A new federal tax incentive is dovetailing nicely with two growing areas of the Lehigh Valley: manufacturing and office space.
That was the consensus of panelists speaking at the Lehigh Valley Business real estate symposium, held March 6 at DeSales University in Upper Saucon Township.
Both manufacturing and office tenants are driving demand for new space, the panelists said. The federal opportunity zone program, which gives investors breaks on capital gains taxes, could be used to capitalize on that demand.
“We think the areas covered by opportunity zones are well-suited to development and there’s a lot of opportunity to take a project that was almost financeable” and make it work, said Colin J. Keefe, a shareholder of Fitzpatrick Lentz & Bubba, a law firm based in Upper Saucon Township.
Many of the zones are in downtown areas that have seen renewed interest and, especially in Allentown, new construction
Likewise, the manufacturing sector in Lehigh and Northampton counties is thriving, but in need of smaller buildings, whether repurposed or new.
Projects on both fronts in Allentown, Bethlehem and Easton could attract investment through the opportunity zone program.
Waiting for regs
A tax incentive enacted under the Tax Cuts and Jobs Act of 2017, the opportunity zone program gives investors breaks on federal capital gains taxes in exchange for investments that support small businesses and housing projects in low-income areas. The investments will flow through opportunity funds. The regulatory details are still being worked out, according to Keefe.
People can invest capital gains of almost any kind and the investments can be both long and short-term, he added.
“We expect to see a lot of activity soon,” Keefe said. “We expect there’s going to be more outside money chasing these projects” in opportunity zones.
Among the challenges will be finding projects that make financial sense. New owners will have to make substantial improvements to a property in order to take advantage of the opportunity zone incentive.
Detecting growth patterns
At the sixth annual Lehigh Valley Business real estate symposium, held March 6 at DeSales University in Upper Saucon Township, Becky Bradley, executive director of the Lehigh Valley Planning Commission, shared some data on how population and traffic statistics relate to economic development in the region.
Overall, the region, which encompasses Lehigh and Northampton counties, is adding more than 4,000 new residents each year, Bradley said.
Overall, nearly 200,000 people now live and work in the region. About 106,000 commute outside the valley to work, while another 97,000 come from outside the area to work, she said.
Route 22 is the region’s busiest road, followed by Route 33, according to Bradley, who shared details of traffic counts the organization compiled with PennDOT.
Route 22 handles almost 95,000 vehicles per day, while Route 33 to the north handles almost 84,000 vehicles per day, she said.
Much of the traffic on Route 33 reflects recent economic growth along that corridor, including the development of industrial properties such as Wind Gap Logistics Center near the Route 512 interchange, she said.
In addition to compiling transportation data, the LVPC reviews proposed developments in municipalities throughout the two counties and uses that data in its planning and analysis.
In 2018, the LVPC reviewed 1,438 approved residential units, an increase from the 1,257 approved units reviewed the previous year.
In terms of residential projects, apartment development within the region remains strong, she said. However, there could be a softening in the apartment market.
At 596 approved units in 2018, the apartment market has returned closer to the historic annual averages after spiking to 1,182 approved units in 2016, she said.
In addition, single-family detached housing could be making a comeback.
For the second year in a row, single-family detached housing development has shown renewed strength, she said, with 420 approved unis reviewed in 2017 and 523 approved units reviewed in 2018.
“Nobody is going to invest in a project that’s not going to work,” Keefe said. “We have projects here that have demand. The whole purpose of the program is to bring new jobs and new money into an area.”
Many of the opportunity zone tracts, particularly in Allentown, cover urban areas already dotted with projects and that benefit from other tax incentives, like the Neighborhood Improvement Zone.
Greenfield properties or undeveloped land also may qualify for opportunity zone investment, Keefe added.
Shift in manufacturing
Though the focus of the valley’s industrial real estate market in recent years has been big-box warehouses and distribution centers covering 250,000 square feet or larger, demand is growing for smaller space.
“Manufacturing doesn’t look like Bethlehem Steel anymore,” said Don Cunningham, president and CEO of Lehigh Valley Economic Development Corp. “Quite frankly, we need more of the smaller footprint.”
Some developers are starting to fill the void.
J.G. Petrucci, for example, is demolishing the former Guardian Life Insurance building near Route 512 in Hanover Township, Northampton County to develop Lehigh Valley Flex Center, a three-building project of 470,000 square feet.
Developers could also carve up smaller buildings for office users, Cunningham added.
In the last five years, Lehigh and Northampton counties added more than one million square feet of office space, with 851,000 square feet in urban centers, according to Cunningham.
Easton also is experiencing demand for office space, with Hearst Publications announcing a plan to open an office in downtown Easton this year.
One of the largest office projects involves payroll firm ADP, which plans this year to move more than 1,000 workers to Five City Center, an office building under construction in downtown Allentown. That could up opportunities for filling vacancies in other parts of the valley.
“I think you will see more of this regional office consolidation,” Cunningham said.