CBRE report: demand for commercial real estate remains high, prices rise in 2020

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Despite the pandemic, or in some ways even because of it, commercial real estate demand was strong along the Pennsylvania I-78/I-81 corridor, exceeding the demand over the prior year and driving up commercial real estate leasing rates to record highs.

A report issued by CBRE on the corridor showed a 13.2-million-square-foot net absorption in the market in 2020 as compared to 10.7 million square feet in 2019.

It also showed a strong demand for logistic, light manufacturing and food manufacturing in the region, with properties in the Lehigh Valley region showing the highest demand.

“I think overall it was a very strong year,” said Bill Wolf, executive vice president out of the firm’s Allentown office.

Wolf said that while the COVID-19 pandemic significantly impacted trends in commercial real estate, the growth has been on trend.

“For the last couple of years there has been steady growth in the Lehigh Valley and Northeast Pennsylvania in general,” he said.

While some sectors, such as retail and office, did see a decline, Wolf said the increase in demand in the other sectors improved the overall picture. And while office has been down, demand picked up towards the end of 2020, a trend he expects to continue into 2021, especially in the life sciences field, which has expanded steadily into the Lehigh Valley market from its traditional hub in the suburban Philadelphia region.

Overall, the corridor had a boom in development activity with more than 9 million square feet entering the pipeline replacing the 5 million of completed construction projects in the fourth quarter of 2020.

Among the projects is the 5.5 million-square-foot River Pointe Commerce Park in Northampton County, which received approvals to begin construction on what will be the largest industrial development site in the Northeast.

Construction on that project is slated to start in 2021.

The explosion in ecommerce and logistical changes made to offset weaknesses in the supply chain led to the biggest demand for commercial real estate. Retailers now want to keep at least a 180-day supply inventory on hand, which means a need for more warehousing and logistics centers, Wolf said.

Because of its access to interstate transportation and proximity to major markets like New York City, the demand has been strongest in the Lehigh Valley. The Lehigh Valley logistics market made up nearly half of the overall demand across the I-78/I-80 corridor with more than 6 million square feet in net absorption. Not only has that led to more light industrial and logistics building construction, it is pushing leases into Berks County, the Poconos and Central Pennsylvania as companies search for available and affordable property, he said.

For example, there are commitments of 3.8 million square feet from an undisclosed prominent retailer, 1.1 million square feet from Lowes, and nearly a million square feet from FedEx, all originating in Central Pennsylvania. Overall, Central Pennsylvania recorded a large uptick in leasing activity up 13% over 2019.

Because inventories are low and demand high, the average asking lease rates are up, especially in the Lehigh Valley market, which is the tightest along the corridor. Since the start of the pandemic, lease rates increased more than 12% up through fourth quarter of 2020, with the Lehigh Valley market recording a new high average asking rate of $6.29 per-square-foot for Class A warehouse space, Wolf said.

CBRE Research expects average asking lease rates to continue to grow into 2021.

While logistics saw a lot of the activity in 2020, Wolf said the food and beverage industry was also a major contributor to commercial real estate along the corridor, especially in the Lehigh Valley.

“Dr. Pepper brought in a plant. There’s Ocean Spray. We also saw two new aluminum can manufacturing facilities under construction,” Wolf said.

In fact, he said, much of the demand in that sector has been driven by support industries for products like food and beverage packaging, such as bubble wrap. “It all must go hand in hand,” he said.

More industry has also led to higher wages, with many light manufacturing jobs starting at between $17 and $20 per hour. Berks County has been slower to appreciate that, he said.

“There has been a perception that there just aren’t enough skilled workers in manufacturing in that area,” Wolf said.

Economic development officials have said, however, that is changing and the demand is driving up wages in the Berks region.

Heading into 2021 Wolf said he sees land approval as the biggest impediment to commercial real estate development and many projects are simply waiting for municipal approval until they can move forward.

“There’s definitely enough demand out there” he said.