The pandemic year left few bright spots across commercial real estate sectors, but industrial was one of the exceptions. This was especially true in Pennsylvania, Lee & Associates principals John Van Buskirk and Brian Knowles note, as the shift to online commerce accelerated last year’s new normal. GlobeSt.com talked with the two of them about the Keystone State’s latest star sector.
“The bottom line is it was a record year for 2020 as it relates to industrial,” said Knowles, with most activity having occurred from Central Pennsylvania down to Philadelphia and up through the Lehigh Valley to Scranton. “There really were a lot of positives: impressive absorption, big deals and companies coming in, and a lot of jobs created. It was really, really good stuff.”
Not surprisingly, e-commerce growth fueled much of that activity. Lee & Associates reports that the growth rate of that industrial segment more than tripled from 2018-2019 to 2020-2021, to 44 percent. And that’s not just Amazon’s abundant ambition as competitors Walmart and Target have both been active in Pennsylvania, and smaller companies looking to enter or compete in the fulfillment space have also been taking down space.
“E-commerce activity as a part of overall retail sales has been growing on a linear basis for years, but we saw a meaningful acceleration of that trend and its impact on demand for space over the course of 2020,” Van Buskirk said. Statistics released by the U.S. Census Bureau in February, 2021 bear that out, with US e-commerce sales for 2020 increasing by an estimated 32.4% over 2019 levels. Van Buskirk went on to add that “all that demand hit the industrial space market while inventories were already pretty low, leading to significant rent growth and a growing shortage of space.” Knowles and Van Buskirk also noted other by-products of the surge in e-commerce activity have included challenging increases in employee and delivery vehicle parking requirements, and rising construction costs as competition for steel and other building commodities grows.
Lee & Associates, which is currently expanding into the Pittsburgh market, has an eye on Pennsylvania’s industrial construction wave, with much of the approximately 35 million square feet in the pipeline having been delayed by COVID-19. According to Knowles, once that space comes online over the next six months – and a fair amount of it has been preleased – rolling construction levels “will really drop considerably. Going into the third quarter, we’re going to be in a different place and it’s going to continue to drive lower vacancies and higher rents.” Some relief may be on the way – Lee & Associates is tracking more than 200 million square feet of engineered concepts, actively proposed plans, and fully entitled projects queueing for future deliveries.
The sector’s momentum extends beyond distribution and fulfillment. “We’re beginning to see signs of a resurgence in manufacturing activity, including companies looking at new facilities in the northeast part of the state,” Van Buskirk said. “It’s not only more of the same, but it’s more new stuff as well. And it’s presenting itself in the form of record high demand levels.”
Charles Dickens may have identified with Pennsylvania’s current CRE market as the industrial sector gives off a “best of times” glow, especially when compared to office and retail. Van Buskirk reported that many retail and office investors are diversifying into industrial product.
“It’s unbelievable the number of responses you get if you have an industrial site or building to sell. It’s just off the charts,” he said.
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US Census Bureau Release: //www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf