Market Conditions: A rebound on the leasing side?
by Bill Gladstone

Although not strong, there is an upward trend in the leasing market. During the last three years, the retail and commercial leasing were least affected, however, the overall volume of deals in all market segments has slowed considerably. It now appears that the different segments of the leasing market are making a noticeable comeback.

Over the past few years, the leasing rates in the A office market dropped from $18.00±/SF to $16.00±/SF gross. Free rent was also being given as a concession. B space, which had been above $15.50/SF (gross), has fallen into the $13.50+ to $15.00/SF range (gross). Concessions were also being made by giving free rent. Now it appears that the rates are moving upward. A deal I just concluded (4,000 SF+) was done above $18.25/SF (gross) with no rent concessions.

The urban (City of Harrisburg) environment is a different story. There was a pent-up demand for A office space. The asking rates for the eight floors of office space in the new Market Square Plaza building (under construction) are $21.95/SF (gross). Although construction is not finished, there is only a little over one floor (15,600 SF) available for lease. But there has always been a difference between the urban and suburban environment in Harrisburg.

The warehousing market was also affected over the past years as rates fell. $4.25/SF NNN (with operating expenses in the $.65 to $.75/SF range) were commonplace. Then rates dropped to under $4.00/SF and, in some instances $3.75 was an acceptable rate, with a generous tenant improvement allowance. The asking rates are now positioned closer to $4.05 to $3.95/SF, and although these rates are low, the activity is starting to increase. I am hopeful that as we go into 2005, the increased activity will allow the rates to rise higher.

The flex warehouse market saw a dramatic drop by $0.50 to $0.75/SF from the $5.00 range established four years ago. But it is starting to creep back to that $5.00/SF mark. Two things that the tenants in this segment of the market insist on are: easy access and plenty of parking, especially for vehicles that may be parked overnight. For buildings with easy access and ample parking, the only issue then is the demand factor. For example, on the West Shore right now a new 130,000 SF project will be coming out of the ground. The rates will be in excess of $5.25/SF because the property has easy access to Rte. 15 at the Rossmoyne Road exit, and is within a mile of the PA Turnpike and Route 581. It has plenty of parking and has the convenient drive-in and dock combination in each bay. It answers the demand for this type of space on the West Shore. Currently, the West Shore does not have 4,000 to 5,000 SF blocks of flex warehousing space. The need in the market is being answered while making sure that typical objections that tenants have are being eliminated. This project is slated for success.

The retail market has perhaps been less volatile as retail growth continues throughout our region. A lot of this growth has been with the super stores (Lowes, Home Depot, WalMart, Target) and really needs to be differentiated from the smaller 1,000 to 5,000 SF retail tenants in shopping centers or commercial tenants in freestanding buildings along a retail/commercial corridor. Those rates may have dropped to $8.00/SF triple net for destination locations and to $12 to $13/SF triple net for the highly visible retail locations on busy commercial corridors (Carlisle Pike, Rt. 22, and Union Deposit). Now those rates seem to be headed back to the $10 to $12/SF range for destination retail while impulse retail is $14.00/SF and higher. Keep in mind that when retail can locate in pockets of high demand the rates can go in excess of $14.00+/SF. For example, the rate for the project at the intersection of I-83 and I-81 by Stanberry Development is $32/SF NNN (operating expenses are $6.50/SF). The developer found a pocket in the market where the demand is extremely high. They are charging (and receiving) much higher rental rates than other areas of the market.

As we move into the fourth quarter of 2004, it appears that, even with the low interest rates making the cost of money very affordable for tenants who want equity, the “Buying instead of Leasing” trend seems to be slowing. This is reflected by the higher leasing rates and, in some segments, the increase of the lease deal flow. If the interest rates continue to rise, it will push the tenants back from desiring equity positions into the leasing mode again, increasing the demand. If the demand continues with no increase in supply, the rates will continue to push upward and bring full cycle a 3-year leasing story in the Greater Harrisburg area.

The market is cyclical and this upward/downward spiral of rental rates will continually occur in the future as it has in the past. With the above in mind, this is a good time to build and have product ready for the spring and summer leasing market of 2005. Finding the right location may now be more of the issue due to the scarcity of land.

Copyright 2005 BillGladsone.com. All Rights Reserved.

< Back to Exclusive Articles