Commercial Real Estate and Office Space Market in Pennsylvania

The state of Pennsylvania offers businesses access to a skilled workforce, excellent infrastructure (including 6 international airport and 3 major ports), and designated Foreign Trade Zones created to boost the state's competitiveness at national and international level (1). This report reviews the impact these elements have had on the commercial property market in Pennsylvania.

Office Space Market

Market analysts at Cushman & Wakefield have drawn attention to how declining unemployment rates and the growth of the manufacturing sector have helped boost the local office market in Philadelphia. Vacancy rates across the metro area and nearby counties have been steadily declining since 2013, and stood at 14.9 per cent in mid-2015. Absorption levels continue to be positive, although leasing activity levels remain more or less stable and the market continues to be driven by tenant demand coming from the health care, engineering, and financial sectors. Average rental rates have increased 2.5 per cent since 2014, and currently stand at $19.79 / sq ft. In Philadelphia's CBD, rental rates are above average in Conshohocken ($32.17 / sq ft), Bala Cynwyd ($29.55), and Main Line ($29.33). Also in these areas office space supply is at its lowest, with average vacancy rates being as low as 5.1 per cent in Main Line. Office space in suburban Philadelphia commands average rental rates of $19.79 / sq ft, with demand tightening around Leigh and Northampton county, where vacancy rates average 11.3 per cent. In the short term, the local office market is set to become more favorable to landlords due to the limited development pipeline and rising rental prices (2).

Job gains and increased construction activity are the predominant trends in the Pittsburgh office market, although vacancy rates, rental values, and leasing activity levels remain rather unchanged, and especially when compared to the office real estate market in Philadelphia. The exception is the Oakland area, which in fact has been outperforming the Philadelphia market. Here, vacancy rates are down to just over 3 per cent thanks to the recent development of mixed-use properties and dedicated office space for the hospitality, not-for-profit, and public sector. Leasing activity in Pittsburgh is centered around Southpointe business park, which is home to leading firms involved in the pharma and energy sectors. Across Pittsburgh, direct asking rates average $20.49 / sq ft. Rates are expected to remain stable except in Oakland and Southpointe (3).

Retail and Industrial Space

Growth in the industrial commercial property market in Philadelphia has been driven by a record-high manufacturing index. The highest demand is for warehousing and distribution space along the 422 Corridor and in Philadelphia county, where vacancy rates have dropped to 1.3 per cent in the Upper Bucks area and to 3 per cent in Chester county. Average rental rates are in the region of $4.63 / sq ft / year, although they reach values of $5.80 and above in counties like Chester and Delaware. Activity levels are high across the state, as more than 3.7 million square feet of industrial space are under construction and will be delivered by Q4 2017 (4).

Industrial space in Pittsburgh is in high demand too following the designation of the area as one of the new manufacturing communities created by the US Department of Commerce and the Investing in Manufacturing Community Partnership. Pittsburgh is one of the most successful US cities in terms of the amount of foreign direct investment it attracts, and as a result, the real estate market benefits from the ever-increasing demand from firms mostly in the oil and gas and petrochemical sectors. Average vacancy rates for industrial space in Pittsburgh are 6.8 per cent and direct asking prices stand a t $5.74 / sq ft (5).

The outlook is most definitely positive for the retail property market too, and particularly in Philadelphia, where the latest quarterly reports point to the healthy levels of investment sales taking place across the city and to the pricing pressures driven by the expansion of grocery chains and regional shopping centers. Future growth will mostly take place in Midwood and Market East (Philadelphia city center), and in suburban districts like Wilmington and Lehigh Valley (6).

Tax Breaks, Business Incentives and Support

Businesses based in the Commonwealth of Philadelphia can access several economic development programs that reward investments made in workforce and infrastructure. Among the most useful programs 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 (7).

- Research and Development Tax Credits are available to small and large business and can cover up to 20 per cent of the expenses associated with R&D efforts (8).