The Philadelphia Region’s Industrial market vacancy rate edged slightly higher in the first quarter of 2024. Vacancy rose 32 basis points to 6.25%, reflecting negative net absorption of 387,466 square feet (MSF) of space and 1.2 million square feet of unleased speculative construction deliveries.

“While vacancy rates ticked up slightly, it’s important to note that overall demand for industrial space in the Philadelphia Region remains healthy,” said Heather Kreiger, Regional Research Director for Lee & Associates of Eastern Pennsylvania. “Demand actually grew by a significant 12% in Q1, reaching 36.8 million square feet.”

Rent growth continues to favor landlords in most markets, apart from Southern New Jersey. This trend is expected to hold in areas with low vacancy rates, such as Central and Northeastern Pennsylvania. However, the market dynamics may shift as a significant amount of speculative construction deliveries are anticipated in the coming quarters. An estimated 9.8 million square feet of new space is projected to come online in Q2’24, with 8.7 million square feet currently uncommitted. The remainder of 2024 is expected to see an additional 12.8 million square feet of space hit the market, with most of it being unleased.

“The key question will be whether demand can keep pace with this surge in new supply,” said Kreiger. “Historically, the Philadelphia region has averaged net absorption of 7.4 million square feet of space per quarter over the past five years. While this level of absorption should help to keep vacancy rates in check overall, it’s important to consider that a significant portion of the new construction is concentrated in markets like Metro Philadelphia and Southern New Jersey, where vacancy rates are already trending upwards.”

"We're confident that demand for industrial space will hold strong, leading to continued healthy absorption rates. However, we're keeping a close eye on how specific submarkets, especially those with existing vacancy challenges, handle the influx of new supply, which will be a key factor in maintaining stable vacancy levels across the region."

Philadelphia area sub-market data

Lee & Associates of Eastern Pennsylvania regularly reports information covering six separate submarket clusters that make up the Greater Philadelphia Region. Q1’24 data is contained below:

 

Central Pennsylvania covering Dauphin, Lebanon, Cumberland, Franklin, Lancaster, York, Perry and Adams Counties

 

Central Pennsylvania's industrial market continued its strong performance in Q1 2024. Vacancy rates dropped for the third consecutive quarter, reaching a low of 4.29%. Demand stayed high at 17.4 million square feet, while construction activity remained minimal with no new building starts. Unsurprisingly, rents continued to climb, with average Class A/B rates reaching $8.55 per square foot. Given these solid fundamentals, vacancy is expected to remain well below historical averages throughout 2024 and into 2025, with landlords likely maintaining their pricing advantage, especially in prime locations.

 

Lehigh Valley covering Berks, Lehigh and Northampton Counties in PA and Warren County, NJ

 

The Lehigh Valley industrial market saw a bump in vacancy due to major occupier departures in Q1 2024. However, there were positive signs: no new construction deliveries occurred, and strong demand metrics point to future absorption. While a significant amount of uncommitted space is slated for arrival in Q2, the market historically absorbs similar quantities. Landlords remain confident, evidenced by rising rents. If leasing activity picks up, rent growth is likely to continue. However, a slowdown in leasing could lead to a moderation in rent increases as vacancy levels rise.

 

Northeastern Pennsylvania covering Luzerne, Lackawanna, Schuylkill, Columbia, Carbon, and Monroe Counties

 

Northeast PA's industrial market saw a slight vacancy increase due to a single large vacancy, but overall activity remained muted. Despite upcoming deliveries exceeding 3.7 million square feet, healthy demand suggests the market can handle this influx. Investor confidence remains strong with new construction starts; however, the region's pre-construction pipeline is the largest in the Greater Philadelphia Region, which will warrant close monitoring in the coming quarters.

 

Philadelphia Metro covering Bucks, Chester, Delaware and Montgomery Counties as well as the Philadelphia City

 

Metro Philadelphia's industrial market experienced a significant vacancy increase in Q1 2024, pushing rates above historical averages for the first time in years. While future construction deliveries appear manageable in the short term, a major challenge looms in 2025 with a surge of new space planned. The success of this submarket will be largely dependent upon the lease up of large-scale developments as a key factor in maintaining market stability over the next few years.

 

Delaware covering New Castle, Kent and Sussex Counties

 

Delaware's industrial market saw a slight vacancy decrease in Q1 2024, driven by a committed construction delivery and positive leasing activity. However, some larger speculative projects remain unfilled, and future demand is uncertain. While upcoming construction includes large speculative development, healthy commitment levels for the rest of the year suggest the market could absorb new space. Overall, Delaware's industrial market outlook hinges on the success of existing speculative projects and the regional competition for large tenants in the coming quarters.

 

Southern New Jersey covering Burlington, Camden Gloucester, Cumberland, Salem and Atlantic Counties

 

Southern New Jersey's industrial market enjoyed a positive Q1 2024 with declining vacancy rates, but the good times may not last. While core locations saw stable rents, the region faces a potential vacancy surge due to a large influx of uncommitted new construction, particularly in Salem County, which already struggles with high vacancy and limited historical leasing activity. Unless leasing activity picks up dramatically or Salem County experiences a rapid turnaround, expect vacancy rates to climb and rents to potentially soften across the region.

Lee & Associates of Eastern Pennsylvania is an affiliate of Lee & Associates, the largest broker-owned firm in North America with offices internationally.