Commercial real estate market cooling, but still strong along I-78/I-81 Corridor

After about two years of record setting growth, commercial real estate firm, CBRE is reporting that leasing activity slowed within the PA I-78/I-81 Corridor logistics market in 2022, posting as little as half of 2020’s total.  

Still, Sean Bleiler, executive vice president out of CBRE’s Allentown office, said the market remains healthy. 

“Overall, the commercial leasing market remains very strong. There is still a lot of corporate demand for both leasing and purchasing,” he said. 

While the overall number of businesses seeking space in the market was down compared to the two prior years, he said a lack of supply added to the slowdown in activity.  

New construction is down slightly, but again, he emphasized it wasn’t due to lack of demand. 

“Interest rates are really the only thing that is slowing down development,” he said. 

Bleiler said he expects higher interest rates will impact new construction over the next several quarters. 

“It’s just put the cost level to the point where it might not make sense to put the shovel in the ground right now.” 

For the past two consecutive quarters construction starts totaled under 2 million square feet. Bleiler said that is a level not seen since the second quarter of 2018. 

The report showed 27.5 million square feet of commercial space remained under construction at the end of 2022, only 24.0% of which was already pre-leased. 

Because of the speculative construction projects being completed without tenants, the vacancy rate ticked up slightly as construction completions outpaced net absorption. 

The average vacancy rate along the corridor is currently at 4.3%, up from its most recent low of 3.5% posted in the second quarter of 2022. 

Bleiler noted that the vacancy rate remains well below the 10-year average of 7%. 

And in some ways those vacant properties are good for real estate developers. 

“Tenants like options,” he said. “They don’t want only one or two options in their price range.” 

He said any building that is up right now is seeing activity and interest and he expects in the short-term demand will still outpace future supply. 

Interest in the region is still coming largely from transportation and logistics companies, particularly third-party logistics providers, but they’re also seeing strong interest from light industrial tenants, particularly food manufacturers. 

Because of the higher vacancy rate rents have slowed from the rapid increase they’ve been seeing in recent years. 

According to the report After rising an average of 5.7% quarter-over-quarter since the fourth quarter of 2019, Class A rent increases have slowed.  

While Bleiler said year-over-year growth remains strong at 6.3%. Only the Northeast Pennsylvania region managed to avoid a regression in its Class A rents with an average of $5.04 cents per square foot. However, that region’s rents still remain far below Central Pennsylvania at $6.03 per square foot and the Lehigh Valley at $7.68 per square foot. 

Currently, he said Central Pennsylvania is leading the region in growth. Over the past six months the market has grown at a much faster pace than the Lehigh Valley, which has less available space and higher rents. 

Overall, the report shows that demand is expected to persist in the short term, driving continued positive absorption while some vacancy growth in the form of new construction may provide some needed supply reserves to the market.