The state of Pennsylvania boasts a solid and diverse economy, which is in fact the sixth largest by GDP in the United States. In addition, local businesses are able to capitalize on the state's strategic location, which offers easy access to important business hubs in the East Coast, including New York, Washington, and in the Midwest, with frequent connections to Detroit and Chicago.
Pennsylvania-based companies benefit from the local talent pool, made up of more than 6 million people, whose skills can support business ventures in virtually every vertical, from logistics to admin support, real estate, or manufacturing.
The state's excellent infrastructure also facilitates business activities. Pennsylvania is home to six international airports with large passenger and cargo capacity, and is the only US state to have ports in the Gulf of Mexico, the Great Lakes, and the Atlantic Ocean. In addition, Pennsylvanian rail and road connections combined cover an area of 125,000+ miles, and can get goods to the 10 largest US markets within a single day.
In total, Pennsylvania is home to more than 1 million small businesses, which account for 99.6% of all companies in the state. That's in addition to the 24 Fortune 500 companies headquartered here, which operate in industries like healthcare, telecommunications, financial services, and insurance.
Other key industries in PA are advanced manufacturing, life sciences, energy production, robotics, distribution and logistics.
Office Space Market
Office Space in Philadelphia
Philadelphia has nearly 150 million square feet of office space, plus an additional 60 million in suburban offices.
Five year trends speak of a marked decline in both deliveries and net absorption, deepening from 2020 onward, and also point at the divide between Class A product and under-performing offices, many of which are being converted into residential properties.
At averages over 16%, vacancy rates are up to four percentage points above the previous 5-year average, and are expected to keep increasing as the rightsizing process continues.
Asking rents for direct leases and subleases are trending up, reaching averages of $33 and $29 / psf respectively, although in the CBD average rents can exceed $35.
In the suburbs, vacancy rates are slightly higher than in central Philadelphia, with averages hovering around 19%. Despite this, the suburban office market has recently been more active than the downtown area, mainly due to interest from life sciences and education companies.
Office Space in Pittsburgh
Total inventory in the Pittsburgh metro area amounts to 120+ million square feet, with the largest sub-markets being the CBD, Greater Downtown, and Parkway West.
Companies involved in robotics, AI, and life sciences are the main drivers of leasing activity in the city's office market thanks to ample federal funding that is likely to drive up office space requirements.
Outside of the activity generated by these sectors, demand hasn't been particularly strong over the past few years. This is reflected in increasing availability rates, which reached a 10-year high in 2022 but have since dropped below historical highs.
Similarly, vacancy rates have increased over a four-year period, currently averaging 12%. This is expected to change as absorption rates are on the rise, and sizeable amounts of Class B space are being converted for residential and hospitality purposes.
Average asking rates are below $24 / psf (FSG), with relatively little change over the 10-year average and not much variation between urban and suburban offices. The priciest locations are East End, Greater Downtown, and the CBD. Sublease rates are below $22/psf.
Retail and Industrial Space
Retail Space in Philadelphia
Philadelphia's local retail sector is struggling with challenges like rising construction costs, inflation, and disruptions to the supply chain. However, since this category of the Pennsylvania commercial real estate market has been supply-constrained for a while, it remains favorable to landlords who own quality retail space.
Even with moderate demand, lack of supply and very limited planned developments all the way down to 2030 mean that rental rates are expected to continue increasing past the current rates of $32 / psf.
Retail space in Pittsburgh
The Pittsburgh market has benefited from the entrance of new retailers, which have put absorption rates at record-high levels when looking at the 5-year average.
Although the market isn't immune to rising interest rates and persistent inflation, undamentals remain strong, with overall vacancy rates dropping down to around 4% and asking lease rates increasing steadily to average values of $15 / psf (NNN). Rates can double the average in Oakland and the CBD and go down to single digits in Fayette County and Parkway East.
Industrial Space in Philadelphia
The latest indicators show sustained appetite for industrial assets in Philadelphia, with vacancy rates dropping consistently to averages of 3%, and growing rental values that in some cases exceed 5% per year.
Five-year figures show record absorption levels in 2021 and 2022, and only 2 sub-markets posted negative absorption rates.
Current rental values average $6 / psf for warehouse and distribution space, and $12 for R&D and flex space.
Industrial space in Pittsburgh
This is by far the best-performing real estate market in the area, with ongoing positive absorption rates quarter after quarter since 2019.
Flex and tech flex space are experiencing growing demand, especially in Beaver and Butler counties, where vacancy rates dropped below averages for manufacturing and warehouse property types. Future growth for this type of asset is expected, and new construction is already underway in the southern suburbs.
Vacancy rates average 4% and Class A asking rents stand at $5 / psf (NNN).
Tax Breaks, Business Incentives and Support
Businesses based in the Commonwealth of Pennsylvania can access several economic development programs that reward investments made in workforce and infrastructure. Among the most useful programs making it a great location for investment, we can highlight:
- Keystone Innovation Zone Tax Credits can be applied against corporate, personal, and capital stock taxes and are available to companies that invest in the development of commercial and industrial sites in designated areas.
- Pennsylvania First Program, consisting of loans and grants to help cover the costs of certain large-scale ventures in targeted industries.
- LERTA, a tax abatement program that offers property tax exemptions for up to 10 years to eligible businesses located in economically depressed Local Economic Revitalization Tax Assistance zones.
- Research and Development Tax Credits can cover up to 20% of the expenses associated with R&D efforts in small businesses, and 10% for large companies.
Additional tax credits and loans are available for manufacturing activities and for businesses that undergo remediation work in former industrial areas. For more information, visit the Pennsylvania Department of Revenue website.