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10A— February 24 - March 9, 2017 — Commercial Office Properties — M id A tlantic
Real Estate Journal
C ommercial O ffice P roperties By Art Campbell, Campbell Commercial Real Estate, Inc. A Tale of Two Cities
I t was the best of times, it was the worst of times. Depending on your position
years of 2006 and 2007. Total dollar value however, was not anywhere close to years with similar number of transactions. Central Pennsylvania, espe- cially the Harrisburg Market, has seen some of the highest and lowest office sale prices ever paid. On the “Best of Times” end of the market, fully leased office buildings with credit ten- ants and specialty buildings, such as medical with long term leases, have sold at record val- ues. Investors seeking a place to put their money are chas- ing what they perceive as safe cash flow. These transactions have reduced cap rates overall
without any real positive sub- stantive changes to the market. This may eventually have a negative effect to those inves- tors that are over-leveraged. During the same period that we have seen record high sales, a lot of transactions were done by local investors who acquired vacant office building at 20 to 30 percent of replacement cost. Even at low acquisition costs, there is risk in how long it will take to renovate and lease the buildings, or in several cases, repurpose them for other uses. A notable transfer is the now vacant Senate Plaza building with 260,000 sq. ft. and the now
vacant 200,000 sq. ft. building previously occupied by HP on GrandviewAvenue, also in East Pennsboro Township. Two va- cant buildings with 61,000 sq. ft. in Rossmoyne, Upper Allen Township, have also recently been acquired and will be reno- vated. The 170,000 sq. ft. build- ing, previously headquarters of PSECU, and 2605 Interstate Drive with over 80,000 sq. ft., previously headquarters for PEMA, are additional examples of vacant or near vacant larger building transfers at very low square foot prices. On the other end of the spec- trum are transfers from $140.00
per sq. ft. to well over $200.00 per sq. ft. for fully occupied medical buildings. Two new Class A buildings constructed for Deloitte in Silver Spring Township and one for HP in East Pennsboro Townships are examples of meeting the need for upscale space with higher density occupancy. The new standard and expectation of having 6 – 8 employees per 1,000 sq. ft. of space has cre- ated a need for higher parking ratios and upgraded HVAC systems. Unfortunately, with the relocation to these newer Class A buildings, more vacancy has been created. A few leases with companies new to the area are close to being finalized, but even with the over 100,000 sq. ft. anticipated with those trans- actions, close to 2,000,000 sq. ft. remains available. The large discrepancy in sale prices coupled with large blocks of vacant space, has cre- ated a quandary for appraisers and brokers. Which buildings should be used as comparables? Historically, distressed sales were not being used in ap- praisals, however when a large number of buildings sold are distressed sales, and they make up a large percentage of the sales, those transactions cannot be ignored. The long followed adage in real estate of location, loca- tion, location has remained extremely important. How- ever, also to be included is un- derstanding every nuance that can affect each building’s mar- ketability and value. It is not uncommon to now see almost identical office buildings sell at price differentials as much as 50%. Occupancy, owner’s equity, and lease terms have never had a greater effect on valuations. The future valuation of the market’s office buildings will depend on several factors that are still uncertain. Obviously the overall economy and job creation by office users is a major part. Interest rates, regulations effecting building renovations, and repurposing will also have an effect. It appears 2017 will not see any major changes to the market and it will still remain somewhat uncertain, which will create opportunities for some and, unfortunately, the “Worst of Times” for others. Art Campbell is the presi- dent of Campbell Commer- cial Real Estate, Inc. n
as an owner or broker in the Central Pennsylva- n i a o f f i c e ma r k e t i s how appl i - c a b l e y o u may th i nk the famous
Art Campbell
line from Charles Dickens A Tale of Two Cities is to you. In terms of total square footage sold, 2016 was a near record year for office building sales, matching the high transaction
S UBJECT P ROPERTY
(717) 737-6161 • www.acampbell.net
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