Monthly Download | Demand Update | September 2017

Demand for new, class A space is a major driver for the region’s construction activity. Our Industrial Demand report tracks industrial requirements across our entire market. As of the end of the third quarter, smaller requirements, 500,000 SF or less, outnumber larger requirements by almost two to one. While larger requirements are predominantly focused along the I-81 and I-78 transportation corridor that spans from the eastern edge of the Lehigh Valley to the southern border of the Central PA submarket, requirements 500,000 SF or less tend to be more flexible in geography, by including areas such as Northeastern PA and Southern New Jersey in their search.

Dating back to Q1 2016, roughly 60 properties 100,000 SF or larger have been delivered to across the Eastern PA market through Q3 2017. This total includes built-to-suit as well as speculative projects. If we divide these 60 properties into two groups, 500,000 SF or smaller and 500,000 SF and larger, we begin to see some interesting developments.
Nearly 20 properties have been delivered that were 500,000 SF or larger since Q1 2016. Two-thirds of those properties were built along the aforementioned I-81 and I-78 corridors. As of today, only five of those properties have available space for lease.

When we focus our attention to those deliveries 500,000 SF or smaller, the number of total deliveries doubles to 40. Less than half, 18, occurred along the I-81/I-78 transportation corridor. Surprisingly, more than half of these smaller properties along this corridor remain available for lease. Outside of this transportation corridor, where the slight majority of smaller deliveries occurred, only five buildings have available space for lease.

These conditions have most likely affected the speculative construction activity currently underway. Of the 26 total speculative projects under construction across the market, 13 are 500,000 SF or less, and over half of those are located in submarkets outside of Central PA and the Lehigh Valley. More than half of these projects have also been granted local tax incentives. Of the 13 projects that are 500,000 SF or greater, 11 are located within Central PA and the Lehigh Valley.

What is particularly interesting is where along this I-81/I-78 transportation corridor these larger speculative projects are being developed. Established industrial hubs along this corridor in Cumberland, Lehigh and Northampton counties have seen rental rates increase since Q1 2016. This is especially true in Lehigh and Northampton counties, where rental rates have increased by almost +/- 20% during that time. Additionally, land acquisition costs have also increased since 2016, with new highs in Floor to Area Ratio (FAR) pricing being set in these areas. This may help explain why we’ve seen large speculative projects begin along this corridor in Franklin, Lebanon and Berks Counties. Asking rents as well as land acquisition costs in these areas tend to be less than the established industrial hubs, and in some cases, local tax incentives have been granted in order to help lure these larger requirements that desire to be along this major transportation corridor.