Barring a slowdown in consumer spending or a major disruption to the U.S. economy, the industrial warehouse construction boom along the I-78/I-81 logistics corridor in eastern Pennsylvania is expected to continue.
The corridor, which includes the submarkets of central and northeastern Pennsylvania and the Lehigh Valley, has seen an explosion of industrial development over the past five years that has been driven by e-commerce, light manufacturing and other industries, as well as retail outlets looking to provide same- or next-day delivery service to New York, Philadelphia and Washington, D.C.
Lisa DeNight, a senior research analyst at CBRE Group Inc., said that while all three submarkets in the corridor have seen heavy warehouse construction activity, the Lehigh Valley has been especially busy. Institutional developers and investors are now starting to turn to the region's other submarkets because developable land in the Lehigh Valley is in short supply, she added.
In the second quarter, CBRE found that rents in the Lehigh Valley averaged $4.98 per square foot, while rents in northeastern Pennsylvania were at $3.52 per square foot and central Pennsylvania rents were at $4.61 per square foot. Anecdotally, CBRE found that recent deals for new warehouse space in the Lehigh Valley had increased to $5.75 to $5.80 per square foot and further growth is expected.
"There's a sort of dwindling of availability of viable sites left," DeNight said. "The radius of heat that generates in the Lehigh Valley has now spread up to the northeastern and central Pennsylvania markets."
Jared Jacobs, a Philadelphia-based research manager for Cushman & Wakefield, seconded that observation.
"We've seen a lot of spillover from Lehigh Valley go over into the northeastern Pennsylvania submarket and central Pennsylvania," he said.
The northeastern Pennsylvania submarket saw 4.5 million square feet of leasing activity year-to-date through the third quarter, while central Pennsylvania saw 6.3 million square feet leased, and 2.4 million square feet were leased in the Lehigh Valley, Jacobs said.
In the third quarter, Jacobs said he estimated the vacancy rate for the entire eastern Pennsylvania market was at 5.3%. Rent growth increased 5.5% year over year for the entire market, while the Lehigh Valley submarket saw rents jump 11.8%.
Over the last two years, institutional developers and investors have been trying to enter the three submarkets in any way they can, Sean Bleiler, senior vice president of CBRE's Allentown, Pa., office, said.
Developers and investors are looking for one-off opportunities to buy existing warehouse facilities, to get stakes in leased warehouses, or to get land positions on titled and untitled land for future warehouse space, he said.
The eastern Pennsylvania market has attracted the attention of insurance companies and pension funds as well, Bleiler said.
Speculative warehouses that are north of 500,000 square feet are being built in all three submarkets, including some that are 1 million square feet, and landlords are finding tenants relatively quickly, Bleiler said.
"Basically everything that's being delivered in the three markets is getting absorbed within 12 months," Bleiler added.
For example, Dallas-based developer Trammell Crow Co. and Allstate Insurance have broken ground on a 440,504-square-foot spec warehouse in the Humboldt Industrial Park in northeastern Pennsylvania. The warehouse is slated to be completed in the first quarter of 2018.
On the macro front, U.S. industrial REITs are poised for higher earnings because of growing demand for warehouse space. According to Moody's, demand is outpacing supply with 60 million square feet being absorbed in the second quarter, a 44% increase from the first quarter.
Industrial REITs such as Prologis Inc. and DCT Industrial Trust Inc., with holdings in markets with high barriers to increasing warehouse supply, are best positioned to see higher revenues from rent appreciation in the coming years, Moody's said in a recent investors note.