A pandemic-fueled spike in online buying boosts demand for warehousing and delivery centers

Commercial real estate agents are dealing with a market in flux right now, with an even murkier long-term outlook in the office and retail sectors.

Activity in some areas has picked up, however, and the warehouse boom is expected to continue. But with COVID-19 an ever-present concern, it’s hard to get a picture on where much of the market is headed.

There was a lot of investment in the first quarter, “and that pretty much stopped in its tracks” because of the coronavirus, said Heather Kreiger, of ROCK Commercial Real Estate. She works primarily in York and Lancaster counties, mostly with office and small retail space and land acquisition. 

Within the past several weeks, activity has really picked up again, she said. “A lot of people are out looking for property to purchase,” either existing structures or land to develop. That includes apartment buildings (called multifamily in the industry) and mini storage facilities. Renters need storage, so they go hand in hand.

Industrial land to construct huge warehouses/fulfillment centers for e-commerce, is also in demand, Kreiger said, which has been going on for a while.

COVID-19’s effect on office space down the road could result in large companies downsizing because employees can work from home, and small businesses upsizing as they require more room to social distance, she said.

The retail outlook

As for retail, Kreiger, president of the Realtors Association of York & Adams Counties, said in an email that it “seems there are more retail spaces coming available. There was an increase in retail vacancy in the second quarter and I believe that will continue to be the trend through this year.”

In its second-quarter market review for York County, ROCK Commercial Real Estate reported an 8% vacancy rate for all retail types, including 11.2% for shopping centers. The vacancy rate for Lancaster County in the second quarter was 6.18% overall for retail and just 3.27% for shopping centers.

Of all the commercial areas, Kreiger wrote that retail was probably hit hardest by the shutdown, particularly bars and restaurants. Outside seating helps, but that won’t be an option when the weather gets cold, she noted. Takeout, delivery and curbside pickup, and partnering with Grubhub and other food delivery apps, will be even more important in the months ahead, she wrote.

Retail stores are dependent upon back-to-school and the holiday shopping season, and those could very well be greatly hampered significantly, either because kids don’t get sent to school or online sales take business away, Kreiger said.

Either way, she wrote, “I believe the trend of curbside pickup is here to stay.”

Blaze Cambruzzi, a partner in TRUE Commercial Real Estate, agreed that the retail industry is “very challenged,” particularly restaurants. Hospitality is the toughest segment right now, and it was doing so well prior to COVID-19, he said.

But it’s hard to find a general theme, said Cambruzzi, who works in Lancaster, Lebanon, York, Cumberland, Dauphin and Berks counties, as well as the Lehigh Valley. Some businesses going through difficulties may be able to work out concessions on their leases; others may not. A lot has to do with the kind of lease it is, he said. “Every tenant needs to know the terms of the lease” and then try to work out a win-win for both parties.  

Entering the pandemic, there wasn’t much vacant commercial space, Cambruzzi said. “It was a pretty healthy environment.” And activity didn’t disappear altogether afterward. For example, there were five written letters of intent for the former Bon-Ton department store in the York Galleria Mall, he said, which is being redeveloped into a mini storage facility. “We have a transient population more than ever, that’s why we need storage.”

Warehousing in demand

Warehousing is still functioning strong, too, Cambruzzi said, echoing Kreiger. “Overall, that’s pretty healthy,” relying on economies of scale driven by a market of high volume.

Before COVID-19, the economy was in incredible shape, backed by high consumer spending, said Mike Rohm, of SVN Latus. Basically, the risk of recession seemed remote and the commercial market was riding the wave, too, said Rohm, who covers primarily Cumberland and Dauphin counties. Property values were climbing, and local investors were competing for the best assets against out-of-town investors, he said. 

But there’s still reason to be optimistic the pandemic will lift, soon, Rohm said.

Buyers may be offering 70% of pre-COVID-19 value and sellers are still not biting, he said. “There’s a discrepancy between what sellers are willing to sell for and what buyers will pay.”

Rohm, who operates an appraisal company, too, also predicted a mega warehouse boom. He cited a new report by professional services firm JLL that demand for industrial real estate could reach an additional 1 billion square feet by 2025.

Jim Helsel, president/owner and broker of record at Helsel Inc. Realtors, said the office market really flattened out since March. Helsel primarily does office leasing and sales and investment analysis in the central Pennsylvania region. He’s still leasing space, generally from 1,000 to 3,000 square feet. That’s where the market is right now.

“The large corporate world is locked down,” Helsel said, and he doesn’t see large, corporate leases resuming anytime soon with the pandemic threat still around. But he also has an interesting perspective on whether working at home is a long-term trend. During the last recession, people started working remotely to save money, he said. Then they began going back to the office.

When employees aren’t together, brainstorming and collaborating, production goes down, Helsel said. “There’s a lack of synergy” when everyone works apart, he said. “You need the interaction.”

The big chill: Cold-storage warehouses could be next distribution boom

Mowery, a general contractor in Cumberland County, is building a 20,000-square-foot cold-storage addition for Feesers Food Distributors in Swatara Township. The addition is expected to be completed by September. (Photo: Submitted)

Plant-based burgers and microgreens have become staples at many restaurants, while fermented health drinks like kombucha have taken hold in major supermarkets as consumers demand fresher, healthier food.

But the trend is reshaping more than menus and grocery shelves. It is putting pressure on the warehouse and distribution market to supply cold-storage facilities that can stock a broader range of products near population centers.

Indeed, a recent report from real estate giant CBRE Inc. expects U.S. demand for cold storage space to expand by as much as 100 million square feet over the next five years. Much of that growth is slated to come from online grocery orders as more consumers choose the convenience of home delivery or pickup services to in-store shopping trips.

The Food Marketing Institute and Neilsen are projecting that online grocery orders will account for 13 percent of total grocery sales by 2022, up from 3 percent in 2018.That would translate into an additional $100 billion per year.

Central Pennsylvania and the Lehigh Valley, two of the biggest markets in the country for warehouse space because of their interstate highways, could absorb some of that cold-storage space. Pennsylvania already is sixth among states with 213.5 million cubic feet of cold storage space, trailing California, Washington, Florida, Texas and Wisconsin.

“I do think this is the next horizon for e-commerce,” said Bill Sutton, vice president of business development for Silver Spring Township general contractor Mowery. “Almost quarterly now we’re getting inquiries about food distribution or cold storage.”

Sutton said he believes grocery chains will look to add their own facilities outside of existing stores to handle home deliveries. He also thinks vacant grocery stores and retail spaces could be revived for use in cold storage.

Indeed, Mowery recently converted an old Giant store in Lancaster to an e-commerce hub to help the Cumberland County-based chain get a bigger piece of the online grocery business.

Mowery also is building a $5 million, 20,000-square-foot cold-storage addition for Feesers Food Distributors in Swatara Township. Feesers, a wholesale food service distributor, has seen a steady uptick in demand from restaurants and health care facilities for local, fresh and organic products, and it needs more storage space.

The company serves customers in six states across the Mid-Atlantic.

Feesers has about 276,000 square feet of existing space along Grayson Road, including 120,000 square feet of freezer space and about 50,000 square feet of cooler space. But that space is maxed out.

“We’re adding more local vendors and trying to expand that,” said Michelle Latta, the company’s CEO, citing growing requests for fresh produce, local cheeses and meats, and fresh desserts.

Todd Kaufman, director of operations at Feesers, said the expansion project, which started this spring and will be completed by September, has been in the works for about two-and-a-half years.

“The trend is now more fresh and organic,” he said, which means more preservative-free food is moving through distribution channels to restaurants and other facilities much more quickly, as the products have a shorter shelf life.

But Feesers can’t simply clear out existing products to make room.

“There is always someone that says ‘I have to have that. It’s been on my menu for 20 years,’” Kaufman said.

As the trends continue, Latta and Kaufman said they expect Feesers will need to undertake additional expansion in the future, though the company is out of land at its existing facility.

Deep freeze

Commercial real estate professionals and county planners say new cold-storage facilities could crop up near existing hot spots for warehouses in Central Pennsylvania. Refrigerated boxes also could be added to existing warehouses as land for new industrial projects is getting scarce in some areas.

But higher construction costs for dedicated cold-storage facilities — the price can be twice as much as that of traditional warehouses — also are a barrier to building more.

“The demand for it is super strong,” said Blaze Cambruzzi, co-owner of True Commercial Real Estate in Lancaster County. “But they are really expensive to build. The bigger risk is if they are not heavily occupied but you have to keep the whole building cool.”

A cold-storage market report from True for southcentral Pennsylvania and parts of the Lehigh Valley found that rents for existing cold storage space averaged $7.70 per square foot. Meanwhile, the average rent for the broader industrial market was $4.29 per square foot.

The high construction costs are one reason the cold-storage market is dominated by just a few companies.

In fact, four major players — Lineage Logistics, Americold, United States Cold Storage and VersaCold Logistics — control more than 70 percent of the cold storage market in North America, according to CBRE. And nearly 80 percent of the refrigerated storage capacity in the U.S. is outsourced by food producers, distributors, retailers and other users.

Royal Square looking to resurrect York Blue Moon, preserve city liquor license

York Blue Moon celebrated its renovations last spring. The well-known York restaurant abruptly closed in December. (Photo: File)

Royal Square Development & Construction is hoping to revive the former York Blue Moon restaurant, which abruptly closed in December.

But Royal Square’s plan isn’t to run a restaurant in the now-vacant space, which is at 361 W. Market St., according to Dylan Bauer, president of development for Royal Square.

The company’s goal is find a restaurateur to buy or lease the 4,000-square-foot restaurant.

The previous owners spent $400,000 on renovations that included a new bar and extra seating. Those changes, along with the property’s onsite parking, could appeal to new operators.

But the chief draw, Bauer said, is the liquor license.

“You can’t do it without the liquor license,” Bauer said.

Liquor licenses can be vital to a restaurant’s survival because liquor sales are where owners make their money, given tighter margins on food sales and other operational costs.

But they also are generating interest beyond restaurateurs in the wake of changes to state liquor laws.

It is possible a deep-pocketed convenience-store chain could swoop in to buy the license in order to sell wine and beer in a store outside of the city, Bauer acknowledged. In that case, the restaurant space may continue to sit empty, dampening the city’s revitalization efforts.

“We need more feet on the streets,” Bauer said. “There is already momentum and a restaurant would push it over the top.”

His company already has invested millions of dollars in redevelopment projects in the WeCo neighborhood, including a transformation of the historic Doll Building next to the Blue Moon. WeCo refers to an area west of the Codorus Creek.

Fearful of the potential impact if the Blue Moon license is sold, Royal Square has a contract to buy the property from PeoplesBank, which took it over from the former owner after the Blue Moon closed.

In demand

Bauer already knows the value of a liquor license.

He has been receiving unsolicited emails and texts from people looking to pay Royal Square up to $400,000 for a liquor license the company has in safekeeping for the former Cobblestone’s building on South George Street.

He admits the price is enticing. But he doesn’t want to sell because he sees restaurant licenses as an economic development tool for the city. They can help bring new businesses into the downtown, which can draw in people. He said the loss of a licenses can make the underlying real estate less attractive.

When a license does become available, large retailers often are at the front of the line to make offers, getting in the way of smaller restaurant operators, especially following 2016 reforms that allowed beer and wine sales at convenience stores and supermarkets in Pennsylvania.

“The reforms in the liquor law made everything unfair,” Bauer said.

Ben Chiaro, senior brokerage adviser for True Commercial Real Estate, the listing agent on the Blue Moon, said grocers and convenience-store operators aren’t doing anything wrong. They have simply adapted to the rules in Pennsylvania and are willing to pay top dollar to control licenses.

And many small restaurant owners also have been able to cash in by selling licenses for much more than they paid.

However, Pennsylvania caps the number of liquor licenses per county. So for every new supermarket or convenience store that buys a license to sell six-packs, one less restaurant can open. If a new restaurant can find a rare license, it has to pay a lot for it.

In fast-growing counties like Cumberland County, a scarcity of licenses has pushed prices well above $500,000.

Royal Square sees the Blue Moon as presenting a lower risk for small restaurateurs looking for a place to open or expand.

Bauer said the plan is for Royal Square to own the property and liquor license and then lease the facility to a new operator for $5,500 per month under a triple-net lease.

Under a triple-net lease, a tenant is responsible for all operating costs in addition to rent, including net property taxes, insurance and maintenance for the duration of the lease.

Chiaro said leasing the space could free up working capital for a new restaurant, plus its owners would have full use of the existing liquor license. Royal Square and True are hoping to lure new restaurateurs focused on sushi, Caribbean or Latin American food, or even possibly a Korean barbecue.

“Leasing it will get someone in,” Bauer said, adding that he would love to eventually sell the property to that operator.

But he also stressed that Royal Square has a short window in which to get a deal done. He said the company would need to get an operator in place by July 31, as its contract to buy the property from the bank is set to expire on Aug. 15.

If it doesn’t, the lender could look at other options, including selling off the license and real estate separately.