As expected, commercial real estate activity along the I-78/I-81 corridor ended 2021 by smashing records.
The year-end report by CBRE showed that overwhelming demand and extremely limited inventory for commercial real estate in the region drove up rent prices and spurred new construction activity.
According to the report, occupancy grew by more than 27 million square feet during 2021, well above the previous historically high mark of 17.2 million square feet set in 2014.
Overall vacancy hit its lowest point in recent years, because of the lack of available modern, Class A existing warehouse space.
Because of that, the construction pipeline grew to 32.2 million square feet by the year’s end.
Also, average asking rents grew by more than 12% over the year because of the high demand and lack of supply.
Bill Wolf, executive vice president with CBRE, said the lion’s share of the demand was for warehousing and logistics space, with third party logistics centers having the highest demand.
Overall, he said third party logistics providers, e-commerce and wholesalers made up 75% of all commercial real estate activity in the region.
“It’s all consumer good driven,” Wolf said.
He said driving the demand was retailers desire to have “safety stock” — more inventory than they would normally keep on hand – in response to supply chain issues caused by the COVID-19 pandemic and other disruptions.
As tenants absorbed more space across the corridor, vacancy hit a record low of 4.3%, a 280-basis point decline year-over-year.
Wolf said he expects the demand to continue through 2022 and for rents to continue to rise.
He said that may cause sticker shock for some tenants whose leases are coming up for renewal this year.
“Rents could double, we’ve seen that,” Wolf said. “There is an education process. It’s just where the industry is going, but no one has ever seen increases like this.”
Wolf said the I-78/I-81 corridor’s proximity to large population centers in the Northeast has kept it as a booming area.
Regions like the Lehigh Valley, Berks County, Central Pennsylvania and Northeastern Pennsylvania are still accessible enough to ports in New York and Philadelphia, but provide a relative bargain compared to the rents in areas closer to the ports, and despite the low vacancy rates, still have a better supply of available or potential sites.
He said the Lehigh Valley region is still in the most demand, but other areas of the corridor are picking up steam.
“Berks County has grown on a larger percentage basis than the Lehigh Valley because of some of the new construction there,” he said. “Berks is becoming more of a known entity rather than a pioneer market.”
While he said sticker shock is likely to be an issue for commercial real estate tenants, Wolf said he doesn’t expect the higher rents to have too great of an impact on consumer prices.
“In the overall scheme of things, rent doesn’t have that dramatic of an effect on the price of things,” he said.
Still, he said those planning for new space should keep in mind the state of the market and prepare for the added expense and greater competition for space.
The competition for space may not be getting any easier in 2022.
Of the construction underway at year’s end, 41.6% was pre-leased. Among the industrial markets in the Northeast US, the PA I-78/I-81 Corridor led the way in construction activity, claiming more than half of all new development underway in the region.