New offices on horizon, but don't expect old to vanish
If you've driven down Front Street in Harrisburg or around other parts of the midstate over the years, you've seen several older house-style buildings demolished and, rising in their places, new steel and glass office buildings.
For example, Wormleysburg-based Pyramid Construction Co. is building a 20,000-square-foot office at 4423 N. Front St. in Susquehanna Township, Dauphin County, that is replacing older office buildings.
The process to build new happens periodically around Central Pennsylvania, despite vacancy and for-sale signs on other offices in the immediate vicinity. New offices could become a more prevalent sight, but many companies say not to expect a wholesale replacement.
For starters, older houses converted to offices are part of the class B office real estate market, said John Thiry, an agent with NAI Commercial Partners Inc. in East Hempfield Township, Lancaster County.
"Class B just isn't leasing very much," he said. "And when it is, it's leasing at significant discounts."
Some companies that own class B properties are making way for better, higher-priced class A offices, Thiry said. Where owners can only get about $10 per square foot for class B, they could get $18 or $20 per square foot for class A, he said.
There's still a market for class B office space, others said.
"I find a lot of people are testing the market for relocating their offices," said Arthur Campbell, president of Lemoyne-based Campbell Commercial Real Estate Inc.
Vacancy is high in some markets and for some types of real estate because companies are moving, he said.
"There remains a lot of vacant space, so competition is fierce," Campbell said.
That keeps new construction relatively slow, and that's compounded by tight financing, with banks wanting to see at least 50 percent leased before they'll put up money, Campbell said.
"No one is going to build speculative office unless they're spending their own capital, and that's rare," said John Noone, a partner in QBN Development Group, the Harrisburg company that owns the 4423 N. Front St. property.
The building, which will be complete early this summer, will have one main tenant with space for other offices to rent, he said. He declined to say who the main tenant would be.
The Susquehanna River Basin Commission is expected to occupy most of the building, said Chuck Heller, associate broker for Cumberland County-based Landmark Commercial Realty Inc.
Thiry puts class B vacancy at about 18 percent and class A at about 12 percent. If your company has the means, you could replace lesser properties with something that will sell better, he said.
Class A offices had a 93 percent occupancy rate throughout the greater Harrisburg area at the end of 2012, according to a market review from East Pennsboro Township-based Landmark. Class B space had 90 percent occupancy in the city and on the East Shore, but on the West Shore it had 94 percent occupancy.
That indicates replacement is rare and class B spaces sell because companies moved up from class C spaces, the same way many class B tenants upgraded to class A, Landmark agent Drew Bobincheck said.
Still, which industries are growing in the midstate can affect office leasing, Thiry said.
For example, in December there were 44,000 health services and social assistance jobs in the Harrisburg-Carlisle metro area, including Cumberland, Dauphin and Perry counties, a 3.5 percent increase from a year ago, according to the state Department of Labor and Industry.
About 66 percent of the jobs added went to private practices, the same type of health services that lease office spaces.
The other office-leasing job sector showing growth in the Harrisburg-Carlisle metro area is business and professional services, such as attorneys, accountants and business consultants, according to L&I. Professional services added 1,700 jobs in the past year, or a 4 percent increase.
The problems with class B offices in markets with growing public services is that they don't have elevators and interior spaces can be cramped. That could keep public-facing tenants from leasing class B, Thiry said.
"If you tear (class B) down and put up new office, you open your prospects up to a larger set of tenants," he said.
Still, there isn't as much new office construction going on around the region, because many companies are watching their budgets. Improved communication infrastructure will change office trends, too, Campbell said.
"One of the things we have to look at is the work-at-home environment and the allocation of workspace," he said.
If more people work at home, fewer people need central office space, he said. That could dictate how much new office space is built in the future.