Yesterday I presented an update on the Phase I ESA market at our Philadelphia DDD event, just days away from the end of the first quarter. On a national level, market barometers paint a promising near-term forecast for commercial real estate deal making with an equal mix of optimism and caution. On a metro level, the Philadelphia market has a number of factors working in its favor. Here are a few highlights:
- E-commerce is reshaping commercial real estate. Retail closures are at their highest point in seven years. The “Age of Amazon” is shifting investment away from traditional retail stores and toward distribution centers and warehouse properties. The forecast calls for an increase of 20 percent in demand for sites that support e-commerce. Multifamily has been the darling of this recovery, but the industrial sector is knocking it off the top seat as the preferred asset class of investors.
- Lenders’ risk aversion remains high. Pressure from federal banking regulators last year made banks more conservative in real estate financing with the added element of transitioning to a rising interest rate environment in 2017, along with growing concern about the timing of the next downturn. On a scale from 1 (very tolerant of environmental “red flags) to 5 (very risk averse), environmental consultants across the U.S. rate their lender clients as a relatively conservative 3.54.
- Pennsylvania’s Phase I ESA activity contracted in 2016. Consistent with overall trends in commercial real estate, Pennsylvania had a less robust 2016 than 2015 with Phase I ESA volume falling by five percent. In nearby New Jersey, Phase I ESA volume in 2016 was stronger, running fairly even with 2015. On a metro level, northern New Jersey and Philadelphia are the 7th and 8th largest Phase I ESA markets in the U.S., respectively. Northern NJ had an active end to 2016, with 10% growth in Phase I activity in the final quarter above 4Q15, while Philadelphia was relatively flat.
- Pressure on environmental professionals to deliver Phase I ESA reports quickly is more intense than ever. Interestingly, pressure for fast turnaround time has surpassed pricing pressure, according to our DDD surveys. Some firms are even charging a premium for faster turnaround times as they look for creative ways to help clients meet tight deadlines in this generation of “now” up and down the chain in real estate.
- There’s generally good news in real estate over the near-term. The pace of growth is slowing, but provided property fundamentals stay solid, demand for Phase I ESAs in 2017 are expected to run even with 2016 levels, with more growth in hot spots like San Antonio, Austin and Portland, barring an unforeseen global political or economic upset. With prices leveling out, the commercial real estate sector is entering a period of greater selectivity and elevated risk management as buyers recalibrate their expectations for future income streams amid a rising interest rate environment.
- Positive factors driving opportunities in the Philadelphia metro this year include:
- It is the 4th strongest Northeast metro behind Boston and NYC.
- …and the 8th hottest industrial market in the US (14th retail market and 17th office market)
- The metro is getting a longer look from national market participants as a lower-cost alternative to other East Coast markets.
- The area’s educated workforce, diversifying industry base and presence of universities and research centers all contribute to its positive forecast.
Thanks to everyone who joined us at the Philadelphia DDD and shared their insights. Hope to see you at a future event!