Commercial real estate agents cope with evolving market forces

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Central Pennsylvania’s commercial real estate market — while more active now than in recent years — is not without its growing pains.

On one hand, national media reports would suggest the sky is falling as big-name retailers shutter thousands of stores in the face of fierce online competition.

But big boxes are not staying empty long in the midstate. Nor are they being filled by other large retailers.

Former Kmart and Sears stores in Cumberland County, for example, are being repurposed to house several smaller stores. Even Sears is getting in on the action, opening a smaller Sears Appliance & Mattress store in its former anchor space at the Capital City Mall.

National tenants are still coming, but they don’t need as much space. Discount retailers and fast-casual restaurant chains are grabbing up other available spaces, while mall and shopping center owners are targeting specialty retailers and other nontraditional tenants such as entertainment venues and fitness facilities to stay competitive.

The medical office category also is seeing new projects as health systems in the region expand to serve a growing and aging population. Hotel construction, meanwhile, is surging after years of limited growth.

Strip center-style developments and large commercial projects that blend retail with offices, restaurants and even hotels continue to emerge.

Look at downtown Hershey, where $25 million is being poured into the redevelopment of a former post office.

“The retailing world is completely upside down,” said Chuck Heller, associate broker at Landmark Commercial Realty Inc. “No one knows where the future is headed.”

Give and take

There is no shortage of larger mixed-use projects getting underway or coming close to development.

Manheim Township offers ample evidence, with developments such as the Shoppes at Belmont and The Crossings at Conestoga Creek taking shape. Major mixed-use projects also are in the pipeline near Messiah College and in Susquehanna Township.

“It will be interesting to see if all the new retail, especially all the added food and dining venues, can effectively compete and last,” said Christine Sable, owner and broker of Sable Commercial Realty in Manheim Township. “It remains to be seen if it will create vacancies in older nearby centers, or if the many new food venues, especially the national franchises, will all be able to make it.”

The last recession led many developers to slow down and sit on investments. Pent-up demand is fueling some of the construction activity now, local real estate professionals said. And many projects under way today have been in planning for years, if not decades.

NAI CIR’s founder and longtime leader Gary Nalbandian, who recently returned full-time to the commercial real estate business, has decided to pull the trigger on two personal multimillion-dollar commercial investments in the Harrisburg area. He’s hoping to take advantage of the recent surge in commercial interest.

“Sometimes talking about it (long enough) creates an energy and an interest,” said Laura Martin, broker and owner of Latus Commercial Realty in Hampden Township.

Office is coming back

Despite trends toward smaller office spaces and employees working from home, office development is picking up again.

“For the first time we are seeing speculative projects,” Sable said, citing renovation of the former Bulova building at 101 N. Queen St. in Lancaster, renamed 101NQ, among other projects in the city.

Sable expects demand for new office construction to continue after seeing very little new product come online for the last 10 to 15 years.

Heller and Martin expect similar office growth in the Harrisburg area.

New owners have bought office properties that were in default and bank-owned — a lingering effect of the real estate crash in 2008. They are putting money into their properties and marketing them for lease. Gateway Corporate Center in Lower Paxton Township is one example of the trend.

In addition, new office buildings have been erected in growing areas, including structures anchored by Deloitte at the corner of Carlisle Pike and Route 114 in Silver Spring Township. Another build-to-suit building is planned at the Deloitte site, known as Sterling Place.

“There has been a shortage on the Pike of decent office space,” Martin said.

Homes, sweet homes

In a region that is often described as “stable,” Central Pennsylvania lately has seen home sales soar above pre-recession highs, driven largely by low interest rates.

However, buyers don’t have much to choose from, as the available inventory of homes for sale has been tight.

New construction has not kept pace with buyer demand, in part because there is little land zoned for housing in some areas.

Many builders, meanwhile, are not willing to risk developing their own land because the approval process is costly and time-consuming. Some would prefer to partner with developers on lots already approved for construction.

Multifamily complexes in the midstate also have experienced high occupancy rates, which attracts investors, but new projects are slow to come online.

What’s not slow in Central Pennsylvania is industrial development. New warehouses continue to pop up along the highways, while logistics firms and other users are leasing up available spaces to take advantage of the region’s proximity to big cities.

On the horizon

Commercial real estate professionals expect the commercial market in Central Pennsylvania to continue growing in the short term.

However, there are a few variables that could impact the market, said Christine Sable, owner and broker of Sable Commercial Realty in Manheim Township.

• A war with North Korea or other military action abroad could shake investment confidence, which could delay business moves or expansion projects.
• Changes to the federal tax code changes could sway market activity, depending on how real estate and other business deductions are changed. Health care reforms could have a similar effect.
• Addressing the state budget deficit could restore business confidence and help the commercial market. But higher taxes to fill gaps would likely hurt efforts to attract new businesses.
• If housing demand remains strong, it should continue to boost commercial activity.
• Amazon’s growth remains a threat to brick-and-mortar retailers as consumers spend more online.