Wednesday, November 17, 2021

Despite The Numbers, It Could Be Smooth Sailing for Harrisburg's Office Market

 By Ben Atwood CoStar Analytics

Over the past 12 months, real estate professionals from across central Pennsylvania have kept a wary eye on Harrisburg's office market, waiting with bated breath for the signs of strain seen in so many cities across the country to appear in the state's capital city.

To an outsider, it might look as though those cracks surfaced in the first quarter of 2021. The market has posted negative net absorption, meaning more tenants vacated space than took occupancy of, for three straight quarters, and annualized net absorption is over 500,000 square feet in the red.

Harrisburg's problems were further compounded in September. That month, in the span of two weeks, both Rite Aid and Harsco announced they would be relocating their corporate headquarters to Center City Philadelphia.

The two companies have deep roots in the area and their departures are certainly a stinger for the office market. Rite Aid occupies over 200,000 square feet of space, and the Fortune 500 company has been open on the fact that most of its corporate employees will be working out of Philly.

The loss of two major employers, plus the negative net absorption, certainly isn’t a good look. But in spite of all the dark prophecies floating around the future of the office market, it’s too early to panic.

In fact, despite those numbers, Harrisburg might still be the most stable office market in the state.

And that's largely because of the state.

"Anyone that deals with the government or gets funding from the government or need to interact with the government in some way, they still need to be here and that’s just not going anywhere," said Sarah Rietmulder Gates, portfolio manager at Linlo Properties.

Linlo is one of largest office owners in central Pennsylvania, and she told CoStar that her group was becoming cautiously optimistic about the sector’s future.

"Compared to our worst fear expectations and what we are reading and hearing about in other markets, our area isn't reeling in the same way," she said. "When it comes down to the straight numbers, Linlo's technically having one of the best years ever."

Gates said her firm pays close attention to renewal metrics, particularly lease term length. Those numbers fell in 2020, but she says they have normalized in 2021, with more tenants signing for leases at pre-pandemic lengths.

She also said that Rite Aid and Harsco's departure were not catastrophic events. Harsco only employed about 100 people in the area and Rite Aid wasn't entrenched in the local economy. In other words, it wasn't good, but its not like Hershey's is rolling out.

There's nothing cautious about Dan Alderman's level of optimism. Alderman is a broker at NAI CIR and has been active in the Central Pennsylvania real estate game since 1983. He says that 2021 has been a great year for him and his firm, and not just because it came after the mayhem of 2020.

"Our office market is just amazing right now; it's just been a fantastic year by any measurement," he said.

Now that's not a sentiment you hear every day from a Pennsylvania office broker. If fact, that take might be unique to Harrisburg.

Alderman also pointed out the region’s negative absorption numbers are mainly due to the closure of a few call centers and said he would not be surprised if office demand picked up quickly because of the federal infrastructure bill and pandemic-related relief funds.

That's an interesting thought, and one that could have ramifications for state capitals across the country.

If you are an entity in Pennsylvania and you wish to receive some of these funds, you likely need to convince someone in Harrisburg to give them to you. That creates an incentive for all industries across the entire state and beyond to have an office presence within this market.

So, despite the recent turbulence, it's still far too early to ring the alarm bells for Harrisburg office. Instead, this might be a market worth monitoring in the coming months.

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