Commercial real estate market pulling back to more manageable levels

Continued high construction costs and rising interest rates have had an impact on what has been a red-hot commercial real estate market in Eastern Pennsylvania. 

But Mark Chubb, senior managing director for Colliers, said that’s no reason to panic. In fact, he said the slight slowdown in new construction and the minor reduction in tenants seeking space, should mean a more balanced and manageable market. 

It is, however, remarkable, he said. 

“It’s obviously an unprecedented time,” Chubb said. “A lot of things have changed very quickly in a very short period of time.” 

He said the commercial real estate investment market has faced “unprecedented headwinds” over the past 90 to 120 days. 

He said expenses have had a significant impact on the value of land for speculative construction with developers having to underwrite higher rate terms. 

“Most of the cost equations are fixed in development. Land is the big variable,” he said. 

Land prices have dropped significantly, down about 30% to 40%  over the last few months depending on the region. 

“It’s still at historic highs, but a lot lower compared to where we were 12 months ago,” he said. 

The market is still strong, he said, according to Eastern Pennsylvania and Greater Philadelphia and Southern New Jersey Industrial Big Box Research and Forecast Reports there was a 7.3% year to date market growth along the I-78/I-81 corridor with 6.3 million square feet of occupier transactions. 

He said occupier demand, meanwhile, remains relatively strong with the Lehigh Valley being the preeminent market followed by Central Pennsylvania and Northeastern Pennsylvania. 

“But it’s dropped to the activity levels we were seeing in 2018-2019, which was very strong, just not the hyperactivity we saw in 2020-2021,” he said. 

Chubb said he still sees the regional market as healthy, noting most areas are still boasting a vacancy rate of under 5% with the average vacancy rate along the I-78/I-81 corridor at 2.2%. 

In the Lehigh Valley the vacancy rate is 2.7% and is about 4% in Berks.  

The tightest market, currently, is in Central Pennsylvania where the vacancy rate is tracking closer to .8% in some areas. 

However, he said because of the volume of growth in Dauphin and surrounding counties along the I-81/I283 corridor, he expects the vacancy rate to loosen up over the next year or so. 

Despite what he said was a slight decrease in demand, from the peak of 2020-2021 market, he said there is still a healthy demand in all regions. 

“There are multiple occupies looking at each available space at any given time,” he said. 

That means rental costs will continue their upward trend. 

Currently, the average rent for industrial properties in the outlying areas of the Lehigh Valley is $9.66 per square foot. It grows to $10.12 per square foot in the Lehigh Valley’s core. 

Heading west does bring lower rent. In the Berks County region, the average rent for industrial space is $7.95 per square foot. In Central Pennsylvania the average rate is $7.46 per square foot along the I-78 corridor and $7.60 per square foot along the I-81 corridor around York County.