Industrial market sees slowdown, expected to pick up in second half

The Central Pennsylvania industrial market slowed during the first half of the year but is expected to pick up again as interest rates are expected to fall and the election concludes. 

Heather Krieger, regional research director for Lee & Associates, said the company’s Regional Industrial Market report shows the slowing was due to high interest rates and a readjustment to the post-COVID market. 

“After COVID, there was a huge demand for industrial space as tenants looked for more space to meet consumer demands,” she said. “When demand started to decline, they gave space back or subleased it.” 

The report shows vacancies inched up by 78 base points despite steady leasing activity, landing just over 5%. The report cites several new to market sublet opportunities, a handful of expiring leases, and two unleased spec deliveries totaling 761,328 square feet.  

The givebacks alone were enough to push quarterly net absorption into negative territory for just the second time in the last five years, the report shows.  

Kreiger said there was 4.4 million square feet of sublease space available in the second quarter. Most of the available spaces were about 150,000 square feet,  

However, Kreiger noted rents showed modest growth in what continues to be a Class A Landlord market. 

Demand remains steady, construction levels continue to taper, pre-leasing commitments are high at nearly 50% and starts in the second half of the year are expected to be relatively modest, the report shows.  

“Even though there has been a slowdown, the market is poised to be strong through the rest of the year and into 2025 with a stable or declining vacancy rate and the increases in rental rates,” Kreiger said. 

The biggest challenge is there are five Class B buildings reporting vacancy between 200,000 to 400,000 square feet, and head-to-head competition across those buildings is expected to be heated, she said. 

The slowdown in new construction starts will give the market time to absorb the space available, she said.  

“Sixty percent of the space under construction is under lease, showing there is still a demand,” Kreiger added. 

“Central Pennsylvania and Lehigh Valley are targeted as excellent markets. We look at properties under construction and our magic ball shows that the slowdown will give the market time to absorb what is available,” Kreiger said.  

In addition, tenant demand is projected to return in 2025 so vacancy levels will continue to drop, she added.  

“The optimum is a 7% vacancy rate for the market,” Kreiger said. “RIght now, rental rates continue to increase because the structural vacancy rate is at 7%.” 

Kreiger said some tenants are waiting for the Federal Reserve to drop interest rates because it takes financing to renovate space and buy equipment.  

“There is always a slowdown in an election year, so we are hopeful the market will do well or at least pick up as the new year rolls around,” she said.