Industrial rents hit record levels even as market cools on I-78/I-81 corridor

Following a slowdown in the fourth quarter of 2022, the I-78/I-81 corridor saw an uptick in leasing activity for the first quarter of 2023. 

Commercial Real Estate firm CBRE put out its quarterly report on activity along the quarter, which said that leasing activity along the corridor topped 6 million square feet while overall net absorption tallied more than 7 million square feet of occupancy growth, the fourth highest quarter on record.   

Still Bill Wolf, vice chairman of CBRE, said the region’s commercial real estate market appears to be normalizing. 

“Overall demand is still strong, but it’s come down to more pre-pandemic levels,” he said. 

Rather than rushing to beef up their supply chain, Wolf said many companies are looking to see where sales are heading before making investments in warehousing, logistics or manufacturing, which is lowering the demand for space. 

The Lehigh Valley trailed Central Pennsylvania and Northeastern Pennsylvania with a lower net absorption of commercial real estate space. 

In fact, Northeast Pa. claimed most of the positive absorption during the first quarter of 2023, tallying 4.3 million square feet.  

Meanwhile, Central Pa. and the Lehigh Valley posted significantly less absorption than in recent quarters as supply remained severely limited, especially within the 1 million sq. ft or greater range, where only two options were available in existing buildings.  

Three leases greater than 1 million square feet were signed during the first quarter of 2023, accounting for half of all leasing activity. 

While the numbers may be down, Wolf said, “It’s a good thing,” and such a normalization is simply part of the cycle and helps keep the market under control. 

That doesn’t mean rent prices aren’t continuing to skyrocket. 

While still a relative bargain compared to other surrounding major metropolitan areas, rents continue to climb in the region. 

The average rent for all classes across the corridor is close to $8 per square foot, the highest ever. 

For the most in-demand properties close to major transportation arteries, Class A industrial space is leasing for closer to $10 to $15 per square foot, Wolf said. 

While demand for space is down, construction of new facilities is also down along the corridor, which will keep the market competitive. 

Construction starts have stalled as a combination of rising construction and debt costs eroded returns on rent assumptions.  

Also, there has been a pushback from municipalities against warehouse development, further stalling efforts to add stock to the supply-restricted industrial market throughout the corridor.  

For a third consecutive quarter, Wolf said, starts totaled below 2 million square feet, which is far less than the average 5.4 million square feet that broke ground since the start of the pandemic.  

He noted that a year ago, active construction projects totaled more than 40 million square feet, but has since dropped to 16.8 million square feet. 

As a result, Wolf said, CBRE is predicting that the I78/I-81 corridor will remain supply constrained during the remaining portion of 2023, which will further drive up rent prices.