While the commercial office space real estate market remains challenging, John Susanin, senior managing director for Colliers, said there has been a bit of an uptick in activity, which he attributes to companies “rightsizing” their office space.
He said that the Lehigh Valley’s vacancy rate did experience a notable increase, rising from 19.6% to 21.4% during the second quarter of the year.
However, one of the significant office deals in the region was an example of that rightsizing.
PPL Corp. leased four floors at Two City Center, just down the street from its long-time corporate headquarters on Hamilton Street, which it is vacating.
The building they are leaving, the iconic PPL Tower has been put up for sale and is likely to be considered for redevelopment into apartments.
Similarly, there are plans for the 254,785-square-foot Grand Plaza at 835 W. Hamilton to undergo conversion into a mixed-use property consisting of apartments and retail spaces, with a few remaining floors dedicated to office use.
This transition from a purely office-oriented property to a mixed-use development will remove substantial blocks of office vacancy from the market
And that, he said, is where the vacancy rate will be impacted.
“There is a continued demand for Class A office space, but there is no new construction planned,” he said. “Because of that there will be a slow and steady absorption over the next several years.”
He said that while the vacating of office space during and after the COVID-19 pandemic was a factor in the stoppage of construction of new office projects, it wasn’t the main one.
While residential rental rates have been skyrocketing in recent years, commercial office space rents have remained stable. At the same time construction costs have risen dramatically, sometimes doubling.
That makes it harder for developers to justify the cost of construction, when the return may not be enough to generate a profit.
Susanin also sees a gradual return to in-office work.
“Certainly, the market has taken a step back, but many companies are pushing to return to the office at least part time,” he said.
While up until this point companies have been generally using the “carrot” technique to lure employees back to the office with offers of lunch or other benefits, Susanin said he is seeing that transform into more of a “stick” approach with companies demanding employees return to the office “or else.”
In the long term he said the result will be a lowering of the commercial office vacancy rate.