Report shows speculative development down in industrial market

A report examining the market in industrial growth for the third quarter showed a considerable drop in speculative development compared to last year.

In its research on the activity level of Pennsylvania’s Interstate 78/81 corridor, which includes parts of the Lehigh Valley, Berks County and Central Pennsylvania, CBRE said total spec construction starts for 2018 were at 15,109,356 square feet and 2019 year-to-date, CBRE is tracking 5,341,689 square feet of starts in the corridor. That represents a decline of about 10,000,000 square feet.

“The Lehigh Valley is still a great location and a lot of people are developing there,” said Vincent Ranalli, senior vice president at CBRE Inc. in Radnor. “As you get further west, I think that’s where they hit the pause button. We got off to a slow start but it picked up at the end. Now we have four or five deals out there, large scale tenants looking for space.”

Some of these potential tenants are with CBRE and some are with other firms, but Ranalli said he expects them to sign leases by the end of the year. These tenants are looking for space that’s 800,000 square feet or larger, he added.

“That will have an impact on which developers pull the trigger on the next spec building,” Ranalli said.

While a decline in spec development would signify there’s less demand for space and less confidence in the market, Ranalli said he sees evidence of strong demand based on interest from those tenants looking for large space, plus the continued strength of other types of tenants.

Those include food and beverage companies, automotive tire companies, e-commerce and companies that provide space for merchandise returns.

“More buildings are being set up to handle the volume of returns,” Ranalli said.

Generally, the growth of online shopping means companies want to be closer to the customers they serve, he added.

“We expect 2019 to finish strong just based on current activity.”

Companies typically sign leases toward the end of the year, he said.

The third quarter saw some significant transactions from large companies such as Keurig Dr. Pepper, which landed at Park 100 Logistics in Upper Macungie Township, Max Finkelstein Tire at exit 10 of I-78 in Myerstown and J.M. Smucker Co. at exit 37 of I-81 in Newville.

For the third quarter, the corridor saw occupancy gains of 2.2 million square feet, on par with the 2.1 million square feet of deliveries.

Construction starts totaled more than 3 million square feet as developers broke ground on new projects, mainly in Northeast Pennsylvania and the Lehigh Valley.

Now, the corridor has more than 17.3 million square feet of new development, which the report said was a record high for the corridor.

In addition, the corridor saw $132 million in total capital investment during the third quarter. Furthermore, institutional and private investors made up 56 percent of the buying pool, while real estate investment trusts and private investors made up the rest.

Average asking rents increased slightly from $4.56 per square foot in the second quarter to $4.58 per square foot in the third quarter and rents noticeably increasing in Northeast Pennsylvania.

The report said Northeast Pennsylvania might gain more attention from developers as land becomes scarcer in and around the Lehigh Valley submarket.

Furthermore, the report said speculative construction should slow down as the cycle continues to mature.