Is the office passé? Not in Central Pa., where vacancy rates are below the national average

How robust is the demand for office space in central Pennsylvania?

Among developers and commercial real estate agents, perspectives vary, with some seeing strong activity across the board, while others point to uncertainty as businesses navigate the COVID-19 economy.

One of those bullish on the market is Lowell Gates, president and CEO of Linlo Properties, Camp Hill.

Linlo owns and manages about 30 office buildings; its portfolio, mostly in Cumberland and Dauphin Counties, extends from Chambersburg to Lebanon, Gates said. He keeps reading that “everyone’s working from home” now, but that’s not the reality locally, he said.

Demand is high, Gates said, whether its companies already here or those coming into the region. “They see central Pennsylvania as a strong market.”

Rock Commercial Real Estate’s Market Review for the 2021 second quarter shows an office space vacancy rate of 4.39% in Lancaster County and 4.32% in York County, significantly less than the national average of 17.2%.

In York, Class A triple net leases are pushing $14 per square foot. But that’s still very favorable compared with Philadelphia and Baltimore.

“Corporations making a move to the area can expect to cut their rent expense by 50% as lease rates in larger metros continue to exceed $35/SF,” the report said.

According to the Rock Demand Index, 46% of office demand in York County consists of new businesses.

Gates said it doesn’t matter if the office space is in an existing edifice or a new one. Both are very active, even though rents are typically 50% higher in new construction.

Linlo recently erected two 10,000-square-foot office buildings in Chambersburg and an 18,000 square footer in Silver Spring Township, Cumberland County. Tenants include a dialysis clinic, an autism clinic and a children’s dental practice, Gates said.

One building was leased by UPMC, he said, as demand in the health care field keeps growing.

All three were fully leased before construction was completed. The biggest challenge isn’t finding tenants, it’s finding construction materials, such as drywall, Gates said.

Linlo Properties’ previous record for leasing square footage was 2018, and that’s already been matched in 2021. And it’s much more than health care tenants, Gates said. There are legal firms, accounting businesses and employment agencies, for example.

The expansion of employment agencies “is an indication employers are having a hard time finding workers,” he said.

In 2020, when COVID-19 was at its worst, “we did about half of what we’re doing this year,” Gates said.

Since March 2020, Linlo has experienced a 90%-plus renewal rate, he said.

A tale of two markets

Michael Curran is president and executive managing director of Camp Hill-based Landmark Commercial Realty, which does leasing and sales primarily in Cumberland and Dauphin counties but also in York, Lebanon, Lancaster and Franklin counties.

It’s “really going to be a different perspective from landlord to landlord,” Curran said.

From his point of view as a real estate agent, “I would say we have a bifurcation,” he said. There’s tremendous activity in spaces with a smaller footprint, such as 1,000 to 20,000 square feet.

Bigger units, however, are a different story, he said. Those tenants are typically slower to identify a re-occupancy strategy, Curran said. “There’s kind of a lag.”

Some larger tenants are subleasing part of their space, he said. Another trend is a rising demand to purchase. Gates said he see a “flight to ownership among some tenants and a flight to quality.” The latter means a desire to upgrade without spending a lot more.

Finally, Curran said, he’s noticed an uptick of five- to 10-year renewals in the last six months or so.

“They’re taking the opportunity to capitalize on market conditions,” he said, and they have “a clearer understanding of their occupancy strategy post-COVID-19.”

The Market Review for York County noted a “shift from large to smaller units as large office users contemplate mitigating building expense.” However, as the review for Lancaster County explained, while “downsizing will remain a driver for larger corporations … smaller operations are experiencing success and in need of more space.”

Rate of Return

As for whether employees will return to the office, Curran said some are but many have not. A hybrid model is catching on, he said, where workers split their time at home and in the office.

Art Campbell, president/broker with Campbell Commercial Real Estate Inc., Lemoyne, said the office market was stable prior to the pandemic, including the price of rents and sales. But “it’s really kind of unknown” since then.

Campbell’s company leases and sells commercial properties, focusing on Central Pennsylvania.

Smaller businesses with 50 or less employees are more likely have moved into their offices again, while the situation with larger ones is harder to define. “Companies have told us they’re never going back to their spaces,” Campbell said.

And some are downsizing but extending their lease terms, he said. “Others are still figuring that out.”

Right now, close to 1 million square feet of office space in 28 buildings on the East Shore of Harrisburg is vacant, Campbell said.

For every new tenant coming into the region, there’s one reducing space or not returning, he said.

Some nonprofits have downsized, Campbell said. Ones that are dependent on fundraisers such as golf tournaments, for example, were hurt by the pandemic.

It is, however, a good time for users to buy, he noted, because there are deals to be had and mortgage rates are historically low.

Personal space

One clear change is the amount of office space per employee. That’s growing, reversing a 20-year trend, Campbell said.

One of the reasons there’s so much uncertainty is that a lot of people who’ve worked at home are “really, really resisting” returning to the office, he said.

“I think the verdict is out,” Campbell said. “We’ll have a better sense in 2023.”

Some workers can be very productive at home, yet “it’s hard to develop a company culture without a space,” he said. “There’s certainly a reason to be together.”