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Developers ramping up to meet strong e-commerce-driven demand

Gerry Blinebury Jr.

The construction activity in the Interstate 81/Interstate 78 corridor and Philadelphia submarkets continues as the lead story for the eastern Pennsylvania industrial market in 2015.

With nearly 6 million square feet completed so far this year and another 12.2 million square feet underway, developers are tapping the pipeline of land development opportunities to meet strong, e-commerce-driven demand.

Of that total, 8.1 million square feet are speculative product, reflecting strong confidence in a market that always has benefited from superior location and infrastructure, and now has become a hot spot for e-commerce retailers and logistics firms servicing the e-com sector.

On a percentage basis, the increase in regional activity related to e-commerce exceeds the national trend. Where e-commerce activity accounted for 30 percent of U.S. industrial occupancy gains in 2014, it represented 50 percent of the absorption in eastern Pennsylvania.

Both the I-81/I-78 and Philadelphia markets experienced respectable leasing activity during the first half of the year. And while the influx of new inventory has bumped up vacancy rates on a temporary basis, the entire region remains extremely stable.

We anticipate that 50 percent of the speculative development underway will be leased prior to completion.

I-81/I-78 CORRIDOR OVERVIEW

Year-to-date leasing in the I-81/I-78 corridor, at 3.3 million square feet, compares to 3.6 million square feet at mid-year 2014.

The largest transactions of the second quarter included deals in each of the submarket’s three regions. This included NFA’s 615,000-square-foot commitment at 1 Industrial Drive in Mount Pocono (Monroe County), B. Braun Medical Inc.’s 500,000-square-foot renewal/expansion at 200 Boulder Drive in Macungie (Lehigh Valley) and Genco Distribution’s 489,000-square-foot renewal at 221 S. 10th Street in Lemoyne (Central Pennsylvania).

The overall vacancy rate in the Lehigh Valley, where nearly 2 million square feet of new speculative product were delivered during the second quarter, increased from a record low of 2.6 percent in the first quarter of 2015 to 5.1 percent today.

Northeastern Pennsylvania’s overall vacancy increased from 8.7 percent in the first quarter to 9.7 percent in the second quarter.

And the overall vacancy rate for the central Pennsylvania submarket increased to 3.4 percent, up only 10 basis points from last quarter.

Direct-asking rental rates increased by 9.8 percent over the past year in the I-81/I-78 industrial market to $4.11 per square foot for warehouse and distribution space. The climb can be attributed to the almost 5 million square feet of new spec product that were delivered over the past 18 months.

PHILADELPHIA OVERVIEW

Leasing activity in the Philadelphia industrial submarket, totaling 5.9 million square feet at mid-year, rose by nearly 50 percent year over year. The largest lease of the second quarter was signed in Montgomery County by Lagasse Inc., involving 636,000 square feet at 125 Green Tree Road in Oaks.

In southern New Jersey, H&M signed the largest lease of the quarter for a 545,500-square-foot, build-to-suit at 1 River Road in the Burlington Industrial Park. That project is expected to break ground during the second half of 2015.

Year-to-date construction completions in the Philadelphia industrial submarket, at 1.5 million square feet, represent the most at mid-year since 2009. Roughly 60 percent of the additional 3.7 million square feet under development is scheduled to deliver within the next 12 months.

As a result, the overall vacancy rate for the Philadelphia industrial market has increased to 6.2 percent – up from 5 percent at mid-year 2014. Direct-asking rental rates for warehouse and distribution space declined marginally over the past 12 months as well to an average of $4.17 per square foot (a 1.9 percent drop year over year).

LOOKING AHEAD

This positive trending will continue through the remainder of this year and beyond.

One emerging shift worth watching involves the volume of Class B and C redevelopment.

To date, land and ground-up development opportunities have kept a similar pace to redevelopment plays. However, with so few land investment opportunities being offered to the market, capital placement has become challenging.

Increasingly, investors are buying older properties and converting these same older properties for modern use.

Gerry Blinebury Jr. is executive director of brokerage services at Cushman & Wakefield in Harrisburg and whose coverage area includes the Greater Lehigh Valley. He can be reached at gerry.blinebury@cushwake.com and 717-231-7291.

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