Despite high interest rates and inflation, there is still significant demand for residential real estate.
However, with higher construction costs, lack of inventory, and remote work still trending, the commercial real estate market is showing signs of cooling.
That was the takeaway from “The State of the Real Estate Market in Lancaster County – Commercial and Residential” forum hosted by the Rotary Club of Lancaster Aug. 30.
Rod Messick, CEO, Berkshire Hathaway Homeservice Homesale Realty, told the crowd of 75 that the demand for residential housing is being fueled by millennials who are looking for larger homes.
“There are a record number of people in the 34–35-year-old range that are skipping what was (the size) of our first home and looking for what was our second home,” he said.
However, on the other end, people are staying in their homes longer, creating a logjam in the market.
“People are delaying housing decisions for financial reasons, such as not wanting to trade low-interest rates for today’s much higher rate,” Messick said, adding his team sees the current situation as a temporary lull rather than a market collapse.
“In June 2019, no one had ever heard of COVID, but even then, we were short of inventory,” he said.
Once COVID hit, Messick said people were “hyper focused” on their homes. They were staring at the walls and saw every crack and flaw and a lot of them wanted new space to go with their lifestyle.
“The pandemic led to increased demand for homes as people sought more comfortable living spaces. This surge in demand drove up construction and homeownership costs. By June 2023, the average home price had risen to $356,000 (a 48% increase), with a median price of $326,000 (a 51% increase). However, the housing inventory had decreased to 512 units,” he said.
At the same time, interest rates doubled from what they were in 2019, creating an affordability crunch. Messick said the salary necessary to qualify for a mortgage doubled, but “obviously wages haven’t doubled.”
Those who are looking to buy face challenges, but Messick said since they delayed buying in their 20s, many can afford to buy.
The challenge is the inventory. “What we see is that people will fatigue delaying lifestyle changes and move, even with the higher interest rates. We will see the logjam break,” he said. “We see signs we are getting close.”
Messick said prices are beginning to stabilize and transactions are returning to more normal volumes like in 2018-2019.
“Central Pennsylvania is gaining population so we will see demand for the foreseeable future,” he said. “Inventory will come from people deciding to move.”
Messick said multifamily housing may help, as people looking to downsize look to rental properties.
“That will take the first log out of the jam,” he said. “It won’t take a lot. If inflation stabilizes and interest rates come down slightly, we will get back to 2018 volumes,” he said, adding that there was more volume in June 2023 than there was in 2019.
“This is not doom and gloom. There is still a shortage of inventory and strong demand, but we will see inventory liquidity as people start to move,” he said.
That will come with stabilized pricing, which Messick said is flattening.
Even so, “There’s no indication of a housing crash like in 2008 because people have more equity in their homes and the supply constraint won’t cause a glut in the market,” he said.
Mark Fitzgerald, president and COO, High Real Estate Group LLC and High Associates Ltd. spoke to the stability and challenges of various sectors in the US economy, particularly focusing on the impact on the commercial real estate industry.
As an overview, he said, the finance, insurance, and real estate sectors contribute about 20% of the US GDP, but each of these sectors is facing difficulties.
“The financial sector is experiencing turmoil with bank defaults and downgrades due to massive deposit withdrawals affecting their ability to lend for commercial real estate,” he said.
Interest rate increases are also impacting loan repayments and property values and the insurance sector is under pressure due to increased natural disasters and higher replacement construction costs, leading to higher property insurance costs.
Locally, Fitzgerald said the industrial market is strong with high occupancy and rising rent prices.
“Demand for warehousing is rising due to e-commerce and onshoring of manufacturing,” he said. “The demand surpasses supply, causing a 50% increase in replacement costs.”
In other areas, Fitzgerald said the local market is outperforming the nation. Despite the economic challenges, he said values are stable or increasing due to limited new supply and sustained demand.
He cited multifamily units having low vacancies locally while the national market is seeing an influx of new units, potentially causing oversupply and decreasing rental rates.
And despite negative headlines, he said the retail industry is projected to exceed pre-pandemic sales in 2023.
“More stores are opening than closing, with a shift towards discount and entertainment sectors,” he said. “Lancaster is following this trend and attracting national retailers.”
Fitzgerald said for every retail business that closes, two businesses are looking to take its place.
“When Shake Shack opened, its first day sales were greater than that at any other Shake Shack opening,” he said. “Consumer spending is trending toward the entertainment industry which benefits the hospitality industry.”
Class A office space locally is performing better than the national average, Fitzgerald said.
“The increase in work-at-home has seen a reduction in the need for office space. Nationally, 18% of office space is vacant but this is primarily in larger urban centers,” Fitzgerald said. “In Lancaster County we are much more stable, at about a 5% to 9% vacancy depending on type of office space. The COVID impact is still being felt as business’s leases come up for renewal. Some companies are not renewing leases.
He added that when office space leases come up for renewal, the leases are for 20% less space and 25% of that space is underutilized.