Industrial market sees slowdown, expected to pick up in 2025

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The Lehigh Valley industrial market slowed during the first half of the year but is expected to pick up again as interest rates are expected to fall and the election concludes. 

Heather Krieger, regional research director for Lee & Associates, said the company’s Regional Industrial Market report shows the slowing was due to high interest rates and a readjustment to the post-COVID market. 

“After COVID, there was a huge demand for industrial space as tenants looked for more space to meet consumer demands,” she said. “When demand started to decline, they gave space back or subleased it. Demand in the last four quarters unraveled.” 

The report shows in Lehigh Valley, vacancy rose to 91 base points and net absorption was negative for the second straight quarter. Contributing factors include declining demand (down for the 3rd straight quarter), a growing set of sublet vacancies, and a lack of preleasing on new construction deliveries.  

Kreiger said the larger spaces are of concern. Fully 70% of the 10 million square feet of vacant space is in blocks of 500,000 square feet or more with six of those spaces sitting empty for the last four quarters or longer in some cases.  

Only one new lease in the second quarter came close to that size, at 469,259 square feet (Carbel); the other four new leases during the quarter totaled just 216,622 square feet, the report shows. 

 With rolling construction levels well below three-year and five-year averages, it could quickly tighten with a return to historical net absorption patterns. 

Kreiger said construction has decreased from a high of 11 million square feet in 2021 to just 2.5 million currently under construction. And there is 41.1 million square feet of vacant space, an increase from about 20 million square feet in 2021. proposed projects which have dropped from 41.4 million in 2021 to just 10 million now.  

“Central Pennsylvania and Lehigh Valley are targeted as excellent markets. We look at properties under construction and our magic ball shows that the slowdown will give the market time to absorb what is available,” Kreiger said. 

The optimum structural vacancy rate is seven percent, she said.  

“Rental rates will continue to increase at that level,” she said. “We assume tenant demand will come back in 2025 when interest rates start to fall, and the election is over.”