Commercial real estate experts were expecting 2020’s industrial development boom to continue, but Mike Hess, senior vice president of CBRE in the Harrisburg office said industrial development along the I-78/I-81 corridor was even stronger than expected during the first quarter of the year.
The corridor, which runs through Central Pennsylvania, Northeastern Pennsylvania and the Lehigh Valley is literally busting at the seams and is growing rapidly with new construction projects to meet the demand.
According to the most recent CBRE market report vacancy rates are down to a low 6.3% and the absorption rate was high.
“There has been more than 3 million square feet of net absorption so far this year,” Hess said.
With 13 million square feet of space absorbed in all of 2020, “the Lehigh Valley, Northeast and Central Pa. are very well on to track to meet or exceed that.”
In response to an uptick in demand during 2020, developers grew the construction pipeline to 18 million square feet. Specifically, Central PA and the Lehigh Valley recorded over 3.2 million sq. ft. in new construction activity.
He expects that to be snapped up quickly by light industrial and logistics tenants, noting that even as construction increases, absorption rates have been keeping up with the rate of construction over the past several years. In 2015, for example, he said there was 8.4 million square feet of industrial construction with 7.9 million square feet leased out.
“It’s almost, to the square foot, balanced what gets built to what gets absorbed,” Hess said.
And while all that growth sounds great for the economy, it does have its drawbacks.
“We are going to be in the position where we are undersupplied,” he said.
The majority of sites that are good for development are already underdevelopment, and most likely already have tenants lined up, he said.
That has increased speculative development significantly.
Basically, to meet the pace of demand, developers can’t wait for a tenant to come to them. They need to have inventory ready so tenants can move in on the faster timetable that the market demands.
“You have to get out there and take a risk on the market, and those who have done it have been rewarded,” he said.
Even as the sector moves into the second quarter of the year, new projects are entering the pipeline.
“This whole region has turned out to be a spec market. If you build it they will come,” Hess said.
But for those companies looking to locate manufacturing or logistics facilities along the I-78/I-81 corridor – prices are skyrocketing. Just over last year, rents across the board have risen 20% to 25% going from an average of about $4.50 per square foot to about $5.50 and he expects rents to continue to trend upward.But, he said, it isn’t just a money grab, construction costs are also rising dramatically.
With the scarcity of land, commercial real estate space is selling for almost $40 per square foot right now, compared to only $20 per square foot in 2020.
Materials are also more expensive and harder to come by. In the competitive steel beam market prices are about $16 per square foot, $2 more than last year and there is a 40- to 50-week lead time on orders. Developers need to order what they need in advance so they have the materials in place in time for the start of construction. “Because of all these factors, new projects are going to have to have higher rentals,” he said.
With the high demand for such space developers and tenants are willing to pay the higher prices. “Industrial has become the new retail,” Hess said, and companies in apparel, consumer goods and food are looking to have production and distribution in the region.
Investors are also willing to pay the price.
The report said even though overall capital markets activity cooled slightly in the first quarter of 2021, it still generated more than $100 million in investment activity, and 2020 ended the year achieving nearly $1 billion in total capital markets activity.