Newmark Knight Frank released its second-quarter 2019 industrial market reports for Greater Philadelphia and the I-81/78 Corridor. New supply was the foremost topic as the total construction pipeline across the two markets increased by 5.4 million square feet. Also, notably, the I-81/78 Corridor realized a rare quarter of negative absorption. However, market activity indicates overall fundamentals in the two regions will remain strong throughout the remainder of the year.
In the second quarter of 2019, the development pipeline in the I-81/78 Corridor industrial market expanded to a record-breaking 18.6 million square feet. Although there are millions of square feet of tenant requirements in the market, the decade-long streak of positive absorption finally broke this quarter due to struggling national retailers closing regional distribution centers. 1.1 million square feet of negative absorption was recorded, and 2.1 million square feet of new speculative inventory delivered vacant. As a result, vacancy jumped from 6.3 percent to 7.1 percent quarter over quarter, its highest measure in three years. The Central Pennsylvania submarket was responsible for the largest share of negative absorption with Sears and Kmart closing warehouse facilities in the region. The Lehigh Valley submarket accumulated 337,211 square feet of new tenancy driven by third-party logistics firms and maintained its standing as the epicenter of new development, with more than 6.5 million square feet of construction underway. In Northeastern Pennsylvania, the supply pipeline nearly doubled this quarter, from 3.5 to just under 6.5 million square feet, the highest quarterly construction total on record for the submarket. Speaking on the subject of this substantial increase, NKF Executive Managing Director Jim Belcher noted, “Warehouse users want to be in the Lehigh Valley, but the tightening labor supply is a real issue. This is starting to drive developers and tenants up into Northeastern Pennsylvania.”
Major big-box occupancies are slated to occur next quarter, which will eclipse the negative absorption sustained in the second quarter and ensure the Corridor market concludes the second half of the year on a positive note.
In Greater Philadelphia’s industrial market, 2.4 million square feet broke ground in the second quarter, driving the supply pipeline up to 7.3 million square feet, a five-year high. There was construction underway in every one of the eleven counties that comprise the tri-state regional market, with the Southeastern Pennsylvania counties responsible for the largest share. Commenting on the expansion of the construction pipeline, NKF Managing Director Justin Bell said, “the majority of Southeastern Pennsylvania’s warehouse inventory was built before 1980. This new supply of efficient, high-bay space will be a boon to the market’s warehouse users.”
Average asking rents skyrocketed in the Greater Philadelphia industrial market this quarter reaching $6.33 per square foot, up almost a full dollar from last quarter. This was largely a function of newly established rates on R&D/flex space at the rebranded and repositioned Discovery Labs complex in the Philadelphia suburbs.
Occupancies in recently completed warehouse space predominantly drove the quarter’s net absorption, totaling 1.8 million square feet. Market-wide vacancy, down 30 basis points from the first quarter to 5.1 percent, is expected to hover in the low 5.0 percent range through the rest of the year, while pent-up demand in the market for modern logistics space continues to drive the absorption of new additions to the inventory.
In the Southern New Jersey industrial market, ecommerce giant Amazon yet again represented the largest quarterly move-in, taking possession of the 650,000-square-foot warehouse at 240 Mantua Grove Road upon its completion. Aside from the development focus on the warehouse sector in South Jersey, a significant manufacturing project was launched in the market this quarter: ResinTech broke ground on a $130.0 million global HQ in Camden County, which will be used to consolidate multi-state operations when complete in 2020. Moving westward into the New Castle County market, available industrial space is as scarce as it can be with vacancy at 2.7 percent in the second quarter. This tightness hasdriven average asking rents beyond $5.00 per square foot for the first time ever.
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