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Commercial Spaces Likely to See New Requirements for HVAC Due to COVID-19

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Impact on Commercial Office Space – Nationally

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

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

The Impact on Commercial Office Space – Locally

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

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

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

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

A New Work-From-Home Paradigm

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

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

A Looming Recession

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

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

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

Where do we go from here?

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

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

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

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

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

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

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

Join in the conversation by leaving a comment below.

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Cannabis-Friendly States Get Major Boost in Commercial Real Estate

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

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

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

Increased Demand for Both Commercial and Residential

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

A Double Edge Sword for Residential Real Estate

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

CRE Investors See This as a Big Opportunity

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

The Economic Impact in Pennsylvania

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

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

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

What’s next for marijuana in Pennsylvania?

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

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

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

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

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Growing U.S. Economy Drives Demand for Commercial Real Estate

Posted on February 13, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

The current economic climate in the United States has been a bit of a roller coaster, and depending upon the industry you’re examining, you may find more ups than downs or vice versa. Trade wars, combined with a slowdown in the U.S. manufacturing sector and around the globe, shook up equity markets and businesses in 2019. But robust job growth has extended the spending power of American consumers, which is ultimately our nation’s economic engine, according to CoStar’s 2019 Year in Review of the U.S. Economy.

To put this into perspective, the United. States is currently experiencing the longest economic expansion since World War II. Additionally, key indicators point to the economy staying solid in 2020, which will extend the record bull run for U.S. commercial real estate. While there are some risks that could eventually move the nation toward a recession, as it stands, the growing U.S. economy is driving demand for commercial real estate, with many factors emerging as a result. Let’s take a look at what the most profound outcomes of this CRE growth.

The growing economy bodes well for demand for commercial and multifamily real estate.

What it means for CRE: Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.

Migration of workers from the Northeast and Midwest is growing the labor markets, which is fueling real estate demand, specifically in the South and U.S. West.

What it means for CRE: With the increase in labor as well as a growing demand for real estate in the South and U.S. West regions, CRE developers and investors should look to these markets as viable areas of growth. An increase in job creation also means a rising demand for office spaces and apartments. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

The answer to combat rising development costs and rental prices in urban areas may be micro-apartments.

What it means for CRE: Simply put, micro-apartments extract the most value from every square foot. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet.

Investing in industrial real estate, over retail, is the safer bet.

What it means for CRE: The industrial vacancy rate is extremely low, in many cities it’s below 5%, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique aspect of this changing market is the emergence of “click-to-brick” retailers, like Amazon, that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order. So for CRE investors and developers, industrial real estate carries more certainty and less risk than retail at this time.

Moving into the new decade, economists expect economic growth to slow somewhat as the labor market cools.

What it means for CRE: Consumer spending may lose some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment. For commercial real estate, 2020 should remain a solid year of growth, especially for the industrial market. Though real estate professionals should remain strategic and always be looking ahead to factors that could impact economic growth, and CRE growth as a result.

What is your view of the current state of the nation’s economy right now? How do you anticipate this changing in 2020? Share your thoughts and insights by leaving a comment below.

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Central PA’s Largest Commercial Real Estate Sales of 2019

Posted on January 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Office Leasing, Retail, Trends No Comments

There is much we can learn by analyzing a market’s largest commercial real estate sales in a given year. Looking at each the industrial, retail, and office sectors, it’s interesting to see the varying demand for size, price and class from sector-to-sector. This tells us a lot of about the direction of economic growth for a region; and for a real estate investor, it also showcases where the best investment opportunities for the future may lie.

Here is a look at the largest commercial real estate sales that took place in Central Pennsylvania in 2019, grouped by sector and sorted by highest sell price.

INDUSTRIAL

400-500 S. Muddy Creek Road – Albertsons Distribution Center (Lancaster County)

U.S. Realty Advisors purchased the Albertsons distribution facility for $117,050,000, or approximately $76 per foot for the 1,539,407-square-foot property on January 2, 2019. The subject Albertsons Industrial portfolio is comprised of a dry bulk/cold storage facilities in Denver, PA and in Melrose, IL. The sole tenant of the portfolio is Albertsons and they signed a 20-year lease with nine five-year extension options (and a one-year extension option) as part of the sale-leaseback transaction. Albertsons is under an Absolute Net lease paying $5/sf in base rent. Their lease requires that the tenant is responsible for operating expenses, real estate taxes, utilities, repairs, maintenance and capital expenditures, in addition to its obligation to pay base rent.

221 S. 10^th Street – (Cumberland County)

This 885,802 SF, class B industrial warehouse sold on September 26, 2019 to Blackstone Real Estate Income Trust for $84.8 million, or $96 per square foot. The sale is part of an industrial portfolio (see #4 below). At a total price of $18.7 billion, this sale of 179 million square feet of urban, infill logistics assets constitute the largest private real estate transaction in history. The portfolio includes high-quality logistics assets across 36 major U.S. markets that GLP aggregated over the past four years.

2601 River Road – Turkey Hill (Lancaster County)

W.P. Carey purchased the Turkey Hill food production and distribution facility for $70 million, or approximately $170 per foot for the 412,248-square-foot property on June 27, 2019. Built in 1980, Turkey Hill leased back the property for 25 years; the lease is triple net, with annual escalations. The buyer reported a weighted average cap rate of 7.1% for their acquisitions for the quarter, which totaled approximately $123.5 million, indicating this was probably priced in the 6s as the largest acquisition. The site was described as mission critical for the tenant, which has invested in many additions and improvements. It was noted that the site is powered through clean energy sources including wind turbines and hydroelectric energy. Turkey Hill had been a division of Kroger, but was sold earlier in the year to Peak Rock Capital.

21 Roadway Drive – (Cumberland County)

On September 26, 2019, Global Logistics Properties Ltd sold the class B industrial facility for $53.5 million, or $96 per square foot. The buyer was Blackstone Real Estate Income Trust. The 558,700 square-foot industrial facility was built on 36.16-acre site with an 8-acre pad site available to be developed into a 150,000 SF facility. The sale is comprised of an industrial portfolio totaling 64 million SF that Blackstone Real Estate Income Trust acquired located throughout the U.S. The sales price was reported at $5.3 billion. The portfolio was 95% leased at the time of the sale. The sale is part of a larger transaction in which Blackstone Real Estate Partners fund acquired 115 million SF for $13.4 billion; therefore, the overall sales price was reported at $18.7 billion for 179 million SF among two translations.

RETAIL

950 Walnut Bottom Road – Stonehedge Square Shopping Center (Cumberland County)

On November 25, 2019, this 88,657 square foot Giant anchored grocery center was sold for $30.7 million, or $346 per square foot to RW Partners, Inc.

2547 Brindle Drive – Shoppes At Susquehanna Marketplace (Dauphin County)

On April 1, 2019, The Shoppes at Susquehanna Marketplace in Harrisburg, PA were sold to an individual investor for $33.5 million, or $305 per square foot. The 110,000-square-foot shopping center was completed in 2004 and about 98% occupied by 25 tenants at the time of the sale. It was previously owned by a joint venture between Clarion Partners and Bayer Properties. The property was initially listed in January 2019 with an asking price of $38.17 million.

235-295 Cumberland Parkway – Parkway Plaza Shopping Center (Cumberland County)

On November 25, 2019, this 82,599 square foot Giant anchored grocery center was sold for $22.3 million or $270 per square foot. Parkway Plaza and Stonehedge Square (see #1) were part of a portfolio of Giant supermarket-anchored shopping centers in mid-to eastern Pennsylvania sold to RW Partners, Inc. for $127,000,000. The Giant grocery stores make up approximately 75% of this portfolio’s gross leasable area generate 80% of the portfolio’s revenue.

903-905 Loucks Road – Two Guys Commons (York County)

On August 19, 2019, Urban Edge Properties sold Two Guys Commons to Vastgood Properties, LLC for $13.15 million, or about $119 per square foot. At the time of the sale, the 110,980-square-foot retail property was fully leased to five tenants which included Crunch Fitness, Aldi, Ashley Furniture HomeStore, Tractor Supply, and Old Country Buffet. Based on in-place NOI, the transaction yielded a cap rate of about 7.5%.

OFFICE

100 Crystal A Drive – The Hershey Company (Dauphin County)

The three class B office buildings totaling 239,089 SF were sold on December 2, 2019 to the Penn State Medical Group for $28,445,835. Built in 1991, the buildings were sold by The Hershey Company for $118.98 per square foot. The seller was motivated to sell the property as they moved their operation into their corporate headquarters. The buildings will serve as Penn State Health headquarters and allow for moving some personnel from the Hershey Medical Center campus, creating space there to allow for expanded clinical services. Penn State Health leased office space in 2017 at that time The Hershey Company gave option purchase rights to the building. Penn State Health exercised their option to purchase the building.

425 N. 21^st Street – Plaza 21 (Cumberland County)

This 62,304 SF class B Office Building sold on September 16, 2019 to J & R Investments, Inc. for $9,300,000. Built in 1970 and renovated in 2009, this building was sold by Select Capital Commercial Properties for $149.27 per square foot. The building is leased to primarily to Geisinger System Services.

2400 Thea Drive – Synertech Building (Dauphin County)

On December 2nd, 2019, Istar Harrisburg LP sold the building in Harrisburg PA, to Real Capital Solutions, Inc for $9,100,000 or approximately $43.94 per square foot. The subject property is a 207,115, four-story class B office building located at 2400 Thea Dr in Harrisburg, PA 17110. The building sits on a 10.62-acre lot. It was constructed in 1999.

305 N. Front Street – (Dauphin County)

On July 17, 2019, this 120,000 SF office property was sold by Harrisburg Riverfront Development to Select Capital Commercial Properties for $7,950,000 or $65 per square foot. Built in 1989, this property sits on 1.2 acres

Closing Thoughts

In Central Pennsylvania and across the nation, it’s fair to say that the commercial real estate market delivered its fair share of ups and downs. Now that we’ve taken a closer look at the largest industrial, retail and office real estate sales of 2019, there are a few interesting points worth noting in each sector.

Industrial – Industrial real estate continues to lead all other real estate sectors with $1.2 billion in sales volume in 2019. The average price was $56.80 per square-foot, with the average property selling for $7.15 million.

Retail – A total of $200 million was invested in Central PA’s retail real estate market in 2019, a decrease from 2018. The average sale price was $142 per square foot.

Office – Annual volume levels for Central PA’s office real estate market stayed consistent with 2018 with $270 million in total sales. The average office property sold for $1.16 million. The average sales price was $102 per square foot.

What do you feel is the most important or interesting trend to emerge from the largest commercial real estate sales to take place in Central Pennsylvania in 2019? Share your thoughts by commenting below.

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Why Banks are Cutting Back on Commercial Real Estate Lending

Posted on January 17, 2020 by Mike Kushner in Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could further decrease in 2020. The cause is a combination of a few different factors – intense competition from non-bank lenders and rising delinquency rates to name a few. Mortgage lending is also predicted to be impacted by rising interest rates and tight housing supplies in many major markets.

This trend is not new, but rather has been slowly creeping in for years. In 2017, U.S. banks reported that demand for commercial real estate loans weakened in the second quarter, though foreign banks reported strengthened demand. Furthermore, loan growth slowed to 4.2 percent in 2018, down from 5.6 percent in 2017, according to bank call reports and Federal Deposit Insurance Corp. data.

Why exactly are banks cutting back on commercial real estate lending? And should this call for concern that a potential economic downturn is in the near future?

Rory Ritrievi, President and CEO of Mid Penn Bank

To lend some expertise on this topic, Omni Realty Group turned to Rory Ritrievi. Rory has more than three decades of experience in banking, specifically in Pennsylvania. For the last 11 years, Rory has served as President and CEO of Mid Penn Bank. Under his direction, the bank has grown from $550 million in assets and 14 retail locations to over $2 billion in assets and 39 retail locations.

Throughout his banking career, Rory has gained deep insight into when and why banks provide commercial real estate loans – and when they do not. Let’s learn what he thinks is going on in the current market, and the pending economic impact.

Omni Realty: How has commercial lending changed in the last 5 years?

RR: In the last 5-10 years, we have seen, for the most part, a return to credit fundamentals that seem to have been abandoned in the years leading up to the Great Recession. Back then it seemed like almost any deal made sense to Bankers. Now, the focus has been returned to analysis of absorption rates, discounted cash flows, borrower experience, reasonable cap rates, and strength of guarantors.

Omni Realty: In your opinion, what are the main causes of these changes?

RR: Losses. Loan losses of 2008-2012 gave a renewed focus to bankers on the true meaning of credit fundamentals.

Omni Realty: What changes would need to take place in the commercial estate market, or economy as a whole, to further improve commercial lending?

RR: Lenders need to evolve their underwriting and analytics to keep up with the evolving demographics. Baby Boomers are aging out so there is a need for more senior housing, multifamily rentals, luxury apartments, and assisted living. Additionally, high student loan balances are making the need for affordable housing in urban areas more prevalent. There is also a growing focus on renewable energy and green spaces. Finally, work from home is more prevalent which challenges the demand for traditional office space. When we look to retail, the shift toward online decreases the demand for mall space, while increasing demand for warehouse space. And we can’t overlook technology. Bankers need to not only know about emerging technology that stands to impact the market, but they must embrace it as a highly valuable tool to help them “keep up.”

Omni Realty: What do you anticipate the trend to be for commercial lending in 2020?

RR: In my opinion, 2020 will be a positive year in the lending business, particularly in Central Pennsylvania. We are in a good credit cycle and the interest rate yield curve is in decent shape compared to last year. There are geopolitical issues such as the impact of the general election, instability in the Middle East, and trade with China but I do not believe any of those issues will halt the progress of our local economy in 2020. Challenge it, yes and maybe slow it a bit, but not halt it entirely.

Omni Realty Group thanks Rory for sharing this valuable information and helping us to further understand the factors impacting how banks view commercial lending. Though banks are, for the most part, treading lightly in the market since the Great Recession, it’s encouraging to hear their renewed commitment to credit fundamentals, and helping both individuals and businesses make well-educated lending decisions.

Amidst a year that will no doubt bring change, it’s important we remain aware of the lasting impact factors such as elections and geopolitical issues may bring to our economy, both immediately and for years to come. Rory provides sound reason as to why we should not fear such changes, but rather maintain confidence in the banking economy, particularly here in Central Pennsylvania.

Do you agree with these insights, or have others to share? We welcome your feedback in the comments below!

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Central PA’s Growth in Commercial Construction Creating Workforce Challenges

Posted on December 19, 2019 by Mike Kushner in Blog, Construction, Local Market, Trends No Comments

With new commercial construction projects popping up all across Central Pennsylvania, it may appear as though it’s a great time to be in the industry. A demand for more commercial construction usually means businesses are growing or moving into the area, bringing with them jobs and economic growth. But there’s one looming challenge that stands in the way of this growth having only upside, and that’s the lack of commercial construction workers to take on this work.

According to Commercial Observer, this workforce challenge is not limited to the Central Pennsylvania region. Rather it’s a nationwide issue that could have wide-spread impact. A serious gap exists between the upcoming demand for labor and the number of available workers with the skills needed to fill those positions.

How does this gap in skilled laborers stand to impact the commercial real estate construction industry? And what, if any, solutions exist? For further input on this issue, Omni Realty Group turned to Dave Sload, President and CEO of ABC Keystone.

ABC Keystone was established in 1959 with the mission of advancing and defending the principles of free enterprise in the construction industry. Today, the organization is a powerhouse with 69 chapters and over 21,000 members. It is one of the leading organizations representing America’s business community and the construction industry.

“The construction industry is already in a critical state when it comes to finding skilled workers. They simply are not out there and it is forcing companies to pass on some projects,” says Sload.

Commercial construction companies being stretched so thin on labor that they decline work illustrates the severity of the labor shortage and the ominous threat it poses on the industry. The real struggle is construction spending is not predicted to subside. In fact, growth over the next two years is substantial.

According to FMI’s 2019 Industry Outlook, total construction spending in the Mid-Atlantic region, which includes Pennsylvania, New York and New Jersey, should increase 5 percent year over year, from $153.6 billion to $161.3 billion. It is predicted that this trend will hold in coming years, with anticipated spending increasing at a rate of 4.5 percent between now and 2022.

Combine this with the fact that the construction industry unemployment has dropped to an 18-year low, and you have the recipe for a sustained labor shortage that will lead to higher labor costs, longer project schedules, and inevitably quality and safety issues that will result from understaffed crew and under-qualified workers.

Sload adds, “Things will only get worse in the future. 40% of the construction workforce will retire over the next ten years. It will not be just the skilled workers we lose but also decades of institutional knowledge.”

Construction jobs are a cornerstone of our local economy, with thousands of well-paying jobs created every year. The latest job openings data from the Bureau of Labor Statistics suggests that since 2014, while the number of jobs openings has almost doubled, the number of hires has increased by just 14 percent. This underlines the fact that it is not a lack of jobs, but a lack of laborers to hire for such jobs.

Sload continues, “If that is not enough, this country is in desperate need of infrastructure legislation to update our highways, airports, wastewater treatment plants and water systems. Should an infrastructure bill pass in the range of what has been proposed, we would immediately be another 500,000 skilled workers short.”

All of this begs the question, “What is the solution?” Construction business owners and other hiring entities have started exploring all viable options for employing and retaining qualified workers. Possibilities include increasing and improving recruiting efforts; retaining qualified workers during periods of slow work so they are more readily available; investing in skills training and continued education programs; and working harder to nurture internal talent, especially to retain institutional knowledge.

While none of these solutions may be the “silver bullet” the industry needs right now, it’s evidence that the issue is not being ignored, and companies are willing to get creative and collaborative with whatever combination of solutions prove to move the needle.

Have you felt the impact of workforce challenges, either personally or within your business? Or do you have a different opinion as to how the commercial construction industry may address this issue?

Join in the conversation by leaving a comment below.

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How Central PA’s Growing Population Impacts Local Businesses

Posted on October 25, 2019 by Mike Kushner in Blog, Local Market, Trends No Comments

According to a 2018 report from the Pennsylvania Data Center, Pennsylvania’s population is expected to grow approximately 1% from the 2010 to the 2020 population, which is 1% better than no growth or a loss. What’s even more remarkable, is Pennsylvania’s growth is focused in about 16 counties, 14 of which are in Pennsylvania’s South Central Region, South East Region and Lehigh Valley, including Pennsylvania’s fastest growing county population in our own Cumberland County, here in South Central PA.

Furthermore, estimated population growth in those 14 counties is about 3.8%, which is driving Pennsylvania’s overall modest population growth, while counties in Pennsylvania’s West and Northern Tier are losing population with only Butler and Centre Counties showing expected population growth.

All of this data raises a very important question…

How does Central Pennsylvania’s changing population stand to impact the economic development of our local businesses?

To help answer this, we asked David Black, President and CEO of the Harrisburg Regional Chamber and CREDC, to weigh in from his perspective and the changes he is seeing taking place in Central Pennsylvania. Here is what he shared.

***

Focusing on South Central Pennsylvania, which includes Adams, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Perry and York, it’s pretty good news for us. Population growth drives demands for products, services and community amenities – quality of life factors. The quality of life factors – everything from good restaurants, entertainment, quality public education, exceptional health care, transportation access and cost of living – are in part driven by more people paying more taxes and needing more services that feed into our positive economic cycle.

Given our region’s transportation advantage via highways, rail and air and other amenities, South Central Pennsylvania is a great place to live, raise a family and have fun, plus we are close enough that if large metros like Washington, Baltimore, Philadelphia or New York is your thing, just a few hours will get you there. Quality of life issues help to attract and retain workforce, which is the business community’s number one issue these days, due largely to the fact that 10,000 baby boomers nationwide are retiring each and every day, leaving workforce challenges in many industries.

People want to live in vibrant communities. Some people prefer urban lifestyles, some are suburbanites while still others prefer the more natural rural lifestyles. Guess what? South Central Pennsylvania has it all. You can live on your 10 acres in Perry County and be to work in 30 minutes in downtown Harrisburg or walk to your job in center city Harrisburg from your apartment downtown, or your own home in Midtown, or commute 10 or 15 minutes from your suburban community to your job.

Population growth helps to drive business growth, it helps to drive additional growth in our region. While we think of ourselves as Harrisburg or Lancaster or York, commuting patterns show us that people commute from county to county to work because they can. I have a theory, with no disrespect to Lebanon County, that everyone in the Palmyra area actually works in Dauphin County at someplace with Hershey in the name! Businesses provide jobs, but people with the ability to spend drive local economies while our strategic location and transportation advantage help to connect us to the global economy and make South Central Pennsylvania such a special place to call home.

***

To offer additional insight, specifically on working age population growth in Pennsylvania, we asked Ben Atwood of CoStar, a national commercial real estate research firm.

***

One of Costar’s recent articles entitled “Latest Census Data Shows Lehigh Valley Leading Pennsylvania in Working-Age Population Growth” stated that the latest data from the Census Bureau shows Pennsylvania continues struggling to lure in new industries and working age residents. The U.S. population aged 20-64 increased by 0.25% last year, but of Pennsylvania’s 67 counties, only seven surpassed this growth rate and 55 experienced net declines.

Harrisburg and its satellite markets are pretty underdeveloped (excepting Lancaster), relatively speaking. And the lack of modern office supply and relatively stagnant population growth means there likely won’t be major companies relocating into the area. Right now, that capital investment would have to be largely local, and how much are people locally willing to risk?

Central PA is in the position to grow in ways other areas in the state aren’t, but that doesn’t mean that growth will be rapid, or even guaranteed. The new developments will be riskier, hampering investor interest. This combined with stagnant, even waning growth in working age population can be cause for concern both near and long-term.

To some extent, the optimism about population growth is misplaced because it could just mean these areas will have a slightly easier go of it over the next few decades, as automation continues to eat away at blue collar jobs in retail, shipping, and professional services in the Commonwealth’s smaller markets.

Things change and evolve, and no one can predict the future, but a lot of growth in these areas is in transportation and manufacturing, industries with long term automation risks, and there’s plenty of reasons to believe automation will expand into white collar employment in the near future.

***

Omni Realty Group is very grateful for David and Ben’s expertise and input. It’s fascinating, yet not surprising that population growth can have such a profound impact on quite literally everything else. Here in Central Pennsylvania we have a valuable opportunity to harness this growth and use it to fuel our economy. This further emphasizes the point that there are many unique benefits to live, work, and play in this region. Whether you call Central Pennsylvania home, are employed in the region, or simply enjoy visiting to experience its social offerings, you are playing an important role in the growth of our economy.

How else do you feel that our region’s changing population stands to impact local businesses? Join in the conversation by leaving a comment below.

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Census Data: National and Local Trends You Need to Watch

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

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

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

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

At a National Level

South and West Lead Population Growth

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

Fastest Growth Occurred Outside of Metropolitan Areas

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

North Dakota Claims Fastest Growing County

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

More Growth than Decline

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

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

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

Counties Also Maintain Same Order of Ranking in Population

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

Lancaster Remains Largest and Fastest Growing County

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

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

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

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

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Power Landlords: Who Owns the Most Office Space in Central PA?

Posted on May 30, 2019 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

These are buildings that you have likely passed countless times. Whether you live in Central Pennsylvania, or any other part of the world, real estate is all around us. Have you ever stopped to wonder who owns a particular piece of real estate? Maybe it’s the not the first question you’re asking on your morning commute, or when out running an errand, but the answer to this question may fascinate you.

Particularly the commercial real estate industry holds a lot of potential to impact economic development in a region. For entities who have made it a business to accrue large amounts of commercial real estate, they provide us with valuable insight into to the state of the economy, based upon their decision to buy or sell/lease space and at what price point. Knowing who the big players are can help keep us apprised of changes in the market that will ultimately trickle down to impact businesses far and wide.

So who are these businesses and how much property do they own? Among private, for-profit entities located in Central Pennsylvania, these are the top five “power landlords” who own the most office space in the region.

Linlo Properties

According to a CoStar Group analysis on April 5, Linlo Properties owns 745,349 square feet of space in Central Pennsylvania. Linlo’s assets include the AT&T Building, an 87,718 square-foot building at 2550 Interstate Drive; 4250 Crums Mill Road, a 75,000 square-foot building; Vista Plaza, a 71,800 square-foot building at 1215 Manor Drive; and Hillside Corporate Center, a 68,525 square-foot building located at 5001 Louise Drive.

Healthcare Trust, Inc.

Healthcare Trust, Inc., a non-traded traded real estate investment trust that focuses primarily on healthcare related assets, comes in second, per CoStar data, with all its 638,516 square feet purchased from UPMC Pinnacle (formerly Pinnacle Health) in 2014. The Landis Building, located at 2501 North Third Street (formerly part of Polyclinic Hospital) is its largest holding at 314,790 square feet.

High Associates

High Associates is the third-biggest property owner in the region with 561,276 square feet of commercial real estate. All their properties are in Lancaster County except 5000 Ritter Road, Mechanicsburg. 1853 William Penn Way, their largest holding, which is 82,331 square feet of space, is occupied by the High Companies.

Select Capital Commercial Properties

Fourth is Select Capital Commercial Properties with 544,599 square feet of commercial real estate. Select Capital’s holdings include 225 Grandview Avenue (the former HP/EDS building) with 214,150 square feet; 300 North Second Street (Commerce Towers) with 72,000 square feet; and 425 N. 21st Street (Plaza 21) with 62,304 square feet.

Hoffer Properties

Hoffer Properties ranks fifth with 531,741 square feet of space. Hoffer’s assets include 100 Sterling Parkway (the former PHICO building), a 220,000 square-foot building and 300 Sterling Parkway, the 129,000 square foot building built in 2016 for Deloitte.

These power landlords of Central PA hold a significant amount of commercial real estate assets. How they choose to use and further develop this space has the potential to shape the economy, locally and beyond, by attracting new businesses which brings new jobs. With the backing of these large entities who are continually investing in and improving commercial real estate, every business in the region benefits from the ripple of this economic impact.

It’s important to note that this list is limited to private, for-profit entities located in Central PA. Hbg. Realty Inc. (Harristown Development Corp.), PA Economic Development Agency, The Commonwealth of Pennsylvania, and Highmark, Inc. all rank higher than the top five on this list.

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