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Momentum, economic landscape should keep commercial real estate sizzling

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Downtown Allentown’s revitalization district, which includes the PPL Center arena block and City Center Allentown, is one of 13 real estate development projects from around the world that won the Urban Land Institute’s 2017-2018 Global Awards for Excellence. It’s one of the reasons, along with tax incentives, why the city’s downtown should continue to have momentum this year.
Downtown Allentown’s revitalization district, which includes the PPL Center arena block and City Center Allentown, is one of 13 real estate development projects from around the world that won the Urban Land Institute’s 2017-2018 Global Awards for Excellence. It’s one of the reasons, along with tax incentives, why the city’s downtown should continue to have momentum this year.

Strong economic fundamentals and, of course, location have positioned the Greater Lehigh Valley to have another successful year in construction, development, commercial real estate and multifamily housing.

“Expectations for 2018 remain strong,” said Adrienne K. Kwiatek-Holub, BB&T vice president, commercial real estate for northern Pennsylvania.

She noted that industrial development continues to be a dominant force in the Lehigh Valley, driven by logistics and warehousing.

“I expect large industrial development of Class-A properties to remain strong for the foreseeable future,” Kwiatek-Holub, a past president of Commercial Real Estate Women Lehigh Valley Inc., told Lehigh Valley Business.

She also said the area’s office market remains attractive, and that multifamily housing looks healthy, as well.

“Assisted living and age-restricted units also are looking strong, driven by the aging members of the population and the attractiveness of the Lehigh Valley,” Kwiatek-Holub said.

In an exclusive interview, Kwiatek-Holub also talked about the impact of tax incentives on development, the future of retail and the development of small pad sites.

n In general, what is the outlook for commercial real estate this year in our region?

Adrienne Kwiatek-Holub: I expect continued growth in the commercial real estate industry in the Lehigh Valley in 2018, driven by the strengths of our region and solid economic fundamentals.  

In February 2017, U.S. News & World Report ranked Allentown among the Best Places to Live (No. 79) and Best Places to Retire (No. 25). The magazine noted the “convenient location, commitment to healthy living and celebration of the arts.”

In March 2017, Site Selection ranked the Lehigh Valley among the top five regions in the northeastern U.S. for economic development. …

The Lehigh Valley’s successful real estate trends continue to be driven by its proximity to New York, New Jersey and Philadelphia; its transportation infrastructure that allows delivery of goods to much of the eastern seaboard; its relatively inexpensive cost of land; the relatively low rent costs; the quality of the local labor force; the proximity to highly ranked health care; and the quality of life.

In 2017, the Lehigh Valley gross domestic product reached $37 billion, which is the highest level in regional history. The top four sectors in our local economy are manufacturing, finance/insurance/real estate, health care and education. Although the manufacturing sector is the largest, it is not outsized compared with the other three sectors.

Expectations for 2018 remain strong. The Lehigh Valley Economic Development Corp. continues to balance its focus on both attracting new businesses and retaining/growing the Lehigh Valley’s existing employers.

According to the Bureau of Labor Statistics, unemployment in the Lehigh Valley measured 4.4 percent in November 2017, comparing favorably with 4.7 percent in November 2016 (despite some modest fluctuations throughout the year).

For all of the above reasons, and further noting the attractive interest-rate environment (despite projected rate increases, interest rates are still at relative historic lows) and competitive banking industry with an appetite to finance good projects, I expect 2018 to be another solid year for the real estate segment.

n What parts of the region will see growth in commercial real estate and why?

Kwiatek-Holub: The noteworthy areas for nonresidential growth over the last decade have been Lower Macungie Township, Bethlehem city, Lower Nazareth Township, Upper Macungie Township and Palmer Township. … I would expect that these areas continue to exhibit growth in 2018, based on their attractive locations and projects in various stages of development.

Additionally, growth in the tax incentive zones – Neighborhood Improvement Zone, City Revitalization and Improvement Zone – will continue to be solid.

n What’s the trend in terms of warehousing in our region? Can the growth be sustained? Are new pad sites finally going to get smaller?

Kwiatek-Holub: Industrial development continues to be a dominant force in the Lehigh Valley, driven by logistics and warehousing. The seemingly unstoppable demand for online retail, with ever quicker delivery turnaround, has been a driver in this market segment, leading many to speculate that the Lehigh Valley and Harrisburg area is the “Inland Empire East.”

Local and national developers have focused on our area, [because of] the unique location advantages compared to many other Northeast regions. …

I expect large industrial development of Class-A properties to remain strong for the foreseeable future, constrained only by the availability of land. As acreage here in the Lehigh Valley is developed, the Inland Empire East is stretching west on 78 and 81 toward Harrisburg.

Existing flex space for 40,000-80,000 square feet is frequently of older stock, which does not accommodate the needs of today’s manufacturers – notably due to insufficient tractor-trailer access.

Small manufacturers who are in a position to construct their own properties have had some success. But developers looking to build a speculative industrial building are faced with the reality that smaller buildings take as long to work through approvals, cost more per square foot, and finding a tenant can be a longer, more risky process.

The best solution to this situation is public-private partnerships to assist developers in overcoming these hurdles. I have heard reports of one-off projects, but more can be done to support these ventures.

n What’s your take on the region’s office markets, including the impact of downtown Allentown’s redevelopment on suburban office spaces?

Kwiatek-Holub: The office market remains attractive in our region. In the past 12 months, absorption of 470,000 square feet has outpaced delivery of 200,000 square feet.

Overall, the vacancy rate is at 8.3 percent, with forecasters expecting that to improve to 7 percent over the next year.

As with all real estate, location and quality of the property are both key drivers. On average, 3-star properties are experiencing lower vacancy rates than either 4-5 star properties or 1-2 star properties.

From my perspective, the revitalization in the cities has had a mixed impact on the suburban space. The benefits of the NIZ and the excitement generated by the renaissance of downtown Allentown have certainly attracted businesses that were formally in suburban locations.

But other prominent businesses have preferred not to relocate, making key decisions to stay or expand facilities in suburban markets.

n What about your outlook on the region’s retail situation?

Kwiatek-Holub: As has been widely reported, 2017 was a dark year for retail in the United States, with as many as 8,600 brick-and-mortar stores closing (over 147 million square feet of retail space). The impact of e-commerce continues to take its toll.

In many respects, with the exception of the recently announced Bon-Ton closings, the larger Lehigh Valley retailers have so far dodged some of the store closings that other regions have faced.

A big trend in retail nationally is in so-called experiential retailing, which allows consumers the ability to have hands-on experiences in the store that they cannot have online. Whether it’s the ability to try out sports equipment through simulators or participate in a cooking class at an appliance store, the concept is to differentiate and build relationships.

There has also been recent buzz about “omni-channels,” in which online retailers have now realized that they cannot completely abandon brick and mortar locations. Potential customers are looking for ways to touch, feel and sample products.

By embracing a multichannel sales approach, any retailer can reach its customers with a seamless and consistent experience, whether by mobile app, website or brick and mortar location. The goal is to be consistent with brand standards across all experiences.

Retail centers here continue to look for the right mix of food and entertainment that will draw consumers out and away from their computers. The Lehigh Valley continues to see growth in restaurants, both chains and locally owned.

There is a growing trend for medical practices to lease space in retail locations, which I expect to continue.

n What about the Neighborhood Improvement Zone in Allentown and other tax-incentivized zones? How does that look for 2018?

Kwiatek-Holub: The Allentown Neighborhood Revitalization District won the Urban Land Institute’s 2017-18 Global Award for Excellence. It was only one of eight U.S. locations to receive the award.

The winners were highlighted for their innovative, forward-looking designs with focus on sustainability, flexibility and neighborhood context.

The power of the NIZ will continue to attract new tenants in 2018, particularly in the office and residential segments.

n What’s your take on the outlook for multifamily housing in the region?

Kwiatek-Holub: The outlook for multifamily remains healthy in the Lehigh Valley, driven by the strong economic fundamentals noted previously.

Vacancies are currently below historic averages, and rent rates have been gaining. Some units that were recently delivered have yet to stabilize, but they are expected to reach market vacancy soon.

Assisted living and age-restricted units also are looking strong, driven by the aging members of the population and the attractiveness of the Lehigh Valley.

In addition to Lehigh Valley residents downsizing from previous single-family homes, the Valley continues to attract transplants from New York and New Jersey due to quality of life, access to premier health care and cost of living.

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