A record-breaking 4 million-plus square feet of industrial space was leased in York County in 2021, according to a new report.
That’s among the highlights of Rock Commercial Real Estate’s latest quarterly update covering York and Lancaster counties. The industrial segment continues to boom as the office and retail segments hold their own while still adjusting to the COVID-19 economy.
Kevin Hodge, a brokerage adviser with Rock, said the York industrial sector “is just screaming hot right now.”
He recently got a three-year lease commitment for 60,000 square feet of space within a day of the first call. “That’s kind of the way the market is” at the moment, Hodge said.
The 4,101,266 square feet leased last year was 135% more than in 2020 and 24% greater than in pre-pandemic 2019. Vacancy fell to a historic low of 2.86%.
Absorption, or how much new space was leased, also set a yearly record of 2.6 million square feet, which is further evidence of heightened demand. A lot of that is for warehouse space but manufacturing space is sought after, too, Hodge said.
Institutional investors accounted for $190 million-plus of sales volume in the fourth quarter. “There’s just so much money in the market right now,” he said.
The report noted that 903,599 square feet of industrial space is under construction in York County (with more breaking ground since the beginning of 2022, Hodge added); industrial expansion projects accounted for 47% of that.
An additional 6 million square feet is in the proposal stage.
In the office market, leased square feet exceeded pre-pandemic levels in 2021. Absorption finished on the plus side, as more than 84,500 new square feet was leased.
Vacancy, at a five-year low, remains below 5%.
During the last three months of 2021, 50% of office sale transactions were for medical space. Lease transactions for medical uses included 5,592 square feet at 130 Leader Heights Road, York, to Penn State Milton S. Hershey Medical Center.
For a secondary or tertiary office market, York County is doing well, Hodge said, and he expects activity to be strong in 2022.
When it comes to the retail sector, absorption was in negative territory in the fourth quarter as the vacancy rate increased to 5.66%. However, the total square footage leased – 46,483 – did surpass 2020, and the average lease rate is up 11.7% since 2017.
Small shopping centers (four to five units) with a strong tenant mix of national retailers remain popular among investors, the report said. For example, Old Navy is to occupy 12,569 square feet at Gateway Shopping Center, Hanover, in the first quarter of this year.
Hodge said the retail market is resetting, as it deals with workforce shortages and other challenges.
“It’s still not bad number,” he said of the vacancy rate, as bricks-and-mortar businesses continue to adapt to the rise of e-commerce.
In the Lancaster County industrial market, vacancy slipped below 1.5% in the fourth quarter, while the national rate was 3.7%.
Matt Czaus, brokerage adviser with Rock Commercial Real Estate, said supply is down and demand is “through the roof.”
Lease rates are now up to $6.27 per square foot. “I haven’t seen such an increase in marketing rates for industrial space for a long time,” he said, primarily due to lack of inventory.
There are projects in the pipeline that may help alleviate that, Czaus said.
The report said 480,000 square feet of industrial space is under construction in Lancaster County and 1.7 million more is proposed, noting that “most speculation builds continue to be immediately absorbed upon completion.”
In the office market, demand for larger office space continues to decline, with the average unit size of signed leases falling from 6,463 square feet in 2017 to 2,199 square feet today.
Though the trend began prior to the pandemic, larger users are taking the opportunity to decrease their footprint in the midst of COVID-19 and start adapting to a remote workforce, Czaus said.
“They’re able to fulfill the needs of their employees with a smaller footprint,” he added. This has created a demand for lesser-sized Class A and B office spaces.
Landlords are actively trying to accommodate that trend, Czaus said.
On the retail front in Lancaster County, vacancy fell below 4% – lower than 2019 levels – as average lease rates stayed above $15 per square foot.
“Retail is steady,” Czaus said.
There’s a dialogue between tenants and landlords because two competing factors are at play, he said.
While rent increases could be difficult to handle for some tenants still affected by COVID-19, Czaus said, it’s getting harder for landlords not to raise rents as they’re dealing with higher costs due to inflation.