Developers adding height, space to new warehouses

Tom Meagher, an executive vice president who heads up the Allentown office of contractor Blue Rock Construction, is seeing the trend firsthand in Central Pennsylvania.

Blue Rock specializes in warehouse and distribution center construction. It has started to build some 40-foot-tall buildings that promise future tenants — namely fulfillment centers handling online orders — greater flexibility to operate.

“Not long ago, the highest building was 32-foot clear,” Meagher said. “Then it went to 36 and now it’s up to 40-foot clear.”

Two of Blue Rock’s active projects are around the I-78/I-81 split, which has been seeing more warehouse construction as industrial land fills up in the Harrisburg area toward Carlisle and east toward the Lehigh Valley.

The two Blue Rock projects are helping to push the average size of an industrial development to new heights. One is a 1.1 million-square-foot warehouse that Nevada-based Dermody Properties is developing off Exit 16 of I-78 in Bethel Township, Berks County. The other is a 738,720-square-foot distribution center at the I-78/I-81 split in Union Township, Lebanon County, for Chicago-based First Industrial Realty Trust.

The average warehouse in the region has increased in size by 29 percent over the last decade to 555,236 square feet, according to CBRE Research, an arm of real estate firm CBRE Group Inc.

The majority of the industrial sites under construction or proposed along I-78 are around 1 million square feet each, said Tom McKeon, executive director of the Berks County Industrial Development Authority.

Infrastructure improvements at many of the interchanges along I-78, including utility upgrades, and tax incentives, have helped Lebanon and Berks counties attract new warehouse projects.

The Berks Park 78 in Bethel Township, home of Dollar General and PetSmart distribution centers, was one of the area’s first industrial parks, paving the way for other development over the last five years, McKeon said.

“Once we got Berks Park 78 done and it was successful, then the private sector came in,” he said.

Big warehouses are under construction or have been proposed all along I-78 heading toward the Hamburg exit, where Cabela’s has a store. Large real estate investors like Dermody and First Industrial are behind most of the projects.

Blue Rock, which works with many institutional investors, currently has more than 7 million square feet under construction across its footprint, which stretches from Maine to Virginia. That is up from about 5 million at this time two years ago, Meagher said.

The majority of the company’s work is in Pennsylvania.

“We’ve definitely seen an increase in the size of projects,” he said, noting a sweet spot between 750,000 square feet and 1.2 million square feet.

The company’s largest project is a 2.3 million-square-foot facility for Amazon on Staten Island.

“What’s driving it is the need to have good distribution centers close to major population areas,” Meagher said.

Central Pennsylvania — which already has more than 165 million square feet of industrial space and highways that can reach most big cities in the Northeast — stands to see continued growth.

Gene Preston, a partner at Dermody Properties’ East Region in New Jersey, agrees. There are a lot of barriers to entry in the New York metropolitan area, he said. The scarcity of land is the biggest, which is pushing more investments west of the Lehigh Valley.

Over the last four or five years, Dermody has built or acquired more than 5 million square feet of industrial space in Pennsylvania. The bulk of that space was along the I-78/I-81 corridor.

Preston said the I-78 corridor is a “natural place” for companies to want to locate a warehouse today. Dermody’s project off Exit 16, which is slated to wrap by June, is within a morning’s drive to ports in New York and Philadelphia. He also said warehouses in the area can quickly draw workers from multiple counties.

Toy maker Mattel and clothing giant VF Corp. recently inked distribution deals at the split in Union Township.

“We’re seeing continued validation of that location,” Preston said.

So is Jeff Thomas, senior regional director at First Industrial. The company broke ground toward the end of 2017 on the distribution center with the 40-foot ceilings.

The project is expected to be done by the fourth quarter this year. A smaller pad site next door will be available for a 250,000-square-foot facility.

Both Preston and Thomas said the increased demand for new industrial space should lead to quick leasing deals with tenants.

“It’s definitely shortened up,” Preston said, citing a company average of four to five months to lease up newly built space. The rule of thumb had been at least a year for a finished spec building.

And construction isn’t slowing down.

Cushman & Wakefield recently reported that developers finished 11.4 million square feet of construction along the I-78/I-81 industrial market last year. Nearly 19 million square feet is to be delivered this year.

Current tenant demands for new industrial space along the corridor amount to about 25 million square feet, said Adam Campbell, executive director. Most companies are seeking spaces of more than 100,000 square feet.

“With supply finally catching up with this ongoing demand, we should see yet another solid year-end leasing number for 2018,” Campbell said.