The upcoming second annual Northeastern Pennsylvania Real Estate Summit, presented by Penn’s Northeast, will explore an economic development system that’s a far cry from the old business plan of just build a park and they will come.
John Augustine, Penn’s Northeast president and CEO, explained that the event is a formal sequel to the 2018 inaugural summit attended by nearly 200 business people. The 2019 version will focus on commercial, industrial and office markets, and explore growth and investment opportunities within the sectors of medical services, downtown development, housing, retail and office space, plus e-commerce and distribution.
“The forum will offer a true picture of the local regional and national real estate markets plus investment opportunities and the inherent processes, and one of our prime goals will be to answer development inquiries that repeatedly come up,” said Augustine. “In effect, this will allow us to see into our own backyard, plus into the neighbor’s backyard.”
Augustine explained that within the northeast urban industrial corridor, recognition is occurring that NEPA is the next profitable frontier for company expansion. Operating costs are steeply rising for commerce within urban setting, making NEPA a favorable target for operations as automation and superior electronic connectivity allow companies to operate in locations once thought of as unfavorable.
“Many talented kids coming out of school in NEPA still leave the region, and we must do a better job of showing them the opportunities that are here,” said Augustine. “When you add in the reality that NEPA manufacturing still has a relatively older workforce, many workplace opportunities are opening up, but we’ve got to retain our graduating talent.”
According to Augustine, one of the big values in attending a business forum, in addition to the educational possibilities, is the participation in networking among those present. This is vital if business people are to connect and learn how to overcome predictable challenges that always face developers.
He also commented that creation of a capable and pertinent workforce has now become one of the keys to economic expansion. The almost universal big push for four-year degrees must be supplemented by two-year technical educations, as tech and trade careers prove to both rewarding and satisfying.
“Remember, you can’t outsource a tech repair job to China,” said Augustine.
According to data compiled by Penn’s Northeast, the overall NEPA market has become fertile ground for commercial real estate developers. The six-county region is home to nearly 900,000 residents, and within a one-day drive resides almost one-third of the American population and one-half of the Canadian populace.
The NEPA populations has also been growing since 2000, and approximately 386,000 jobs now exist in the six-county region, with two-thirds of these located in Lackawanna and Luzerne counties. This market now sports an average unemployment rate of 5.6 percent, which is typically higher than within Pennsylvania and the national rate, but also has achieved a large decrease since the dark days of the Great Recession.
On the real estate front, more than 6 million square feet of buildings are under construction within NEPA. Since 2000, more than 41 million square feet of industrial space has been leased, with 2017 featuring 5.4 million square feet of new industrial leases.
Unlike many single-occupation markets, NEPA offers work diversity. Health care, employing more than 65,000 workers, is the busiest sector followed by retail with 48,000 employees and manufacturing with 42,000.
Education also is booming. Overall, more than 40,000 students are enrolled at the region’s 19 colleges and universities.
The warehousing and storage industry has quickly become a great success story. This NEPA sector is expanding at almost five percent per year, and has created approximately 6,600 new jobs during the past decade.
“During the last two years, due to market conditions and a lot of hard work, we have doubled the minimum wage in the NEPA-based distribution and warehousing industries,” said Augustine.
Capital gains opportunities
Bob Durkin, president of the Greater Scranton Chamber of Commerce, is scheduled to be a panelist at the 2019 forum. He zeroes in on a prime opportunity for commercial real estate investment using Federal Opportunity Zones (FOZ).
The FOZ program allows distressed tracts of land to be identified in a region, approved by Harrisburg, and then marked for special private investment. A vastly declining tax burden on capital gains is then available if the property is held as an investment for the long haul.
A variety of regions have been identified within NEPA as FOZ eligible. These include the boroughs of Blakely and Jessup plus tracts of land that wrap around Scranton’s downtown, creating an incentive for banks to be involved in investment and dollars to the distressed areas while potentially earning Community Reinvestment Act (CRA) credits from Uncle Sam.
“The FOZ process is now a prime tool to promote funding projects,” said Durkin. “We have various experts in place to assist with the process for investment, but we still need potential entrepreneurs to move forward.”
Durkin also is enthusiastic about “marrying” other investment possibilities with the FOZ opportunities. These include use of the Local Economic Revitalization Tax Assistance Act (LERTA), which promotes economic development by providing property tax improvement abatements for up to 10 years for improvements to industrial, commercial and business property.
“When LERTA is used, the land owner will still continue to pay their base taxes, so the county, city and school district lose nothing up front,” said Durkin.
Another forum panelist, Kevin Rogers, serves as community development lending and investing manager with PNC Community Development Banking, and has seen first-hand how the FOZ process can work. He cited the example of a stately 100-plus-year-old brick structure located within Bethlehem’s south side that hand been once used as an ice plant and for cold storage.
Lehigh University then utilized the building for a dry storage and maintenance facility. PNC became involved with a developer pursuing FOZ and the structure is now destined to house 30 apartments, plus retail and dining areas.
“The FOZ process creates a natural extension of our work,” said Rogers. “Here at PNC we have the pros to guide the lending and investment services, and we know each community’s needs.”
According to Rogers, availability of a program such as FOZ is not an automatic slam-dunk. Developers which are crucial to a project are historically attracted to larger housing and development opportunities, such as those involving $25 million and above, making it difficult to recruit those who would be willing to pursue more modest projects within officially distressed locales.
“Yet, we had the FOZ program deployed during 2018, and we’ve had four transactions so far,” said Rogers. “It’s also important to remember for a bank to receive that CRA credit, the project must be located within a low to moderate income area and upon completion benefit the community.”
Rogers cited another program, known as a Community Development Entity, as a good deal worthy of investigation by developers. This allows creation of a domestic corporation or partnership that serves as an intermediary vehicle for the provision of loans, investments, or financial counseling within low-income communities.
Ongoing changes to market conditions must be recognized within any commercial real estate plan, according to designated panelist Jeff Algatt, senior vice president with Collier’s International Global Real Estate Services. He cited the bustling health care arena as an example, where urgent care centers are now popping up is a wide variety of locations, including potentially within Walmart parking lots, and some analysts believe the nation is head for the existence of perhaps only five giant health care systems after consolidations.
As markets rapidly evolve, Algatt is urging financing professionals and developers to utilize a demand-side approach. Within this philosophy, instead of focusing on the supply of real estate listings, efforts are concentrated on identifying specific derivers for development, creating them and then attracting occupants to these factors.
“When a business wants to come to a region, automatic opportunities for commercial real estate development are created,” said Algatt. “This process is the opposite of a supply-side approach, where the buildings are first made available and then occupants located.”
Algatt is enthusiastic about the economy as it pertains to commercial real estate. His firm is forecasting continuing profitability for business in the years immediately ahead, and at worst only a slow-down of economic expansion will appear during 2020 as interest rates and market fundamentals continue to look favorable.
Additional market changes identified by Algatt as drivers within the real estate arena include the expanding use of automation and artificial intelligence, particularly within the distribution industry. These advances will cause great process and workforce disruption, while ending some jobs but also creating new opportunities for skilled workers.
“Identifying these market changes and then pursuing the opportunities being created are all part of a demand-side approach to development,” said Algatt. “These include the reality that health care management is now about cost cutting, market share, patient comfort and patient attraction, which in many ways are a big change from the way health care has traditionally been delivered.”