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How Medical Marijuana Will Impact Real Estate in Pennsylvania

Posted on August 31, 2016 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.

How Medical Marijuana Will Impact Real Estate in Pennsylvania

Since the legalization of medical marijuana in April, the Pennsylvania Department of Health has placed a lot of focus on developing a program that is expected to be operational by 2018. In fact, temporary regulations were just rolled out to give growers and processors an idea of the rules they will need to follow.

All types of industries are anxiously anticipating the economic impact of legalized medical marijuana. For some businesses, it will be a major boost. For others, it will hardly move the needle. It makes sense that growing, processing and dispensing will require new space, but how much will this really impact real estate? Let’s take a look.

The Potential Impact on Local Real Estate

While it may seem like medical marijuana growers and processors will be filling up industrial real estate space all across the commonwealth, this isn’t the case. Strict regulations allow for limited growing permits based on factors such as population, access to transportation and the number of people who have qualifying conditions for medical marijuana.

In total, there are 50 dispensary permits (which include 3 locations per permit), 25 grower/processor permits and 8 clinical research permits (which include grower/processor ability and 6 dispensary locations, but must be partnered with a medical research facility). The 25 grower/processor permits plus the 8 clinical research permits mean that just 33 growing locations are permitted. Spread out across Pennsylvania, this is not a huge impact on industrial real estate.

Growers and processors will be looking for warehouses of various sizes between 50,000 and 200,000 square-feet in size. They may also be interested in a property with extra land to use for constructing greenhouses. There are enough existing properties that fit this criteria that it is not expected that new warehouses will be built for the specific purpose of growing medical marijuana. Rather, vacant warehouses will be gutted and retrofitted with water systems, climate control and HVAC.

Additionally, regulations allow for 198 dispensary locations where medical marijuana can be purchased by people with qualifying conditions. Each will require real estate that’s a mix between retail and office space.

“Dispensaries will be a combination of your local Rite Aid and a doctor’s office,” explains Andrew Blasco, Executive Director of Pennsylvania Medical Cannabis Industry Group (PAMCIG). “They will sell medical marijuana and related items like vaporizers in a secure and clinic-like environment.”

The biggest impact won’t be the sale of real estate. Rather, it’s the 12,000 permanent jobs plus many more temporary jobs created by the 198 dispensaries and 33 growing and processing locations.

The Industry to Benefit the Most

So if it’s not real estate, then what industry really stands to benefit the most from the legalization of medical marijuana? The answer may surprise you. Growing and processing requires a great deal of energy. Electric power companies will essentially gain a whole new industry of very loyal customers who rely upon energy use 24/7.

“Each growing and processing location will use about the same amount of electricity as a 16-story hotel. Combined, that’s like Pennsylvania gaining 33 new hotels and fully powering them around the clock,” says Blasco.

Additionally, there will be a niche market for architects, engineers and contractors who specialize in retrofitting warehouses to be used for growing medical marijuana. These facilities have very specific requirements, not only for climate control but for security purposes. Companies with this specialty would be highly sought after by permit holders.

While there is a lot we can anticipate, the full impact of the legalization of medical marijuana won’t be felt until regulations are finalized and businesses are able to begin growing. PAMCIG expects regulations for grower/processors to be done by mid-late September, while temporary regulations for the entire program can be expected to be completed by Christmas.

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

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Hundreds of Thousands of Square-Feet of New Office Space Coming to Central PA in 2016

Posted on August 1, 2016 by Mike Kushner in Blog, Local Market, Trends No Comments

Two new construction projects, located at the intersection of Carlisle Pike and Hogestown Road in Mechanicsburg, will deliver 258,000 square-feet of office space to Central Pennsylvania this year. Silver Spring Township is calling this construction “Class A Office Space Project” and are confident that, by attracting new businesses to the area, this space will benefit the entire community and its existing businesses.

Here’s a look at how the market has responded to this new space, as well as our analysis of the long-term trends that are yet to come.

Select Year-to-Date Deliveries/Top Under-Construction Properties:

In Q2 2016, Central Pennsylvania had just one building delivered, but it was substantial. Ranked number one on the Greater Philadelphia list of Year-to-Date Deliveries is the office space located at 974 Hogestown Road, Building 200, Mechanicsburg. It is Class A office space that is 100% occupied. Another 129,000 square-feet building, also located on Hogestown Road is under construction and projected to be completed in Q3 2016.

Absorption and Demand:

In Q2 2016, the net absorption has almost doubled since Q1 2016 and is nearly six times larger than it was in Q4 2015. In Q4 2015 it was 50,949 square-feet, increasing to 162,531 square-feet and further increasing this quarter to 301,337 square-feet. This is the largest net absorption we have seen in over a year, compounded by the fact that Central Pennsylvania’s last four years of net absorption has been varied and volatile. One new building delivered this quarter contributed 129,000 square-feet of pre-leased space to the market. There are 2 more buildings currently under construction and they are expected to deliver 136,590 square-feet of space to the market later this year.

Vacancy:

The vacant square footage decreased from 3,705,257 square-feet (Q1) to 3,532,920 (Q2). The vacancy rate also decreased to 6.5% (down 0.3% from last quarter). This is the lowest vacancy rate we have seen since prior to Q3 2012 and is only the second time it’s dipped into the 6.0% range, with last quarter being the first time. Though the vacancy rates have bounced slightly between increasing and decreasing each quarter since 2012, the overall trend has been a decrease.

Rental Rate:

This quarter, the quoted rental rate decreased from $17.32 (Q1) to $17.25. This is the first decrease that we have seen since Q3 2013. However, the fact that the price per square foot still remains above $17.00 makes it a higher price point than the market has experienced between the years of 2012-2015.

Employment:

Pennsylvania’s unemployment rate rose to 5.6% in June. The local labor force declined by 4,000 from May’s record high level of 6.54 million. The Pennsylvania Department of Labor reported that nine of the 11 sectors actually posted job increases in June; however, the two sectors that posted a loss, mining and logging and trade, transportation and utilities, were enough to cause the unemployment rate to rise. They each posted job losses of 600.

Our Summary/Analysis:

Silver Spring Township’s “Class A Office Space Project” is drawing new business into Central Pennsylvania. With 129,000 square-feet of 100% occupied space delivered to the market this quarter and another building of the same size to be delivered next quarter, there is a proven demand for this space. Furthermore, this spur of activity has the potential to draw even more businesses into the area who want to be part of the growing business community. This would come at an opportune time as the local market is experiencing a rise in unemployment.

What trend this quarter do you think will have the greatest impact on the Office Real Estate market moving forward? Share your insight by commenting below!

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ABC’s of Commercial Real Estate: What you need to know about each classification of office space

Posted on June 8, 2016 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Office Leasing No Comments

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

You are likely aware that there are different classifications of office space, specifically Class A, B and C. But what qualities determine the letter associated with any given commercial property? Is it the location, the layout, the finishes or the amenities?

The answer is it has to do with all of these things! The classification of office space is very important to keep in mind both as a real estate investor and as a business tenant. Your budget and use of the space will help determine the class best suited for your needs. When looking to rent or buy commercial real estate, you can save a lot of time and frustration by teaming up with an experienced tenant representative or buyer agent who can advise you on the most appropriate class.

Here’s an overview of the pros and cons of each of the three classifications of office real estate!

Class A

Overview: As you might expect by the name, Class A office space is considered extremely desirable investment-grade properties and command the highest rents or sale prices compared to other buildings in the same market. These buildings are in prime locations with efficient tenant layouts that function as well as they look. Some Class A office space is an architectural or historical landmark designed by prominent architects. Simply put, Class A office space is for the renter or investor who wants the highest level of quality and convenience and is willing to pay a premium for it.

Pros: With Class A office space, you know you’re getting the best – the best location, layout, finishes and amenities. You are likely to have other desirable businesses as your “neighbors” in the same building which can increase the value of your space. You can also rest assured knowing the space will be well maintained for the premium price, meaning less headaches or inconveniences for you in the long run.

Cons: This class of space comes with the highest rent or sale prices. You may also have less negotiation power since the space you’re getting is usually in top condition with every advantage to drive the price high – including many businesses who are eager to jump on the space if you don’t.

How It Relates to the Local Market: The Central Pennsylvania submarket has 93 existing buildings that are classified as Class A. Combined, that’s a total RBA of 8,820,990 square-feet. After submarkets Philadelphia CBD/Non-CBD and Southern New Jersey, Central PA is the submarket with the lowest vacancy rate in CoStar’s Philadelphia Office Market Area, coming in at 9.9% in first quarter 2016. The average asking rental rate for this the first quarter is $19.78 which is the third lowest rate in the market area.

Additionally, it’s worth noting that just because two buildings are both considered Class A, does not mean they are equal. This is all the more reason to work with an experienced tenant representative who can help you find the best space at the best price to meet your needs. Just take a look at the example of these two buildings in the Central PA submarket below. Both are Class A, but for which property would you be willing to pay the premium price?

Class A Office Space located at 100 Sterling Parkway, Mechanicsburg, PA

Class A Office Space located at 3 Crossgate Drive, Mechanicsburg, PA

Class B

Overview: Class B office space is a step down from Class A space in its location, design, quality and amenities. As such, this space carries a lower price tag. Class B buildings offer utilitarian space without special attractions and have “ordinary” design, compared to Class A. These buildings typically have average to good maintenance, management and tenants. They are less appealing to tenants than Class A properties, and may be deficient in a number of respects including floor plans, condition and facilities. They lack prestige and must depend chiefly on a lower price to attract tenants and investors.

Pros: Since Class B office space is “middle of the road” for the classes, you have the advantage of getting a better work environment than Class C for a price that’s less expensive than Class A. As an owner or investors of Class B space, you’re likely to find many tenants whose budget and expectations align best with Class B space.

Cons: On the flip side, Class B space has several drawbacks to consider for the cost savings. It’s not likely to be in as prime of a location as Class A nor have the same amenities and quality of finishes. You may find the layout to be less convenient and the building and its other tenants to be “less prestigious” than Class A.

How It Relates to the Local Market: The Central Pennsylvania submarket has 1,303 existing buildings that are classified as Class B. Combined, that’s a total RBA of 28,378,254 square-feet. With a vacancy rate of 7.7% in first quarter 2016, it is the lowest of any submarket in CoStar’s Philadelphia Office Market Area though it’s average asking rental rate is only the third least expensive at $17.36, coming in higher than I-81 Corridor and Southern New Jersey. If you find it overwhelming to understand and interpret the local market trends, a tenant representative/buyer agent can guide you with knowledge and expertise. He or she knows how these trends impact demand and pricing and can use it as leverage to help you negotiate the best deal.

Here are two examples of Class B office space so you can see the variations within a single class.

Class B Office Space located at 200 N. Third St., Harrisburg, PA

Class B Office Space located at 204 S. 3rd St., Boiling Springs, PA

Class C

Overview: Class C office space describes buildings that generally qualify as no-frills, older buildings that offer basic space and command the lowest rents or sale prices compared to other buildings in the same market. Such buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige. Things like inferior elevators, mechanical or electrical systems help reduce the cost, but also increase the possible headache for tenants. These buildings lack prestige and must depend chiefly on a lower price to attract tenants and investors.

Pros: The biggest benefit of Class C office space is its low price in comparison to Class A and B. If you’re looking for a simple and understated work space with zero frills, Class C might be a great option to help you stick within your budget while still gaining the space you need to grow your business.

Cons: When looking at Class C space, you need to keep your expectations in check. This is the lowest of the classes and likely to be the least desirable work conditions as well. There may be things that need obvious repair, the building and its location may leave a lot to be desired and your neighboring tenants are not likely to be prestigious businesses. Having said that, sometimes you can get lucky and find a Class C space in an area that still has “good bones” and a lot to offer the right business. It’s always important to keep an open mind, especially when working with a limited budget!

How It Relates to the Local Market: The Central Pennsylvania submarket has 2,162 existing buildings that are classified as Class C. Combined, that’s a total RBA of 16,600,363 square-feet. With a vacancy rate of 5.1% in first quarter 2016, Central PA has the second to lowest vacancy rate in CoStar’s Philadelphia Office Market Area. It’s average asking rental rate for the first quarter is $14.99 which is the second lowest only to I-81 Corridor.

Again, here are two examples of Class C office space so you can see the variations within a single class. Depending upon your requirements, Class C office space might be just what you need, but make sure you work with a real estate broker who exclusively represents tenants and buyers to ensure you’re getting a fair and favorable deal!

Class C Office Space located at 4655 Linglestown Rd, Harrisburg, PA

Class C Office Space located at 1505 Market St., Camp Hill, PA

What other questions do you have about the different classifications of commercial office space? Ask by commenting below!

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

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Manufacturing Continues to Grow in Central Pennsylvania: What’s Going On and Why It Matters

Posted on October 27, 2015 by Mike Kushner in Blog, CREDC Articles, Local Market, Trends No Comments

This article has been featured by the Capital Region Economic Development Corporation (CREDC) and can be also viewed on their website.

Manufacturing Continues to Grow in Central Pennsylvania According to the PA Manufacturers Association, manufacturing and its affiliated businesses contribute $11 Billion to the economy in south-central Pennsylvania alone, providing our community with an estimated 110,000 jobs. This industry is a huge part of our local economy and its growth impacts the growth of many other businesses.

It should come as good news that the demand for manufacturing space is on the rise. 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 for location, this area is a central hub where products, after being manufactured, can be easily distributed throughout the northeast United States (via I-81, I-83, and I-78). 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.

For businesses who need to manufacture and distribute their goods far and wide, Central Pennsylvania is an obvious choice for setting up shop. No matter your particular business or industry, this growth matters to you too! It’s important to understand these trends and the various ways they will likely impact your business. Let’s take a look.

Current Market Trends Worth Noting:

Six more manufacturing buildings entered the market in the last quarter alone, giving us the highest RBA we have seen in more than two years at 62,988,707 square feet. Among this space, 60,527,229 square feet are currently occupied which showcases the high demand for manufacturing space in Central Pennsylvania.

Net absorption has also shown tremendous improvement since the 2013. Just two short years ago, net absorption was in the red by hundreds of thousands of square feet. The lowest point occurred in 2013 Q2 when net absorption was negative 403,861 square feet. The very next quarter, net absorption shot up to a positive 598,898 square feet. Though there has been some fluctuation in the market since, we have remained mostly in the black and currently have a net absorption of 30,468 square feet.

Additionally, Central Pennsylvania’s vacancy rate for manufacturing space has shown significant improvement from the 5.6% we saw in 2013 Q3. A steady decrease has brought this rate down nearly two whole percentage points to the 3.9% we see today.

Finally, the average rental rate has declined approximately $.20/SF since 2013, but has stabilized at approximately $3.50/SF in 2014 and 2015.

What this means to the Central Pennsylvania region:

To the many businesses that are directly and indirectly impacted by the manufacturing industry, the current real estate market is a positive indicator that other markets will follow this favorable trend. Growing manufacturing companies produce more jobs which spur growth in almost every other aspect of the economy from office and residential space to restaurants and shopping centers.

To the 110,000+ people who are employed by the Central Pennsylvania manufacturing industry, the market shows positive signs that these businesses continue to grow and also offers the potential of even more manufacturing businesses being drawn to the area.

Overall, Central Pennsylvania maintains its reputation for being a hub for manufacturing and distribution. The industrial real estate market, specifically for manufacturing space, reflects the strong and steady growth would we expect to see in this region.

View the original article on the CREDC website here.

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Back in Black: Central PA Retail Market Increases Net Absorption, Rental Rates in Q2

Posted on September 23, 2015 by Mike Kushner in Blog, Local Market, Trends No Comments

It is a good time to be building or renting retail space in Central Pennsylvania!

Second quarter 2015 closed out with the highest quoted rental rate we have seen since at least 2011. Retail businesses are willing to pay the $11.75 per square foot – and more – to move into highly sought after space in Harrisburg, Lancaster, York and the surrounding areas.

Combine this with the fact that the market absorbed a combined 144,318 square feet of space, bringing us back into the black with net absorption, and you can see why we’re hopeful that this is the start of a healthy and prosperous trend in Central PA real estate.

Let’s take a deeper dive into what the numbers are telling us about second quarter 2015 and what we can expect for the future of retail real estate in the Central Pennsylvania submarket.

Select Top Retail Leases

Properties all across the Philadelphia retail market continue to change hands as businesses exit and enter leases. Looking specifically at the Central Pennsylvania submarket, there are several retail leases that occurred in second quarter 2015 that are worth noting.

Blue Mountain Thrift Store now occupies the space at 2 N. Londonderry Square in Harrisburg Area East. In Harrisburg Area West, Peebles moved into the Shippensburg Shopping Center. And finally York County welcomed CSL Plasma into its Eastern Boulevard Plaza.

Select Year-to-Date Deliveries:

Three of the top 10 year-to-date deliveries in the Philadelphia retail market occurred in the Central Pennsylvania submarket. The Messina Highlands project in Shrewsbury was completed this quarter with an RBA of 30,000 square feet and a quoted rental rate of $26.06. A ton of popular shops including AT&T and Panera Bread will occupy this space. Currently, 32% of the space is still available for rent.

Another retail property located at 2108 S. Queen Street, York was delivered this quarter with an RBA of 16,000 square feet and is 100% occupied. Finally, the construction project at 750 Lititz Pike, Lititz was also completed in Q2. This property has an RBA of 10,820 square feet and its quoted rental rate is $17.

Select Top Sales:

Among the top select sales in Q2, the Central Pennsylvania submarket had two of the top nine on the list. The Shoppes at Susquehanna Marketplace in Harrisburg came in at number three. Clarion Partners purchased this from Stanberry Development, LLC for $44,000,000. In Lancaster, the Manor Shopping Center was sold by the Real Estate Equity Company, LLC to Wharton Realty Group for $34,990,000.

Vacancy:

This quarter, the vacancy rate dipped ever so slightly from 5.6% to 5.5%. These numbers have remained fairly stable ever since first quarter 2014 which is the last time we saw it at 6.0% or higher. The vacant square feet also reflected this small change in vacancy rate, decreasing by 93,642 square feet.

Rental Rates:

Looking at the quoted rental rates, Q2 experienced a $0.20 raise from $11.55 to $11.75. This is the highest rental rate we have seen in the Central Pennsylvania retail submarket since third quarter 2011.

Absorption and Demand:

Last quarter, the net absorption dropped into the red at negative 160,861 square feet. In second quarter 2015, we are back in the black with 144,318 square feet. This significant change was certainly a reflection of the 3 new buildings that were delivered this quarter.

Our Summary/Analysis:

The Central Pennsylvania submarket experienced some exciting changes in second quarter 2015 that indicate a healthy and growing retail industry. Returning to a positive net absorption and increasing quoted rental rates to the highest they have been in more than four years demonstrates the demand for retail space in the local area. Additionally, three new buildings delivered to the market, with two more under-construction, are signs that Central Pennsylvania retail businesses are demanding more space to grow!

The retail industry is a strong indicator of economic health. At the local level, there is a lot we can take from this quarter’s numbers and apply them toward predicting the growth and changes in our overall economy. Retail businesses are investing in this area, moving and expanding into new spaces that are driving up net absorption and the quoted rental rate. We should enjoy this growth and excitement, as it is sure to catch the attention of other retail businesses who may also consider making Central Pennsylvania “home” for some of their stores.

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

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Harrisburg’s Retail Real Estate Hits Record Low Net Absorption in Q1

Posted on June 2, 2015 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

The Central Pennsylvania retail real estate submarket closed First Quarter 2015 with some good news and some bad news. On a positive note, the quoted rental rate is the highest it has been in nearly four years. However, this data is quickly overshadowed by the submarket’s negative net absorption which plummeted 316,783 square feet in a single quarter. Most concerning is how Harrisburg Area East has appeared to bear the brunt of this drop.

So what has gone on in the local retail real estate market this past quarter? And what could be the cause of this major shift in net absorption? Let’s first take a look at what the numbers are saying and then apply them to what this means for the health of the market.

Top Under Construction Properties:

The Central Pennsylvania submarket has two retail properties that are under construction that are among the Top 15 for First Quarter 2015. Coming in at number six, Messina Highlands has an RBA of 30,000 square-feet and is 45% preleased. This property is expected to be delivered in Second Quarter 2015. Number 15 on the list is a property located at 108 Pauline Drive in York, Pennsylvania. This is expected to deliver an RBA of 7,200 square-feet in Fourth Quarter 2015 and is not preleased.

Select Top Retail Leases:

Out of the Select Top Retail Leases that were signed in First Quarter 2015, there were two Central Pennsylvania properties that made it to the top 10. Coming in at number three, the 46,158 square-foot Toy “R” Us, located in Harrisburg Area West was leased by an unlisted tenant. At number seven, a 14,976 square-foot property located at 611 N. 12^th Street in Harrisburg Area East was leased by Save-A-Lot.

Vacancy and Availability:

First Quarter 2015 closed with 4,799,169 square-feet of vacant space. The vacancy % jumped from 5.7% last quarter to 6.0% this quarter. It appears the dip we saw in this number throughout Second, Third and Fourth Quarter 2014 is returning to its higher average in the 6’s, but not nearly as high as it was two years ago at this time. No new buildings were delivered in this quarter, so the total RBA stays put at 60,315,522 square-feet.

Absorption and Demand:

The net absorption was the biggest shift we saw in First Quarter 2015. Last quarter ended with a positive 62,480 square-feet, but this number since dropped to negative 254,303 square-feet. This is by far the lowest number we have seen in the Central Pennsylvania retail market in nearly four years. The closest comparison was back in Second Quarter 2012 with a negative net absorption of 49,528 square-feet – but still far off from where we are now.

Looking specifically at Harrisburg Area East, this submarket experienced a negative net absorption of 237,665 square-feet. In comparison to the rest of the submarket, Harrisburg Area West maintained a positive net absorption of 45,041 square-feet as well as York County with 48,431. The rest of the Central Pennsylvania submarket closed the Quarter with a negative net absorption, but not nearly as low as Harrisburg Area East. Adams County ended with negative 3,672 square-feet; Lancaster County ended with negative 98,938 square feet; and Perry County ended with negative 7,500 square-feet.

Rental Rates:

The quoted rental rate for First Quarter 2015 is $11.51. This is a mere penny increase from the previous quarter, which is just enough to bring it to the highest rate we have seen in Central Pennsylvania’s retail real estate market in nearly four years.

Our Summary/Analysis:

In some markets, retailers that are back in expansion mode are bumping up against a big obstacle – a lack of inventory when it comes to good real estate locations. The limited supply of new retail construction has been a huge help to improving absorption and vacancies. However, the Harrisburg East Submarket which is part of the Central Pennsylvania Submarket Cluster (including Adams, Cumberland, Dauphin, Lancaster, Perry and York counties) struggled in Q1 2015. The major contributors were the closing of a Sears store in the Lebanon Plaza Mall and the Kmart at 2090 Lincoln Highway in Lancaster.

Sears Holdings Corporation, the company that runs Sears and Kmart, has a problem. They have a lot of real estate and not enough sales to keep all that real estate busy. As a result, they are forced to close stores that underperform or as their leases expire. In buildings they own or hold long-term leases, they often opt to rent out space to other businesses to try and minimize expenses as much as possible.

Harrisburg East experienced an unfortunate setback in Q1, but as a whole, the Central Pennsylvania submarket’s economic health looks hopeful for the remaining quarters. It’s important that we continue to watch other Sears Holdings Corporation’s real estate locations as well as any other big businesses that are struggling and closing retail locations as a result.

What other trends in the retail real estate market have you seen take place in First Quarter 2015? Share your insights 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!

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Central Pennsylvania Retail Market Sees Burst of Growth in Second Quarter 2014

Posted on August 12, 2014 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

The Central Pennsylvania Retail Real Estate Submarket, which includes Adams, York, Lancaster, Perry, Dauphin and Cumberland Counties, experienced a surge of growth in second quarter 2014. Where did this growth occur? What was the cause? And what does this mean for the local economy? Let’s first take a closer look at what the numbers are telling us.

Second quarter 2014 experienced the most square-footage absorbed in one quarter since first quarter 2011. Total net absorption for this quarter was 298,553 square feet. This was a 237,473 square foot increase from first quarter 2014 which had a net absorption of just 61,080 square feet. After taking a major hit in second quarter 2012, net absorption has been slowly (and unsteadily) recovering; however, this is the highest spike it has seen in more than three years.

Vacancy rates dropped to 5.9 percent in the second quarter, falling from the previous quarter’s 6.2 percent. This is the lowest vacancy rate Central Pennsylvania has seen since before third quarter 2010. In correlation to the decrease in vacancy rates, rental rates increased by $0.27. At $11.47 per square foot, this is the highest rental rates we have seen since second quarter 2012.

Additionally, second quarter 2014 brought Central Pennsylvania some of its top retail leases as existing businesses changed locations and new businesses entered the area. Some highlights include White Oak Furniture’s 38,869 square-foot lease in North Londonderry Square, Palmyra. Get Air signed a 24,300 square-foot lease in Union Square, Harrisburg. A new Aldi location in Mill Creek Square, Lancaster took 17,594 square feet of retail space off the market in second quarter 2014. Finally, Sky Zone moved into a 24,045 square foot space in Gateway Square, Hampden Township. Combined, this is a total of 104,808 square feet of retail rental space absorbed by just four locations in a single quarter.

The Central Pennsylvania retail real estate market finished second quarter 2014 with encouraging indicators of growth. New and expanding businesses are requiring more space, pushing rental rates higher and vacancy rates lower than they have been in years. This growth is also sure to have a positive impact on the local economy as these businesses create more jobs and bring new revenue streams to the area.

No real estate class is more closely tied to economic recovery than the retail sector. While facing other obstacles such as the loss of major shopping center tenants, migration of retail users to pad sites, lack of new-format retailers and competing internet sales, the next six months will see continued recovery of gross retail sales as consumers increase household debt and feel more financially secure with restructured housing payments and more retirement equity. Continued housing market stability remains the key metric in the fate of local retail growth.

Have you experienced any benefits or drawbacks related to the burst of growth in the Central Pennsylvania retail real estate market? Share your insights by commenting below.

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