The dramatic growth of development in downtown Allentown is hurting the Lehigh Valley suburban office market.
However, the suburbs also are attracting new office tenants, drawing fresh development and some construction and upgrade projects.
That is the backdrop as the office market reacts to what will be more than $1 billion in new buildings in Allentown – development, largely offices, spurred by the attractive tax incentives of the downtown's Neighborhood Improvement Zone.
“Are we affected by the NIZ? We certainly are,” said Don Frederick, general partner of Winchester Road Limited Partnership, which owns a suburban office property in South Whitehall Township. “I can't compete with the NIZ because they are building their buildings, theoretically, with tax money, not with cash. We are dealing with real world economics.”
Others say the NIZ is making the office market more competitive but that some users always will prefer a suburban environment and that tax incentives are not necessarily a deciding factor.
As a sign of strong interest, one real estate company is looking to build a corporate office park of multiple buildings in an untapped suburban office market off Route 33. Some corporations are consolidating offices and moving employees into single existing sites, often staying in the suburbs.
Meanwhile, the expansion of health networks, the rising population, increasing interest in the Valley from site selectors and a strengthening labor pool all play a part in painting a bright future for both the urban and suburban office market.
Although some real estate professionals are not too concerned about a flight of corporations to the cities, there is no doubt the surge of new office development in downtown Allentown is drawing tenants. Some experts say it creates an unfair competitive advantage since a large part of this growth is driven by the NIZ tax incentives, which are specific to Allentown and are used by developers to drive down rental rates.
With about one million square feet of new Class-A, top-of-the-line office space coming on the market in downtown Allentown alone, it would appear that the city could be swallowing up a significant amount of office space in a short time.
However, Allentown's NIZ developments, as well as office projects proposed for the City Revitalization and Improvement Zone in Bethlehem, will be coming to fruition over a period of time, not all at once.
“It's certainly making it more competitive, but companies choose the suburbs for certain reasons and urban areas for other reasons,” said Lisa Pektor, president of PennCap Properties of Bethlehem, who said the suburban market is going to stay steady.
While the incentives of the NIZ draw people to offices in downtown Allentown and the CRIZ is expected to do the same for South Side Bethlehem, some companies have reasons for staying in a suburban, rather than urban market.
“We've landed some companies because of our ease of access to the country club,” Pektor said of her company's suburban offices.
She said many of her tenants, which include suburban flex and office users, are expanding.
Bigger office users, such as call centers, typically seek open-floor plans and ease of access to highways, which makes the suburbs a better fit.
Also, some companies wouldn't generate as many NIZ or CRIZ taxes, so they aren't necessarily targets of these incentives, she said.
“I think some of the Allentown suburban offices have a harder time competing against the urban areas of Allentown,” Pektor said. “It's not a huge jump to go from Cedar Crest [Boulevard in South Whitehall Township] to downtown.”
Lauren Gilchrist, research director for Jones Lang LaSalle in Philadelphia, called the NIZ an “extremely powerful incentive.”
However, she said brokers for JLL have reported strong activity in backfilling those spaces vacated by companies that left the suburbs for downtown Allentown.
Morgan Stanley recently announced it wants to return to downtown Allentown, occupying space in Three City Center, a new office building in the NIZ. The investment firm will move employees from two offices on Winchester Road and Pond Road in South Whitehall Township and one on Main Street in Bethlehem, closing all three offices.
Morgan Stanley is the main tenant on the first floor of an 80,000-square-foot office building on Winchester Road that is owned by Frederick's firm. Morgan Stanley's lease expires in February. Frederick said he has prospects for the space.
The NIZ creates unbalanced competition, Frederick said. He said he cannot compete with the $7 or $8 per square foot rental rates offered to office tenants in the NIZ.
“I think there is an oversupply of office space, especially in the NIZ and, of course, there's more proposed,” Frederick said, referring to the recent announcement of the third phase of the Butz Corporate Center in Allentown. “It escapes me when you have a market of any product where there's excess, why would they build more? I fail to see the logic.”
Peter Gebert of Franklin Realty Development Corp. of Blue Bell said he sees an artificial demand in Allentown created by the NIZ, subsidized by taxpayers of Pennsylvania.
“Once the stimulus goes away, that demand will subside,” said Gebert, whose company owns the Pond Road building where Morgan Stanley will vacate.
While office activity is occurring in the suburbs, Gebert said he is seeing little if any new construction other than in Allentown, he said.
“I think that trend will continue until the excess office inventory gets absorbed and the market tightens up a little bit,” Gebert said. “As it gets absorbed, it will prompt some new development in the suburban markets.”
John Crampsie, principal and broker of record for NAI Summit of South Whitehall Township, said he is happy with the activity on the suburban office market and does not think downtown Allentown growth has much of an impact.
“With the downtown, there's going to be some deals that are going to go down there,” Crampsie said.
“Let's face it, there's not a mass exodus to downtown Allentown. There just hasn't been that much. There is always going to be competition and there's always going to be reasons why they choose one over the other.”
Sometimes, companies who choose a downtown location will still maintain a presence in the suburban office market.
While National Penn Bank moved its headquarters from Boyertown to Two City Center, an 11-story office building that opened in downtown Allentown last year, the company retained employees at its Boyertown site.
National Penn also built a new business center for its employees in Spring Township.
PennCap Properties is looking to build Mill Creek Corporate Center, a new corporate office building in the suburban market off Route 33 and William Penn Highway in Bethlehem Township.
The project is ready for preliminary final approval by the township for the first part of the development, Pektor said.
She said she sees strong interest in companies looking for office space in that area, particularly since it is close to the New Jersey market and offers access to Interstate 78 and Route 33, which opened a new interchange farther north in nearby Palmer Township.
“We have seen interest in that corridor,” Pektor said. “It will complement the interchange. With William Penn being the newest project closest to New Jersey, we think it will be successful.”
Improved facilities help retain and draw tenants to the suburbs.
“A lot of those buildings are [Class] B and C, and in order to attract tenants, one has to upgrade them,” said Christopher Baj, senior adviser for Sperry Van Ness, a commercial real estate firm in Hanover Township, Lehigh County.
Developer David Jaindl, owner of 7660 Imperial Way, renovated the corporate office complex built in the 1980s in Upper Macungie Township near the intersection with Route 100 and Interstate 78. He bought the building in January and upgraded the interior and finished landscaping to the exterior. The building is now 76 percent occupied.
With the upgrades, the building is now repositioned as a Class-A multitenant office building with a new entry and lobby, interiors and glass wall entries to some suites.
“The [suburban] office market is poised for growth but I think real, meaningful growth is going to follow with real, economic growth in spending and companies will then expand,” Baj said. “I think we are poised for growth, but I think it's going to be cautious growth that could increase significantly. That's going to be coupled with landlords of suburban offices willing to do the upgrades to attract new office tenants.”