacancy rate of 2.0%, Lebanon came in at 15.8%, Harrisburg/Carlisle at 6.8% and York/Hanover at 4.9% based on Q4 2017. Though Gettysburg did end 2017 with a vacancy rate of 0.4%, it’s important to note this submarket has just 78 buildings with a combined 4,372,179 SF of existing inventory which places it at a much different level than the other submarkets, comparatively.

Within the MSA, Harrisburg/Carlisle has the largest SF of industrial space under construction at 1,813,468 SF.

Two significantly large industrial projects will soon result in the addition of 1,813,468 SF to the Harrisburg/Carlisle submarket. Comparatively, Lebanon has three buildings under construction with a combined 1,310,195 SF of space, Lancaster has two buildings under construction with a combined 76,486 SF of space, York/Hanover has two buildings under construction with a combined 895,000 SF of space and Gettysburg has no new industrial space under construction. For Central PA as a whole, that equals 4,095,149 SF of new industrial space that will soon be delivered to the market.

Harrisburg/Carlisle’s ended 2017 with a positive net absorption of 2,700,108 SF.

According to CoStar’s Q4 2017 industrial market report, Harrisburg/Carlisle ended the year with the highest, positive net absorption we’ve seen since prior to 2014. At 2,700,180 SF, this is significantly higher than any other quarter that year, especially Q2 where the net absorption dropped to negative 499,576 SF. Additionally is Q4 2017, one new building was delivered to the market, adding 1,100,000 SF of space. Even with this influx of inventory, the net absorption rose by 2,083,756 SF. The new building that was delivered is Whirlpool’s new distribution facility located at 100 Fry Drive, Mechanicsburg.

Influx of State and Federal dollars will continue to improve transportation in and around Central PA.

The Trump administration has recently been touting a $1.5 trillion, 10-year public-private plan to improve roads, bridges, ports and other infrastructures across the nation. Central Pennsylvania has plans to utilize some of this federal funding to bolster its priority projects which include fixing structurally deficient bridges and widening interstates. Improvement to our roadways and infrastructure will improve public safety, create construction jobs and make Central PA an even more attractive location for warehousing and distribution.

After reading through these top 10 facts any commercial real estate investor should know about Central PA’s industrial market, you are likely to have some comments or questions of your own.

Start a discussion by leaving a comment below!

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How Central PA Health Systems are Rethinking Real Estate

Posted on March 21, 2018 by Mike Kushner in Blog, Guest Blogger, Healthcare, Local Market, Trends No Comments

Major changes are taking place in America’s health systems and we are starting to see the impact of some of these changes right here in Central Pennsylvania. Hospitals are no longer the desired “hub” for healthcare, rather free-standing emergency rooms, 24-hour emergency care centers and walk-in clinics are helping to keep people out of the hospital, while expediting their care.

Additionally, telemedicine is reshaping the need for brick and mortar facilities, placing a new emphasis on health systems acquiring “virtual” real estate. These emerging trends are intended to increase access to quality healthcare while allowing health systems to reduce overhead.

To help us answer some of the most important questions surrounding the changes taking place in Central PA’s health systems, we interviewed two guests who are highly knowledgeable on this very topic.

Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division at UPMC Pinnacle. Paul Toburen, also with UPMC Pinnacle, is the Senior Vice President of Facilities and Support Services.

With a combined, vast experience in health systems operations, Dr. Caicedo and Mr. Toburen collaborate to lend their insights into how Central Pennsylvania’s health systems are rethinking the way they use commercial real estate.

Omni: Looking at how Central PA’s health systems currently function, what are some of the biggest challenges?

Christian/Paul: One of the most critical challenges we face in Central PA is access to care – not just any access, but the right kind of access. It’s a moving target we are trying to hit. Patients want access to fairly and competitively priced healthcare, in the right setting, with quality resources and skilled staff.

The challenge stems from the fact that we are all trying to live in two worlds: the fee for service world and the value based world. We can’t have it both ways and also provide access to quality healthcare to everyone in Central PA. There has to be a compromise somewhere.

Omni: As Central PA’s health systems see more and more value in serving the outpatient market, what strategies must be implemented to make this shift?

Christian/Paul: The key to shifting our focus to better serve the outpatient market is to make simple and immediate access to healthcare available to patients right where they are. Rather than asking patients to come to us in traditional office and hospital environments, we need to have access points in the work place, malls, retail spaces, home, etc. Health systems are now trying to acquire more virtual real estate than they are brick and mortar locations. This is evident by the more than 120 rural hospitals who have shut their doors since 2005!

Omni: With the use of telemedicine becoming more prevalent in our health systems, what are the pros and cons of diagnosing patients in their home?

Christian/Paul: The pros, as we touched upon above, will be the ease of access and convenience to the patient. It will allow physicians to see more patients in a day, reducing patient wait time and reducing patients exposure to germs and infections. Additionally, telemedicine is a great option for Medicaid recipients.

The cons, well that will evolve as the technology changes. Currently there are limitations as to the level of evaluation one can conduct via the virtual encounter. As technology evolves, (i.e. Haptic pressure feedback) we will have greater ability to perform better virtual exams and arrive at an accurate diagnosis through telemedicine.

Omni: Specifically, how will telemedicine impact brick and mortar healthcare facilities?

Christian/Paul: Simply put, the growing use of telemedicine will diminish the need for brick and mortar facilities and drive the demand for virtual real estate. If done thoughtfully and strategically, this should be a win for both patients and health systems. Speaking from the health systems standpoint, we can save a lot of overhead while providing patients with faster, more convenient care. Hospitals will stay play an important role in the overall health system, it’s just going to look a little different in the future.

Omni: What Central PA health systems do you feel are leading the way in rethinking how they use real estate?

Christian/Paul: We believe all Central PA health systems are rethinking the way we use real estate. The cost of construction continues to escalate. We are now looking at lease agreements versus building-to-own along with repurposing existing buildings to accommodate our current needs, but having flexibility for future needs as well. Speed to the market is critical in today’s healthcare industry, as we must accommodate the patients’ needs.

Given the transformation taking place in Central Pennsylvania’s health systems, and health systems worldwide, how do you feel about the changes taking place and where they will lead us in the future?

Join in the conversation by sharing your thoughts or questions!

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More about Christian Caicedo: Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division, UPMC Pinnacle. He is the former Vice President of Operations and Medical Director for West Shore Hospital, and Interim Chief Medical Officer, Pinnacle Health System. He has served as Executive Director of Emergency Services and served as Clinical Director for Community Campus Emergency Department, Pinnacle Health System. Dr. Caicedo also served as medical director for Swatara Emergency Medical Services, and was a member of the Swatara EMS board of directors. Currently, he serves as Medical Director for Susquehanna EMS.

More about Paul Toburen: Paul Toburen is currently serving as Senior Vice President for Facilities and Support Services for the UPMC Pinnacle Health System. Paul oversees fourteen departments with a primary focus on Construction Management and Real Estate. Paul has obtained his MBA and MS and is a member of the ACHE, ASHE, COAA, IFMA among other organizations.

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Central Pennsylvania Office Real Estate Made Few Gains in 2017

Posted on February 19, 2018 by Mike Kushner in Blog, Local Market, Office Leasing No Comments

Vacancy rates in the local office market remained mostly stagnant moving into the New Year.

If the saying “no news is good news” can be applied to Central Pennsylvania’s office real estate market, then 2017 was a good year indeed! We closed out 2017 with few noticeable gains and mostly stagnant vacancy and rental rates. On a positive note this means there were no lasting drops to cause volatility to the market; however, if “stagnant” remains an ongoing theme for our local office real estate market in 2018, we may have some cause for concern.

Let’s take a look at some key data for our three local submarket clusters: Harrisburg/Carlisle, Lancaster and York/Hanover. You will see that each experienced its own ebb and flow with some submarket clusters faring better than others at the close of fourth quarter 2017. The most important question to consider when looking at this data is: “What submarket is poised to perform the best in 2018 and what does that mean for commercial real estate and our local economy?”

Harrisburg/Carlisle Submarket Cluster

Vacancy – The office vacancy rate for the Harrisburg/Carlisle Submarket Cluster increased to 6.3% at the end of the fourth quarter 2017. The vacancy rate was 5.8% at the end of the third quarter 2017, 5.9% at the end of the second quarter 2017, and 6.5% at the end of the first quarter 2017, placing it just shy of where we began the year.

Absorption – Net absorption for the Harrisburg/Carlisle Submarket Cluster was a negative (135,877) square feet in the fourth quarter 2017. That compares to positive 25,603 square feet in the third quarter 2017, negative (6,036) square feet in the second quarter 2017, and positive 22,829 square feet in the first quarter 2017.

Largest Lease Signing – The largest lease signing occurring in 2017 was the 57,764 square foot lease signed by Pennsylvania Health and Wellness, Inc. at 300 Corporate Center Drive located in Camp Hill.

Rental Rates – The average quoted asking rental rate for available office space, all classes, was $18.12 per square foot per year at the end of the fourth quarter 2017 in the Harrisburg/Carlisle Submarket Cluster. This represented a .89% increase in quoted rates from the end of the third quarter 2017, when rents were reported at $17.96 per square foot.

Inventory – Throughout 2017, a total of two new office buildings were delivered to the market with a combined total of 73,000 square feet. At the close of the fourth quarter, two additional buildings remained under construction with a combined total of 70,000 square feet of inventory yet to be delivered.

Lancaster Submarket Cluster

Vacancy – The vacancy rates for the Lancaster Submarket Cluster in 2017 held steady for the first three quarters at 6.0%. Only in fourth quarter 2017 did we see the slightest movement in vacancy to 6.1%. Since its dip to 5.3% in third quarter 2016, the vacancy rate has returned to its recent historical average where it continues to remain stable.

Absorption – In the fourth quarter of 2017, net absorption dropped into the negatives for the first time all year, ending 2017 at negative (13,391) square feet. Net absorption was 2,462 square feet in third quarter 2017, 101,013 square feet in second quarter 2017 and 16,187 square feet in first quarter 2017.

Rental Rates – Even with a drop in net absorption and only a slight increase in vacancy rates, the quoted asking rental rate for available office space, all classes, in the Lancaster Submarket Cluster continued to increase throughout 2017. In the first quarter the quoted rental rate was $16.63, $17.13 in the second quarter, $17.20 in the third quarter and $17.46 in the fourth quarter. This is the highest quoted rental the Lancaster Submarket Cluster has experienced since prior to 2014.

Inventory – Two new office buildings were delivered to the Lancaster Submarket Cluster in 2017. Both delivered in the second quarter and combined they added a total of 113,000 square feet of new office space.

York/Hanover Submarket Cluster

Vacancy – The fourth quarter office vacancy rate for the York/Hanover Submarket Cluster held steady at 5.9%, the same as it was in the third quarter. This is slightly higher than the 5.6% vacancy rate in the second quarter and the 5.8% vacancy rate in the first quarter.

Absorption – The fourth quarter ended with a net absorption of 1,400 square feet. This is an increase from the third quarter’s negative (29,853) square feet that was a significant drop from the second quarter’s 15,646 square feet the first quarter 2017’s 31,636 square feet. This is the only increase in net absorption the market experienced in 2017.

Rental Rates – 2017 started off with a fairly steady quoted asking rental rate for available office space, all classes, of $17.40 per square foot. It increased by $0.01 in the second quarter to $17.41 and spiked in the third quarter at $18.05. Though still higher than the first two quarters, 2017 finished with a slight dip in quoted rental rates as it fell to $17.74.

Inventory – No new office buildings were delivered in the York/Hanover Submarket Cluster in 2017. There is one building under construction with a total RBA of 840 square feet.

Looking at the comparison of the three Central Pennsylvania submarket clusters, which do you feel is in the best position to start making some moves in 2018? Share your ideas by leaving a comment below.

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Impact of the New Tax Law on Commercial Real Estate

Posted on February 12, 2018 by Mike Kushner in Blog, Commercial Real Estate No Comments

The federal tax overhaul, which was enacted into law on December 22, 2017, was the most drastic tax law changes that the United States has seen in 30 years. While it will take some time to fully understand how much tax savings the changes could generate for commercial real estate investors, there are several significant impacts that are quite apparent.

New tax climate favors commercial real estate investors

Legal and tax experts agree that the new tax law bestows several benefits that make it more appealing for commercial real estate investors to buy properties. Many of the changes will put more money back into the pocket of investors in terms of tax savings. Some of the changes, particularly the tax treatment of capital expenditures, will shield a tremendous amount of income for property owners that are making capital investments and improvements to their properties. And let’s not overlook the ripple effect the new tax bill may create, such as fueling economic and job growth that will drive demand for commercial real estate. All things considered, real estate has become just about the most accessible way for high net-worth investors to profit from the tax law.

A shift in capital should increase demand for commercial properties

The tax new law creates an incentive for investors to shift capital from equities to pass-through businesses. Essentially, the law enables a taxpayer to factor 2.5 percent of the original purchase price of a property into the calculation of the 20 percent deduction for pass-through income. This allows a real estate investor the ability to reduce real estate investments to an effective 29.6 percent tax rate, which is 10 points lower than it was in 2017. Without the predicted shift in capital based on the tax new law, commercial real estate prices likely would have stalled in 2018, due to increasing interest rates and decreasing cap rates. It’s important to note that the deduction is set to expire in December 2025.

Expansion of Section 179 allows commercial property owners to direct expense improvements

Another positive for commercial real estate investors is the expansion of the Section 179 deduction for depreciation. Under the Section 179 revision, the new tax law lets commercial property owners count the cost of improvements (i.e. roofs, HVAC systems and security systems) as direct expenses in the year these items were installed. Under the previous tax law, improvements had to be capitalized with a small piece being expensed each year until the full cost was exhausted. Additionally, the Section 179 change is retroactive to the 2017 tax year, which is unlike other parts of the new law.

Tax-free 1031 swaps for real estate were retained

Another piece of the tax law that should have commercial real estate investors excited is the retention of tax-free 1031 swaps for real estate. The real victory here is that lawmakers did not yank 1031-exchanges for real estate, as they did for aircraft and other types of personal property. In fact, under the new law 1031 trades are now restricted exclusively to real estate.

Insights from a tax adviser

The new tax law creates some gray areas and leaves many questions unanswered, particularly as it relates to commercial real estate. As a commercial real estate investor, the best thing you can do is consult a tax adviser before making any drastic changes to your real estate investment strategies. At Omni Realty Group, we had a few questions of our own so we asked Jim Holland, accountant and owner of Jim Holland CPA to weigh in with his insight. Here is what he shared.

“There is no doubt the biggest winner in the real estate arena was for commercial real estate investors; however, it is wise to proceed with caution. I would recommend to any commercial real estate investor that they tread lightly until more is known about calculating the 20% reduction of business income, including from flow through entities. The calculation can be complicated and burdensome.”

That’s not to say there are some immediate actions CRE investors might consider taking in 2018 to put themselves in the best possible position to maximize the benefits of the new tax law. Clifton Guise, Tax Attorney and Partner at Halbruner, Hatch & Guise, LLP shares the following.

“Because most real estate investors own and operate their real estate activities through pass-through entities (LLCs, LPs, and S-Corps) or sole proprietorships, it is important to determine if the investor qualifies for the Qualified Business Income (“QBI”) Deduction. The QBI Deduction is an individual level deduction that can reduce the tax rate on income from pass-through entities. An investor may need to restructure their entity or in some cases restructure their leases in order to qualify for the QBI Deduction.”

Taking the time to fully understand the new tax law, and identifying how you may need to restructure your leases or business model to maximize your benefits under this law is a worthy investment of your time. If you are a commercial real estate investor, make it a goal to seek advice on the new tax law and how it stands to impact your business going forward.

Share your opinion! What do you think is the most important impact the new tax law will have on commercial real estate?

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Real Estate Trends to Impact the United States in 2018

Posted on December 27, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

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

Rapid technological advancements and significant demographic shifts significantly influence the real estate industry. These various factors like growing urbanization, longevity of Baby Boomers and differentiated lifestyle patterns of Millennials are changing the way people value real estate. Add into the mix macroeconomic and regulatory developments, and you have the perfect storm for some significant changes to come to the real estate market in 2018.

With the many changes that have already taken place in 2017, many real estate companies find themselves searching for ways in which they can gain a competitive advantage and drive top- and bottom-line growth in the New Year.

To achieve this, we must identify and monitor emerging trends that are likely to impact the economy moving into 2018. Take a look at the top trends that are shaping the U.S. real estate industry right now!

ECONOMIC OUTLOOK: Increasing interest rates could temper growth

Federal Reserve is likely to raise interest rates in the short-to-medium term. Volatile global markets have led to continued low interest rates, but that’s expected to come to an end in 2018. Higher interest rates are likely to increase mortgage costs and could deter real estate investments to some extent.
Gross domestic product growth will likely increase 2.5 percent in 2018. It’s the same as in 2017, but better than the 2.1% growth in 2016. The modest economic improvement could temper the pace of commercial real estate (CRE) transaction activity.
Improving labor markets and household wealth will boost consumer confidence. The U-5 unemployment rate which includes discouraged workers and all other marginally attached is expected to drop under 5 percent. The employment-to-population ratio is projected to peak in 2018, as retiring Baby Boomers may reduce the share of employed.

REGULATORY OUTLOOK: Greater compliance means greater cost

Increased compliance and administration costs will result from the new accounting standards on lease accounting and revenue recognition that will primarily impact real estate investment trusts (REITs) and engineering and construction (E&C) companies.
Risk retention rules will lower issuance of commercial mortgage-backed securities (CMBS). We are also likely to see a reduction in capital availability in secondary and tertiary markets.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 will ease REIT tax provisions and R&D tax credits for E&C companies, while increasing the flexibility to invest in startups for R&D experimentation. However, corporate tax reforms will reduce flexibility for corporations to spin off real estate assets into REIT structures.

DISRUPTIVE TRENDS: These factors are reshaping the face of CRE

Collaboration and Sharing.These sound like two positive trends, right? They certainly are for startups who utilize new platforms and business models like Airbnb or WeWork to reduce their real estate overhead. However, this type of collaboration and sharing of space is disrupting the way organizations lease and use commercial real estate space for their businesses. Traditional CRE companies will need to rethink their approach toward space design, lease administration, and lease duration in order to compete.
CRE data is becoming more ubiquitous and transparent thanks to technological advancements. The traditional brokerage model is being threatened by the increasing ease and efficiency of online leasing. Traditional brokers will need to diversify their services to include consulting and collaboration.
A growing demand for mixed-use developments as consumers prefer to “live, work and play” in proximity. This demand is the result of a shortage of workers with strong STEM skills, rising urbanization and Millennials’ preference for an open and flexible work culture. Companies trying to compete for this type of talent should choose office locations in areas that cater to the living and working environments preferred by their ideal candidates.
Rising demand for fast and convenient online retailing is disrupting the retail and industrial markets. Innovations in speed and mode of delivery (such as same-day delivery and e-lockers) will decrease the demand for large retail and industrial spaces. This trend will also cause a blurring of the lines between these two properties. For example, some retail space could double as fulfillment centers. To stay afloat, retailers will need to try different store formats to appeal to the consumer, while industrial properties should focus on smaller, more flexible spaces located near cities.
A change in how we get around will also change how we use real estate. With each passing year, more and more people rely upon “pay-per-use” vehicles and rideshare platforms like Zipcar, Uber and Lyft. We also get closer to self-driving vehicles. This major disruption to the entire mobility ecosystem will result in fewer people owning and driving their own vehicles, especially in urban areas. This will free up large parking spaces in prime locations that can be put to different uses. Real estate companies should begin to explore ways to reduce and repurpose parking space as a means to generate more income.

Over the course of the next 12 months, the U.S. commercial and residential real estate industry can expect to be hit with various changes and challenges. Some of these changes may have a favorable impact, while others could impose some serious setbacks. For real estate businesses to gain a competitive advantage and drive top- and bottom-line growth in 2018, they should take note of these emerging trends and work on developing a strategy now to react to the changing market, when the time comes.

What real estate trend do you think will have the most significant impact on the United States in 2018? Share your insights by leaving a comment below!

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