While a downtown revival is going strong in the cities of Lehigh and Northampton counties, the office market remains active and stable outside these urban areas. And the fundamentals of the suburban office market will continue to boost demand over the next two years.
That’s according to several brokers who shared insights on this market in these two counties.
The western and suburban portion of Lehigh County, which includes areas of Upper Macungie and South Whitehall townships, for example, shows a significant number of lease renewals and new tenants.
“There’s still been a lot of activity on the West End,” said Ryan Dietrick, senior vice president at Colliers International in Upper Macungie Township.
The high number of lease renewals in the area shows that tenants want to be there, Dietrick added.
The same goes for suburban areas such as South Whitehall Township.
“There’s slow and steady growth in the suburbs in most areas,” said Tom Skeans, managing director at SVN Imperial Realty of South Whitehall Township.
Half of all building absorption by tenants in the west since 2016 took place in Class-A buildings, according to real estate firm CBRE. The commercial real estate industry views Class-A buildings as high quality spaces in demand among tenants.
“The west is more attractive to tenants simply by nature of having a larger inventory of Class-A buildings than the east,” said Jody King, vice president of CBRE Inc. in Upper Macungie Township. “Class-A vacancy is 14 percent in the west, 24.6 percent in the east.”
CREATING LARGE VACANCIES
One large corporate tenant, Aetna, is moving nearly 500 employees from the space it leases at 1550 Pond Road in South Whitehall Township to another office building in West Bethlehem, leaving behind a large vacancy while also filling one in the same market.
At Collier’s office at 7535 Windsor Drive in the Iron Run Corporate Center, the real estate firm is busy marketing the building after its largest tenant, ADP, announced plans to move out of a 60,000 square-foot suite once the company’s lease expires in October 2019. When ADP moves into downtown Allentown, it will bring 1,600 more people to the city, Dietrick said.
The move will create a significant vacancy in the suburbs. However, Dietrick said Colliers has already had showings of the space for a tenant that would occupy the entire 60,000 square feet.
Kelly Berfield, senior vice president at Colliers, said the firm would like to lease it as a big space. Furthermore, the owners of Iron Run are planning to remodel the building and put in a gym, a move that could attract tenants.
“A lot of tenants like that they don’t have to pay for a large conference room,” Dietrick said. “They love the idea of a gym.”
Despite ADP’s looming departure, Dietrick said he does not think the space will stay vacant for long.
The flight of suburban tenants to downtown areas, such as Allentown, is certainly a factor that affects the success of the suburban office market. However, brokers say the effect is not entirely negative.
IMPACT ON RENTS
The loss of tenants moving downtown directly affects only a few property owners, Skeans said. However, it has an indirect effect, Skeans said. When a large block of space becomes vacant, it absorbs demand that otherwise would have pushed up market rent, he added.
“If it wasn’t for the downtown, I would think we would have had a 3 to 4 percent increase in rents year after year,” Skeans said.
According to CoStar’s recent office market report, a number of tenants have left behind large chunks of vacant space in existing suburban properties after leasing space in new projects, which are able to charge highly competitive rental rates thanks to tax incentives, such as City Center in downtown Allentown.
Many of the new leases in downtown Allentown are coming from tenants consolidating suburban offices in properties that may prove hard to refill, creating pockets of vacancy, according to the report.
Skeans said tenants will fill these properties but it will take some time.
“Large blocks of space also have a tendency to pull new tenants to the market and make room for local companies to expand and consolidate… not everyone wants to move downtown,” Skeans said.
SUBURBAN BENEFITS
The location of employees also plays a role, particularly if many already live in the suburbs.
Employers looking at the suburban office market often ask about employee drive times, Berfield said. They want to know how far the majority of their employees need to drive to get to work and that could influence their decisions to move.
One benefit to a suburban office is ease of access, according to Skeans.
“A lot of companies have a lot of people coming and going all the time,” Skeans said. “A downtown parking garage is not conducive. That’s the other thing; downtown tenants pay an extra $3 per square foot for parking.”
In general, brokers say suburban office tenants like the ease of parking and proximity to on-site food services as well as modern shared conference spaces and amenities such as gyms and outdoor walking paths that some large corporate office buildings provide.
Signage opportunities are another benefit for some businesses looking for the ability to put their company name on the front of a building. That type of benefit is less likely to be available in an urban office building.
THE GROWTH CONTINUES
Other suburban areas show growth, too. The office market in the Saucon Valley area is robust and, because of limited supply and location, rents there are about 20 percent to 30 percent higher than in the rest of the valley, Skeans said.
Still, the increase is not enough to spur developers to build new office buildings in the suburbs.
“Currently, non-medical office leasing rates don’t justify new construction in the absence of some form of subsidy,” Skeans said. “In most Lehigh Valley submarkets, net rents need to increase 40 percent before we will see speculative office construction.”
As a whole, the Lehigh Valley office market, including both cities and suburbs, is using more office space year over year, he said.
