Jared Jacobs, Cushman & Wakefield research manager, Philadelphia office

PHILADELPHIA, PA—The market for industrial property tightened in the third quarter as industrial real estate vacancy declined in Philadelphia, but the continued frenzy of speculative construction along the PA I-81 and I-78 Corridor in the Lehigh Valley region led to an increase in vacancies there, according to Cushman & Wakefield's third quarter 2017 industrial real estate analysis.

In the Lehigh Valley, 1.5 million square feet of speculative construction added during the third quarter remained largely vacant, says Jared Jacobs, Cushman & Wakefield's Philadelphia research manager.

“Both the Philadelphia Metropolitan Area and the industrial, warehouse and manufacturing markets along the major Interstates of I-81 and I-78 continue to benefit from job creation in the Pennsylvania economy,” Jacobs says. He points out that the statewide unemployment rate declined by 60 basis points over the past year to 4.9 percent.

“Philadelphia's manufacturing index has been positive for 14 consecutive months and rose 4.9 points to 23.8 in September,” he says.

Overall vacancy for industrial property in the Philadelphia Market ended the third quarter at 3.4 percent, down 150 basis points from a year ago. The market includes six Pennsylvania counties as well as Philadelphia, three southern New Jersey counties and northern Delaware. Overall asking rental rates declined slightly, 1.3 percent, in the past year to $4.59 per square foot for all industrial property types. “Strong activity in class A facilities is leaving more class B and C product available for lease, which is dragging the overall rental rate average down,” Jacobs says. “Still, the Philadelphia market absorbed 4.6 million square feet year-to-date in 2017, even with 2.7 million square feet of new construction this year.”

The southern New Jersey market, with both Burlington and Gloucester counties already topping one million square feet in total year-to-date leasing, led the region in both leasing and new construction. Major Philadelphia Market transactions in the third quarter included:

Amazon signed the largest lease, taking 652,411 square feet being built at 240 Mantua Grove Rd. in West Deptford, Gloucester County, for fall 2018 delivery.
In Burlington County, PFG Customized Distribution renewed for 127,340 square feet at 500 Highland Drive in Westhampton.
National Powersport Auctions leased 112,000 square feet at 2578 Pearl Buck Rd. in Bristol for the Lower Bucks County submarket's largest deal in the third quarter.
Prologis executed the largest investment sale of the quarter with its sale of the 936,000-square-foot warehouse and distribution center at 3000 AM Drive, in Quakertown, to WPT Industrial REIT for $74.3 million or $79 per square foot.

Two-thirds of the 7.1 million square feet of speculative industrial space delivered to the PA I-81 and I-78 corridor this year remained vacant at the end of September, including much of the 1.5 million square feet that came onto the market during the third quarter. “The vacancy in that new space is the primary reason that year-over-year overall vacancy has increased 140 basis points to 5.3 percent,” Jacobs says. “Still, rent growth remains strong in the PA I-81 and I-78 industrial market, increasing by 5.5 percent year-over-year to $4.76 per square foot. Lehigh Valley produced the largest increase with asking rents, up 11.8 percent, to an average rate of $5.31 per square foot for warehouse and distribution space.”

The Lehigh Valley submarket leads in construction, with nearly 5.8 million square feet. Leasing activity has been strong in all three PA I-81 and I-78 submarkets this year.

Central PA leads the region with nearly 6.3 million square feet of new leasing activity this year, including the largest lease of the third quarter when Syncreon signed for the one million square-foot building under construction at 100 Goodman Drive in Carlisle.
The Northeastern PA submarket's year-to-date leasing activity of 4.5 million square feet already surpassed 2016 totals and is on pace to top the previous annual high of 4.6 million square feet in 2007. American Tire leased 1 million square feet under construction in the Northeast Logistics Center in Tobyhanna for the quarter's largest lease.
XPO Logistics signed the Lehigh Valley submarket's largest lease of the third quarter for 628,475 square feet at 1611 Van Buren Rd. in Easton.

The largest investment sale of the third quarter took place when Northpoint Development acquired Endurance Real Estate Group's portfolio of 544,975 square feet of warehouse-distribution space in Northeastern PA for nearly $30.1 million, or $55 per square foot.

Cushman & Wakefield's Philadelphia research team forecasts asking rental rate annual average growth of 1.7 percent for the next five years in the Philadelphia industrial market. In the short-term, however, the delivery of more than 1.1 million square feet of speculative space probably will cause overall vacancy to rise for the next six to nine months. Meanwhile, the researchers also forecast healthy construction activity continuing throughout the PA I-81 and I-78 market with 14.3 million square feet under construction set to deliver over the next year.

Instant Insights /

Industrial Vacancies Falling in Philadelphia, Spec Builds Up in Lehigh Valley

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