By Christopher Moore, CCIM & Joe Latina of LMT Commercial Realty, LLC
After an exhilarating few years with activity and trends accelerated by the pandemic, the commercial real estate market in the Greater Philadelphia-New Castle County area is adjusting to changes spurred by the rapid rise in interest rates, elevated land prices and construction costs.
Cash is being squeezed out of the market for investment sales, as potential 1031 Exchange sellers are reluctant to sell without a replacement property to purchase. Exchange buyers are facing higher interest rates as they seek to apply debt leverage against cap rates that remain at historic lows.
The good news, however, is if the market is heading for a downturn, at least we’ll be starting from a position of strength.
The Delaware multifamily market has a sub-3% vacancy rate, with very little product available for sale. The industrial market in New Castle County has a sub-4% vacancy rate and in the Greater Philadelphia area, industrial properties are 94%+ occupied. Industrial leasing rates have more than doubled in recent years, going from $5-6 PSF/YR to as high as $9-$12 per PSF.
The Industrial market is tight, as evidenced by a recent client assignment to lease a 100,000 to 125,000 s/f facility with only three clear options in the trade area.
Industrial zoned land prices have risen steeply in the past couple of years, going from $100-$200K per acre for unimproved land without approvals to over $400K per acre. Site work costs have nearly doubled in the same period. Previously, site work costs were under $100,000 per/acre while they are now topping out at almost $200,000 per acre. Further, approval processes and permitting are taking much longer.
While the recently disrupted supply chain is improving, transformers and HVAC components still have long-lead times for delivery and are causing construction delays.
The office sector continues to be the asset class with the slowest recovery. Wilmington’s office vacancy rate is hovering around 19%, and net absorption has been negative for the year. Remote and hybrid work’s impact has been felt by all the Central Business Districts (CBDs) across the country, and Philadelphia is no exception, with Kastle Systems reporting that the city’s offices were only 41.1% occupied for the first week of December. That is the lowest of the 10 largest U.S. cities for which Kastle monitors office occupancy rates.
Conversely, the retail recovery is doing quite well, with occupancy rates continuing to rise in the market. While there appears to be a decline from local and boutique retailers that often get shopping centers to fully leased status, that space is getting absorbed by a new type of tenant to retail – doctors’ offices. We’re seeing dental practices, dermatologists, optometrists and urgent care operators moving into traditional retail locations like never before. It makes sense for these professional practices, as the centers offer easy ingress and egress, plenty of parking and customer access, as well as low-cost marketing – the classic sign above the door.
Looking ahead, if the Federal Reserve achieves its mission of taming inflation and transaction volume returns to normal levels, we have reason to be optimistic about the commercial real estate market in our area of the Mid-Atlantic, because the fundamentals are in place for buyers and sellers, landlords and tenants to find common ground on their real estate requirements.
Christopher Moore, CCIM & Joe Latina are managing principals at LMT Commercial Realty, LLC. LMT Commercial serves real estate investors, property owners, tenants and restaurant owners and operators throughout the Mid-Atlantic.