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.
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.
The region’s industrial real estate market is starting to show its age, and that means developers may be looking to replace some of the older structures along the I-78/I-81 corridor with newer, more modern and efficient ones.
According to a report by CBRE, the average age of an industrial building in Lehigh and Northampton counties is 32 years old. The average age in Central Pennsylvania is slightly older at an average of 36 years.
That’s still better than some regional markets according to Vince Ranalli, executive vice president at CBRE.
He noted that the average industrial building in the Philadelphia metro region was 49 years old and the average industrial building in the New York/Northern New Jersey market is 60 years old.
The national average is 43 years and 28% of the country’s industrial buildings are over 50 and at risk of becoming functionally obsolete.
While better off than some markets, Ranalli aid the aging stock is contributing to the new industrial construction in the region.
“The old buildings just aren’t as efficient. They have lower ceilings, less dock doors, less parking and they’re just not as desirable,” Ranalli said.
He gave the Kraft Heinz building in the Lehigh Valley as an example. That facility was built in the early 1970s.
“When a developer looked at a building like this they’d say, ‘this would limit the number of tenants that would be able to use this,’” he said.
So, instead of trying to market the property, it was knocked down and two new state-of-the-art buildings were constructed in its place.
You are going to see more of that, Ranalli said. Especially with the diminishing availability of land, reusing, renovating or rebuilding old sites is becoming increasingly common.
And while, yes, construction costs remain high and interest rates are rising, the rent is also increasing on the more modern buildings, which make up for the construction investment, he said.
He said that tenants, especially in the ecommerce and logistics industries, are asking for properties that have such things as higher ceiling heights and are more energy efficient to help them operate better.
He said developers are delivering. There are currently 36.7 million square feet of new industrial buildings under development along the I-78/I-81 corridor. Comparatively, there is currently a record 627 million square feet of new industrial construction going on nationally.
And the demand is there. Ranalli said newer buildings perform better on the real estate market. Of the distribution facilities built in the past 10 years, there is a minuscule 2% vacancy rate.
CBRE is leasing The Commodore, a mixed-use facility consisting of 32-luxury apartments and prime office and retail space at 100 Northampton St., Easton.
The 74,000-square-foot building is being developed by Optima Durant Group.
CBRE’s Jody King and Pamela Hall will handle the leasing of the 14,000 square feet of office space as well as 1,900 square feet of retail space.
“The Commodore is located along the historic Delaware River, one of the Northeast region’s most cherished waterways,” said King. “In addition to the office and retail space, the property will also include an 8,000-square-foot rooftop restaurant, tenant gym and other additional amenities. The Commodore will truly be a historic building for the Lehigh Valley that will operate as a complete lifestyle ecosystem.”
“The Commodore development represents a defining period of remarkable revitalization that has taken place in the City of Easton,” said Garett Vassel, founding president of Optima Durant Group. “Due to this undeniable success and the building’s gateway location, the property has taken on an iconic responsibility for the community. For more than four years, there have been so many incredible partners that have helped make this project occur and as a result, commercial tenants, residential tenants, and the greater community will benefit from meaningful, one-of-a-kind spaces at The Commodore.”
Construction is wrapping up at the seven-story property and tenants are expected to move in January 2023. It was recently announced that the owners of Zest and Grille 3501 restaurants will bring a new concept to the rooftop restaurant.
The Lehigh Valley isn’t just getting more warehouses. The warehouses are also getting bigger.
CBRE just released its latest 100 largest industrial & logistics leases report. This year there were 37 leases of properties over 1 million square feet, up from 24 in 2021.
Four of those properties were in the Lehigh Valley.
“Our region, the I-78/I-81 corridor, is in the top 10 for the largest leases across the country, and this is the seventh year in a row,” said Vince Ranalli, executive vice president of CBRE. “It’s a great run that we’ve had.”
He said the boom in the construction of large warehousing space is significant and ongoing.
He noted that the number of warehouses larger than 1 million square feet grew by 35% over 2021, and that was a record year.
“We’re on pace for another really strong year next year,” he added.
The number of large warehouses isn’t just increasing, the overall size of the buildings is also on the rise.
Building size is up 14% over 2021.
“The buildings just keep getting larger,” Ranalli said.
The larger buildings are being leased mostly by the retail, food and beverage and third-party logistics industries.
“They’re telling us that they’re extremely focused on having adequate inventory on hand,” he said. “We call it ‘just in case’ or ‘safety stock.’ They’re trying to prevent the supply chain issues [of the recent past.] Their warehouses are full to hold all this inventory.”
He said the demand to keep inventory in stock close to major population centers is going to continue to drive the market for large warehousing space in the Lehigh Valley.
And while there has been talk about a small recession looming on the horizon with higher interest rates and a tight labor market, Ranalli said he doesn’t expect that to kill the momentum of construction in the warehousing and logistics space as these companies continue to seek to update and modernize their supply chain.
“The industrial & logistics market preformed solidly in the first half of the year despite headwinds challenging the broader economy,” said John Morris, CBRE’s president of Industrial & Logistics in the Americas. “We have seen a falloff in leasing by smaller users – those in 25,000 square feet or less – likely due to the economic environment. But the largest users are forging ahead, picking up most of the slack.”
Consumer demand is driving the warehouse boom in Central Pennsylvania and Lehigh Valley with ecommerce companies leasing more than half of the space.
That demand is expected to grow, and local and regional companies are investing in the development, according to CBRE.
Other space is occupied by food and beverage distribution and manufacturing companies, according to Becky Bradley, executive director of Lehigh Valley Planning Commission. Small to medium-sized businesses make up the rest.
Bill Wolf, vice president of CBRE, which tracks industrial development across the country, including Central Pennsylvania, said Lehigh Valley’s industrial sector and the region are seeing substantial growth from the scaling up of local manufacturing and logistics facilities.
Pennsylvania’s 78 and Interstate 81 corridor in Central Pennsylvania and the Lehigh Valley added the most leased large industrial space in the country in 2020, with 8 industrial leases of 1 million square feet or more added last year, according to a CBRE report.
Additionally, the I-78/I-81 corridor was home to 11 of the 100 largest industrial leases, coming in at almost 13 million square feet — larger than any single MSA (Micropolitan Statistical Areas) or city-sized region in the United States, CBRE said.
The region is close to the ports of New York, New Jersey, Baltimore, and Philadelphia. It also has access to rail service through Norfolk Southern and CSX.
In addition, Lehigh Valley International Airport is ranked one of the top air cargo markets in the country and one of the fastest growing, according to the Airports Council International’s 2021 report.
“The majority of the facilities are general retail and wholesalers – consumer products,” Wolf said. The reason for the growth, he said, is simply consumer demand.
Bradley said most of the warehouses are built on spec.
“They are giant boxes with a lot of flexibility inside,” she said.
However, the majority are leased before construction is complete or around the time of completion.
“We can’t establish traffic (during the planning stages) because we don’t know who is going in until they get there,” she said.
Steven Deck, executive director, Tri-County Regional Planning Commission, which covers Dauphin, Cumberland, and Perry counties, agreed.
“There’s no single or even small group of developers that stand out in our region, more a broad range of commercial/industrial real estate developers,” he said.
In terms of who leases the space, “unless there is a single lease holder like FedEx, UPS, Walmart, Amazon, Proctor & Gamble, etc. we don’t know who leases the space,” Deck said. “Many of these warehouses have unknown users at the land development stage, with such decisions often made well after the planning process is complete.”
“Generally, we see 35%-40% leased before completion,” Wolf said. “Inventory is low, so space is absorbed before completion.”
According to the CBRE report, investing in warehouse and industrial space is more risk diverse. Investors are more local than foreign.
Bradley agreed, saying development is happening by companies that specialize in it. Locally, CBRE, Prologis, Lee & Associates of Eastern Pennsylvania, National Logistics and J.G. Petrucci Company Inc. are among the major players.
Space not leased by ecommerce, food and beverage or manufacturing, are leased by small or even large businesses, Bradley said.
“It could be used for storage, which there is a need for,” she said.
Many of the warehouses, Wolf said, are operated by third party operators.
“It’s always been there, but we are seeing an increase,”
He explained the third-party operators offer accounting, human resources, outsourcing and other services that help companies run more efficiently.
“We are in unprecedented times with construction delays, supply shortages and even delays in approvals,” he said. “There is more demand than supply, so costs are going up.”
Nationally, there has been a 15% increase in rents in major markets, he said. In Central Pennsylvania, rates have climbed 20%, with Lehigh Valley seeing an average of $9-$10 a square foot and Central Pennsylvania seeing $7-$7.50 per square foot.
“The further away from major transportation routes, the lower the rents will be,” Wolf said.
“All the markets are hot” and developers are stretching out to find land suitable for development,” he added.
After Lehigh Valley, developers are stretching into Berks County, Wolf said.
York County, with access to the I-83 corridor, has been strong as well. With access to Baltimore and Harrisburg, companies have pulled labor from those markets and prospered.
Lancaster and Reading, however, have suffered because of Route 222, Wolf said. “The road to nowhere does not give good access.”
While the work being done on Route 222 is ongoing, those markets are still behind in the building boom, he said.
Cold storage is an area of real growth too, he said. “These garner premium rents because they are unique buildings, especially if the leasee needs the whole building.”
Cold storage is in demand not only by food companies, but pharmaceutical and chemical companies as well, he said.
The attraction to the regional market is also due to the labor market, Wolf said.
According to the CBRE report, the regional warehouse labor force was around 190, 500 in 2020. That is expected to grow 13.4% by 2030.
While the labor market is strong, Bradley said different companies require different numbers of employees, depending on the business.
“Look at Walmart, for example,” she said. “They have two warehouses side by side. One is for small items and the other is for large ones.”
Bradley said there could be a 50% difference in the number of employees needed. The warehouse that ships small items can employ 4,000 to 5,000 people while the one that ships large items requires less hands, she said.
“These facilities are becoming more automated all the time in the efforts associated with increasing capacity without huge increases in labor costs,” Deck said.
Bradley agreed. “There is a lot more automation going on.”
Wolf said AI will play a big part in manufacturing, in warehouses and in transportation.
“These companies are more tech savvy with understanding where goods are coming from and how much they need to keep on hand,” he said. “Automation brings on more efficiency through the whole process.”
Even with inflation on the rise, Wolf said the growth of warehouse space is expected to continue because rent is a small portion of the supply chain costs when looking at the cost of transportation, goods, and payroll.
Coming off a record-breaking year in 2021, the I-78/I-81 corridor is continuing to experience record low vacancy, record high absorption and record high rents in the commercial real estate market, as well as a construction industry that’s struggling to keep up with demand.
According to the latest report from CBRE, the vacancy rate in the region was a low 3.8%, while net absorption was 4.9 million square feet.
Average rent has reached $5.94 per square for industrial space and there is currently 33.5 million in new construction in the pipeline.
The average rent along the corridor is up 3% over last quarter and is expected to continue to climb.
In the coveted Lehigh Valley, average asking rents rose to $7.07 per sq. ft. In Central Pennesylvania and Northeast Pennsylvania, average asking rents landed at $5.32 and $5.30 per square foot, respectively. In the particularly tight Class A warehouse subset, overall average asking rents increased to $6.48 per square foot, indicative of the strong competition for modern logistics facilities.
Vincent Ranalli, executive vice president with CBRE said not only is the vacancy rate at a record low, but 40% of all of the new construction in the pipeline is already pre-leased.
He said that has developers very bullish and many are moving forward on new projects much faster than they would have in the past.
He pointed to one project in East Allentown Township, just north of the Lehigh Valley International Airport.
The development calls for five buildings and the first two buildings, which are under construction, have already been leased.
Because of the expected continued demand, the developer is looking to break ground on the next Three buildings this spring.
“Looking back at the first quarter of 2021, we actually have more demand than we had at that time. We have more tenants looking for space and by every metric we’re busier this year than a year ago,” Ranalli said. “Last year was an historic year in the Lehigh Valley so we seem to be on course for another banner year.
But it’s actually Central Pennsylvania that is currently leading the pack in new construction, a fact that Ranalli attributes mostly to the availability of space compared to the Lehigh Valley.
“Lehigh Valley is just a little bit harder to develop in because there’s less sites,” he said. “What you have in Central Pennsylvania is that there’s less barriers to entry.”
He said there are currently 12.6 million square feet of industrial space under construction currently in Central Pennsylvania as compared to 11 million square feet in the Lehigh Valley.
“Landlords are still very confident and are willing to go forward on speculative projects,” he said.
He noted there is also strong diversity in the tenants of these buildings, with third-party logistics, ecommerce, food & beverage and consumer goods leading the tenant pool along the corridor.
And while construction is up, Ranalli said it still isn’t quite keeping up with demand and CBRE expects the tight market to continue through at least the rest of the year.
Industrial tenants in the region can expect sticker shock when their leases come up for renewal according to a new report by CBRE.
Rent has gone up dramatically in the past five years, — the length of the average lease — and companies need to be prepared to pay more to keep their facilities.
Bill Wolf, executive vice president of the firm’s Allentown office, said while rents are up across the country, regions near ports are seeing the largest increase, which has Northampton County in the top five of regions in the Greater Philadelphia region and I-78/I-80 corridor for rent increases.
Industrial rents have gone up 26.7% in Northampton County, due mostly to its proximity to ports in New York and Newark and also because of competition for scarce available space, which has enabled owners and developers to push prices higher.
Rents have gone from $4.87 per square foot in 2016 to $6.81 in 2021 in the county.
Lehigh County was slightly behind with a 25.4% percent increase over the past five years.
Wolf said it’s something these companies need to be prepared for.
“You have to prepare and get advice from your consultants,” he said.
The report warned that many tenants may think “can we negotiate the rate? Can we relocate and find a better rate?”
While exploring their options, tenants may find that their relocation options are limited or non-existent. Many go back to their landlord and find that they cannot negotiate down, but in fact the previous renewal offer expired, and the new rate is now even higher.
If there is any good news is that while rents continue to climb, the Lehigh Valley is still a relative bargain compared to some regions.
In the region included in this survey, Delaware County had a 67.6% increase in industrial rent, with number jumping from $5.46 per square foot in 2016 to $10.11 per square foot in 2021.
In other regions close to major ports the increases have also been dramatic. In Southern California rents have gone up more than 86% in five years, with rents near the Los Angeles ports up 57% and 40% in the New York/Newark area.
While it may be a startling increase, Wolf said these companies should be cognizant that an increase would be coming.
“The rental rates are the most visible cost increase, but these companies are already seeing increases throughout their supply chain,” he said.
He said shipping, for example is up 150% over five years and domestic freight is up 40%. He said he would also expect fuel surcharges to be implemented or increased because of the dramatic spike in gas prices recently.
The United States had a record year for large warehouses in 2021 and the I-78/I-81 corridor, running through the Lehigh Valley, Central Pennsylvania and Northeastern Pennsylvania ranked second in the country for these large transactions.
According to CBRE, driven by a rebounding economy and strong e-commerce sales, companies committed to 57 warehouse leases of 1 million square feet or more across the country in 2021. That’s a 19% increase.
Chicago had the greatest number of the top 100 transactions with 12. In second place, the I-78/81 corridor followed with 11, however it did record the most transacted square feet at 12.4 million.
“Each year, the PA I-78/I-81 corridor is among the leaders of 1 million square feet or larger transactions,” said CBRE Executive Vice President Vincent Ranalli. “Tenants with needs of 1 million square feet or more seek out our region due to availability of large sites to accommodate these mega deals, competitive lease rates, labor availability and an overall business-friendly environment.”
The industry sector claiming the largest share of those leases is general retail and wholesale, which recorded 44 transactions at 46.1 million square feet.
Ranalli said this was a significant jump from 2020 when that sector recorded 32 transactions of 35 million square feet.
E-commerce-only occupiers, which was the leader in 2020, were second at 21 deals of 27 million square feet, followed by food and beverage users at 15 deals at 14.2 million square feet.
As expected, commercial real estate activity along the I-78/I-81 corridor ended 2021 by smashing records.
The year-end report by CBRE showed that overwhelming demand and extremely limited inventory for commercial real estate in the region drove up rent prices and spurred new construction activity.
According to the report, occupancy grew by more than 27 million square feet during 2021, well above the previous historically high mark of 17.2 million square feet set in 2014.
Overall vacancy hit its lowest point in recent years, because of the lack of available modern, Class A existing warehouse space.
Because of that, the construction pipeline grew to 32.2 million square feet by the year’s end.
Also, average asking rents grew by more than 12% over the year because of the high demand and lack of supply.
Bill Wolf, executive vice president with CBRE, said the lion’s share of the demand was for warehousing and logistics space, with third party logistics centers having the highest demand.
Overall, he said third party logistics providers, e-commerce and wholesalers made up 75% of all commercial real estate activity in the region.
“It’s all consumer good driven,” Wolf said.
He said driving the demand was retailers desire to have “safety stock” — more inventory than they would normally keep on hand – in response to supply chain issues caused by the COVID-19 pandemic and other disruptions.
As tenants absorbed more space across the corridor, vacancy hit a record low of 4.3%, a 280-basis point decline year-over-year.
Wolf said he expects the demand to continue through 2022 and for rents to continue to rise.
He said that may cause sticker shock for some tenants whose leases are coming up for renewal this year.
“Rents could double, we’ve seen that,” Wolf said. “There is an education process. It’s just where the industry is going, but no one has ever seen increases like this.”
Wolf said the I-78/I-81 corridor’s proximity to large population centers in the Northeast has kept it as a booming area.
Regions like the Lehigh Valley, Berks County, Central Pennsylvania and Northeastern Pennsylvania are still accessible enough to ports in New York and Philadelphia, but provide a relative bargain compared to the rents in areas closer to the ports, and despite the low vacancy rates, still have a better supply of available or potential sites.
He said the Lehigh Valley region is still in the most demand, but other areas of the corridor are picking up steam.
“Berks County has grown on a larger percentage basis than the Lehigh Valley because of some of the new construction there,” he said. “Berks is becoming more of a known entity rather than a pioneer market.”
While he said sticker shock is likely to be an issue for commercial real estate tenants, Wolf said he doesn’t expect the higher rents to have too great of an impact on consumer prices.
“In the overall scheme of things, rent doesn’t have that dramatic of an effect on the price of things,” he said.
Still, he said those planning for new space should keep in mind the state of the market and prepare for the added expense and greater competition for space.
The competition for space may not be getting any easier in 2022.
Of the construction underway at year’s end, 41.6% was pre-leased. Among the industrial markets in the Northeast US, the PA I-78/I-81 Corridor led the way in construction activity, claiming more than half of all new development underway in the region.
Unprecedented consumer spending is continuing to drive demand for commercial real estate in the Lehigh Valley according to the latest Northeast Industrial Brief from CBRE.
Consumers spent a record $565.8 billion in the U.S. in October 2021, putting added stress on an already overwhelmed supply chain system.
The report shows that port activity increased by 16.1% in 2021 and the lack of warehousing space for those imported goods has meant industrial rents continue to climb.
“A lot of tenants that want to be closer to the ports are priced out of the market,” said Vince Ranalli, executive vice president for CBRE. “Real estate costs are a lot lower by moving west.”
He said that is sending tenants into the Lehigh Valley, Berks and even Central Pennsylvania markets.
The demand has pushed rent up 20% over last year and most Class A industrial space is leasing for about $8 per square foot in the region.
“Still, that’s a bargain compared to some areas closer to the ports. We can be a third of the cost,” he said.
The Lehigh Valley currently has an industrial space vacancy rate of about 4%, which means those rents are likely to keep climbing to keep up with the demand.
The demand and low vacancy rate also means new construction continues at a rapid pace.
“We have about 9 million square feet of space under construction right now and 41% of that is pre-leased. The building is still going up and it’s already leased,” Ranalli said.
The Lehigh Valley does have another advantage in attracting these commercial tenants, Ranalli said, and that is scale.
With more open space the region can deliver larger warehousing and logistics facilities than the denser urban areas closer to the ports in Newark and Philadelphia.
He cited Bridgeport 78, the development underway at the former Ingersoll Rand property in Phillipsburg, New Jersey.
That development can support an industrial building up to 1.4 million square feet.
“That’s what differentiates us. We can still deliver these types of projects,” he said.
The report did note that the heavy demand for light industrial space goes throughout the Northeast U.S.
“We have never before seen dynamics like these play out in the market — insatiable consumer demand, booming port activity and a dearth of available industrial space throughout the Northeast,” said Thomas Monahan, a vice chairman at CBRE. “While 58.5 million square feet of industrial space is under construction in the region, most of which is already pre-leased, only 6.5 million square feet. is in port-adjacent submarkets.
Monahan said it’s clear by the numbers that even the new construction will not be enough.
The company’s research shows that demand will continue unabated throughout 2022, far outstripping supply.
Recent reports of such supply chain problems as the 80,000 cargo shipping containers piled up at the Port of Savannah and ships waiting up to nine days to offload their cargo, illustrate why the commercial real estate market is booming in Eastern Pennsylvania along the I-78/I-81 corridor.
Retailers are having trouble getting their goods delivered in a timely manner and that can have a strong negative impact on business if they fail to have the inventory they need for high-demand seasons such as Back-to-School or the Christmas holidays.
“If retailers can’t hit that, there’s going to be major implications,” said Sean Bleiler, senior vice president for CBRE. “It’s not just about a kid not getting the backpack they want. Their stock is going to get hit if they can’t get theses goods off the ship and into their stores.”
That’s driving these companies to want to store their goods closer to home, and it’s having a continued major impact on the commercial real estate market in the region.
Bleiler said the I-78/I-81 corridor saw record activity in the third quarter, surpassing the record numbers of the first and second quarters of the year. Most of that – especially in the Lehigh Valley – was driven by third-party logistics providers and ecommerce companies looking to house their products and distribution in the dense population region of the Northeast.
According to the most recent CBRE report on the corridor, there was a mere 4.6% vacancy rate with 25 million square feet of new construction in the pipeline.
“A lot of that is already pre-leased so net absorption is actually outpacing construction,” he said.
In the Lehigh Valley alone there is 9 million square feet of industrial buildings under construction with a 4.6% vacancy rate.
The Central Pennsylvania region is slightly tighter. It has 7.7 million square feet of industrial space under construction and a 4.4% vacancy rate.
The demand is driving rent for commercial properties to record levels across the board.
“The Lehigh Valley is the most expensive on a square foot basis because of its proximity to the New Jersey and New York markets,” he said.
However, he said as prime properties become rarer and more expensive, the market is being driven westward into Central Pennsylvania and beyond where there is the potential for more developable land.
“Five years ago, building 30 or 50 miles west may not have made a lot of sense, but now that’s making sense,” he said.
The report shows current commercial rents are averaging $5.60 per square foot., a year-over-year increase of nearly 20%. It added that the lack of availability, particularly for class A spaces, has led to tenants entering competitive bidding wars.
As a result, Class A base rents written into leases averaged $6.13 per square foot during the third quarter, a 2% premium over average Class A asking rates.
With supply chain problems expected to continue, and logistics changes brought about by the COVID-19 pandemic, Bleiler said CBRE sees no end in sight to increasing demand for and cost of commercial real estate along the corridor.
“We’ll see rates continue to rise quarter over quarter and we’ll continue to see record rates and construction isn’t going to be able to keep up,” he said. “We think it will continue for the foreseeable future at this point.”
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