New office impacts
2015 has brought a boost in office space construction to Central Pennsylvania and there is even more space to come.
While this may be exciting news for businesses looking to expand into the local market, we need to watch this trend closely and cautiously because the potential impact may not be so favorable for landlords and sellers of commercial office space.
The good news is we have four projects under construction that will deliver more than 400,000 square feet to the market within the coming year, with a majority of this space already pre-leased.
However, this promising news for the market is tempered by the fact that many tenants will vacate other office space nearby to occupy these newly constructed office buildings.
Once delivered, this square footage will most certainly impact net absorption and vacancy rates in the Central Pennsylvania submarket.
What can we do to prepare and attempt to reduce any negative impact? Let’s first take a look at what’s going on in the market and then analyze what will likely result from these trends.
The Cornwall Health Center, located in Harrisburg Area East, broke ground in fourth quarter 2014 and is scheduled to be delivered in fourth quarter 2015. It has a rentable building area of 54,234 square feet and is 100 percent pre-leased.
The TecPort Business Campus – Building A broke ground this quarter and is scheduled to be delivered in third quarter 2016. It has an RBA of 7,590 square feet. It is not pre-leased and its quoted rental rate is listed as negotiable.
Additionally, a Class A office space project is under construction at the intersection of Carlisle Pike and Hogestown Road. The two buildings that make up this project have a combined 259,000 square feet of space and are expected to be completed in spring 2016.
Finally, there is Class B office space at 1250 Camp Hill Bypass that is under construction. Its 82,000 square-feet of space is 100 percent pre-leased.
This quarter, rental rates rose to $17.14 per-square-foot. This is the highest rate we have seen since before 2011. The vacancy rate decreased from 7.8 percent to 7.5 percent. The vacant square footage also decreased from 4,120,331 square feet to 3,962,599 square feet.
The total RBA in Q3 2015 increased to 52,581,663 square feet. Net absorption also experienced a substantial increase, more than tripling last quarter’s 50,466 square feet to the 190,232 square feet that closed out third quarter 2015.
But take note, both net absorption and vacancy rates will soon be greatly impacted by the 400,000-plus square feet that will be delivered to the market in the next year.
New construction certainly has its benefits, and for the time being, the Central Pennsylvania office submarket is receiving a positive boost from the activity. But as this new square footage is delivered in the next 12 months, causing businesses to vacate other space within the region, we can expect to see some new trends emerge.
• Inconsistent net absorption: The only real pattern in net absorption of office space over the last 15 quarters has been inconsistency. Year-to-date for 2015 we are at 630,738 square feet; 2014 totaled negative 311,827 square feet; 2013 was 909,658 square feet; and 2012 was negative 226,424 square feet.
• Increased vacancy rate: The addition of 340,000 square feet of new construction in the Harrisburg West market that is being occupied by Hewlett-Packard and Deloitte will result in an increased vacancy rate in 2016 due to the occupants relocating from existing space.
In addition, the Walgreens-Rite Aid merger will contribute to the market’s increased vacant space as the two companies integrate corporate back-office functions.
• Decreased employee square footage: Square feet per employee has been in a long-term decline and will continue on this trend. E-commerce, telecommuting and the desire for open and collaborative work spaces are squeezing the office space sector given that square footage per office employee is diminishing.
• Increased demand for medical office space: The one bright spot in the office market segment is the increasing demand for medical office space. Orthopedic Associates of Lancaster is constructing a 73,529-square-foot facility in North Cornwall Township. Good Samaritan Hospital is opening a 22,000-square-foot center at 840 Tuck St. in Lebanon. And PinnacleHealth is opening an 80,000-square-foot Advanced Care Center in a former retail shopping center located at 1251 E. Main St. in Annville.
These predictions are not going to be music to the ears of landlords and sellers, but this market provides some prime opportunities for new and growing businesses to expand within Central Pennsylvania. Increasing vacancy rates and inconsistent net absorption creates a competitive market in which the buyer or renter has the upper hand. So businesses take note. If you were thinking of moving to or expanding within Central Pennsylvania, 2016 is the prime time to do so.
Mike Kushner is the owner of Lower Paxton Township-based Omni Realty Group.