Consolidation in the industrial space hasdriven a wave of new development across the U.S. and a veritable tsunami ofbuilding activity in the last couple of years in Southern California's Inland Empireand, more recently, in the Lehigh Valley in Pennsylvania and New Jersey.
According to SNL data, industrial anddiversified U.S. REITs are building more than seven million square feet in TheValley, as the metropolitan area of Allentown–Bethlehem–Easton, Pa.–N.J. iscolloquially known.
"The activity there is as robust as it’sever been," Jared Jacobs, Philadelphia-based research manager for Cushman& Wakefield, said in an interview.
Necessity is the mother of much of the newconstruction. The Lehigh Valley's vacancy rate stood at 1.2% as of Sept. 21,which is the lowest on record, Jacobs said.
The extremely low vacancy is all the moresurprising for the amount of new inventory that has come online, at 10.9 millionsquare feet, taking into account all public and private developers, since 2014.Roughly 99% of that new inventory is now occupied, Jacobs said.
Approximately8.6 million square feet is under construction in the market by all developers,and 4.3 million square feet of it is expected to bedelivered by year-end, according to Jacobs. What's more, the vast majority ofthe inventory being built is speculative, meaning shovels are in the groundbefore a tenant has signed a lease.
"Once these buildings start going up, theyget pre-leased pretty much right away, or are leased shortly aftercompletion," Jacobs said. A year ago, tenants would wait three to sixmonths after a building came online to lease it up.
Rampant development is not new to The Valley. The Allentown–Bethlehem–Easton,Pa.–N.J. region earned the sixth spot on SNL's list of fastest-growingU.S. industrial markets since 2014.
Total REIT-owned industrial area grew just over 25% in theregion between July 28, 2014 and Sept. 22, SNL data shows. grew itsindustrial exposure to the region nearly 121%, while expanded its footprint by 96%.
The growth of e-commerce has been a principaldriver of building activity in the Lehigh Valley, which links the majormid-Atlantic metropolitan areas, including New York, Philadelphia andWashington, D.C. But it's not just "the Amazons of the world"bolstering operations there, Jacobs said. Other national tenants, such asSamsung, Verizon, East Penn Manufacturing, California Cartage Co. and StitchFix are doubling down in the market, too.
The Lehigh Valley's relatively cheap rent hasbeen a draw, but Jacobs said average rent has been steadily climbing. Askingrents for new spec space are around $5.25 per square foot at the high end,which was an unusually high rate before the current boom.
"They want this new, attractivewarehouse-distribution space with higher ceiling heights and more loadingdocks," he said. "These buildings are much more modern and efficient."
Some observers say the Lehigh Valley is on itsway to becoming the next Inland Empire, the west coast industrial mega-marketspanning the Riverside–San Bernardino–Ontario, Calif., metropolitan statisticalarea outside Los Angeles. The MSA has been ground zero for the industrialbuilding boom of the last couple of years and ranked No. 1 on SNL's list of thefastest-growing U.S. industrial markets.
Total REIT-owned industrial area there grew just over 44%between July 28, 2014, and Sept. 22, according to an SNL analysis.
During the roughly two-year time frame,Rexford Industrial RealtyInc. and LibertyProperty Trust increased their exposure in the region by roughly133% and 108%, respectively.
The dynamics of the Inland Empire's buildingboom are similar to those of the Lehigh Valley's. Congestion and land scarcityaround the coastal ports have pushed companies inland, and cheaper rents havesweetened the prospect.
"With such a low vacancy rate and nowhereto go, the release valve is the Inland Empire," Mike McCrary, managingdirector of Jones Lang LaSalle's Inland Empire industrial team, said in aninterview.
McCrary pointed to three Inland Empireindustrial growth drivers, in addition to the entrenchment and expansion ofe-commerce businesses: Migration of companies from the congested and expensiveLos Angeles and Orange County markets; growth in shipping volume worldwide; andorganic expansion by companies already in the market.
The companies with growing industrial footprintsin the Inland Empire span all sectors of the economy, from third-partywarehousing and logistics to food production and service, McCrary said. AlereProperty Group, Panattoni Development Co., Hillwood Investment Properties andClarion Partners, in addition to REITs Prologis Inc. and Duke Realty Corp., are among the developers capitalizingon the opportunity.