Pennsylvania Rings with Opportunity
Pennsylvania, like many states, weathered the recession earlier this decade and has emerged poised for commercial real estate growth and activity. Along the way, some things have changed: "Pittsburgh has undergone—like most large industrial...employment regions—a shift to service employment," says Diane Baer Yecko, CCIM, of Glimcher Group, Inc., in Pittsburgh.
All in all, many of the Keystone State’s commercial real estate sectors are alive and well, ringing with opportunity from Philadelphia in the east to Pittsburgh in the west, brokers say.
Multifamily: Not Enough Sellers
Philadelphia’s multifamily market has been "extremely active," says Ann Bailey, CCIM, of CB Commercial Real Estate Group in Philadelphia. The downtown market is "booming" due to graduate students and young professionals seeking apartments, she notes.
In the City of Brotherly Love, multifamily occupancies average between 94 percent and 97 percent, depending on the submarket, she says, but generally are up from last year. Lease rates are up too, running $1 psf to $1.40 psf for class A space and $0.65 psf to $1 psf for class B and C.
In terms of sales, there’s "just not enough willing sellers," Bailey says. However, some sales are occurring and prices are up, she says. Little multifamily construction has occurred in the Philadelphia area: "Land is scarce with zoning in place," and the approval process is long, she says. Six to eight projects came on line in the region in last 18 to 20 months.
In Pittsburgh, the scenario is similar, says Peter Sukernek, CCIM, of Howard Hanna Commercial in Pittsburgh, who sums up his multifamily market as: "lots of buyers, lack of product." Many buildings have been owned long-term by individual families or organizations, and many have been refinanced over the years, he says. "Because of recapture, meeting asking prices often is difficult."
And in hilly Pittsburgh, "It is difficult to build new product," Sukernek notes. There is some new speculative construction—200 units on the North Shore and another 400 units planned in the Strip District near downtown, he says. "A number of local developers are looking for suburban locations to construct larger (350-unit) complexes." But finding land and dealing with topography and cost constraints makes this difficult, he says.
Pittsburgh’s apartment occupancies recently averaged 90.9 percent, he says, and lease rates run $10 psf to $12 psf annually in high-end new construction or older buildings located in prime areas.
While some sales have occurred for both large and small projects, there’s "still way more buyers than sellers," Sukernek says. Cap rates have been "under 10 for AAA properties" and prices have ranged from $57 psf to $92 psf. "There will probably be a continued scarcity of product available for sale," he predicts. But, "If interest rates stay where they are, there should be a continued increase in value."
Office Occupancy Up
The state’s major office markets are healthy, local brokers report. "With strong occupancy, absorption, and rents, greater Pittsburgh is experiencing its best office real estate market in a decade," says Jeffrey B. Ackerman, CCIM, of CB Commercial/Arnheim & Neely in Pittsburgh. "As the century turns, we find the office market, notably in the central business district, solid if unspectacular. Outside the CBD, all areas remain strong."
The region’s office market has benefited from growth in several industries, including high-tech, health care, telecommunications, and financial services, as well as their service providers such as law firms and communications groups, he says.
The market has seen considerable build-to-suit construction, he says. "The Parkway West corridor—from the CBD to the Pittsburgh International Airport—continues to be the hot regional area. Because there are virtually no older buildings, development comes from the ground. Here, space that enters the market is absorbed almost immediately. There is also considerable activity along I-279, the so-called Parkway North, with speculative buildings being developed in Wexford and Cranberry."
Several major office buildings, both downtown and in the suburbs, recently have sold with prices ranging from $80 psf to $130 psf, Ackerman says.
Leases favor landlords, he says. "Concessions are virtually off the table, and deals are within 5 percent of the asking rate. While tenants are trying to lock in, going longer at favorable rental rates, landlords are looking to fix for only three to five years, then bump rates over a longer term."
Ackerman said he expects Pittsburgh’s office occupancy and rental rates to continue to rise, but slowly. "Small and mid-size firms will not only fill the highest quality downtown offices, they will also take high-demand suburban offices."
In Philadelphia, steady employment increases have helped office, reports Peggy Gallagher, CCIM, of Peggy Gallagher Commercial Real Estate in Philadelphia. Although some large companies’ mergers have resulted in layoffs, "other companies are hiring."
Office occupancy rates are up, leasing at about $18 psf to $28 psf per year. The market has seen some new construction, she says—"And in some of the Philadelphia suburban markets, there has been redevelopment of industrial properties to office."
Pennsylvania is home to several well-located, active industrial areas. For instance, in central Pennsylvania, "There is considerable activity within the industrial market at all levels and in all sizes of space," reports James L. Helsel, Jr., CCIM, of Helsel, Inc., Realtors in Harrisburg. "The central Pennsylvania market and economy are excellent," he says. "The state capital, located in Harrisburg, acts as a stabilizing force for our market."
Industrial occupancy there averages between 94 percent and 95 percent, having been stable over the last two years, Helsel reports. Large-box industrial buildings lease for $3.60 psf to $3.75 psf per year, while smaller buildings go for $3.80 psf to $4 psf. Large buildings recently have sold for $20 psf to $25 psf and smaller buildings (under 100,000 sf) for $28 psf to $33 psf. "Prices are stable for larger buildings and up slightly for smaller buildings," he says.
The Lehigh Valley, a region about 50 miles north of Philadelphia that includes Allentown and Bethlehem, "has successfully transitioned from an area known for Mack Trucks and Bethlehem Steel to one of the preferred distribution locations in the Northeast," reports Deborah S. Skeans, CCIM, of Imperial Realty in Allentown.
"Demand exceeds supply," she says, and a variety of build-to-suit and speculative projects are being developed. "Reflecting changes in distribution methods, buildings have become larger, higher, and often have the potential for major expansion. Investor interest in this market segment is strong and acquisitions reflect anticipation of continued demand and increasing rents. Continued expansion is expected, restrained only by a diminishing amount of physically suitable and properly zoned land."
Locations are determined by transportation linkage and travel times, she says, factors that have spurred the construction of more than 5.5 million sf of new distribution space since 1993, as well as new manufacturing and distribution space.
In retail, the "Pittsburgh metro [area] is under-retailed due to several factors," Yecko says. The most important factor? The market’s hilly terrain and lack of development sites, she says. "Retailers need to focus on at least three site areas to have a presence in the market," she explains, and "the demographics and the physical barriers require substantial analysis before a decision."
"There is much second-generation space being reinvented for new development boxes," such as razing or blowing out the shells of old grocery stores, she says.
Metropolitan Pittsburgh’s retail occupancy averages 92 percent, Yecko says. Lease rates are up: regional malls get $25 psf to $35 psf net annually; 400,000 sf or larger neighborhood centers and new big boxes snare $12 psf to $14 psf; centers under 200,000 sf but over 10,000 sf get $12 psf to $14 psf; and retail under 10,000 sf brings $14 psf to $16 psf.
Yecko says she foresees Pittsburgh’s CBD resurging, with retail and its rivers "being a major draw for large entertainment/anchor development."