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Midstate warehouse market seen as softening

Despite dip in demand, rental rates rise

While it remains one of the strongest markets in the country for warehouse development, big-box activity in the Interstate 78/Interstate 81 corridor may be starting to soften.

CBRE Research, an arm of real estate firm CBRE Group Inc., said leasing volume and tracked requirements for space have dipped in the region, which includes Central Pennsylvania, the Lehigh Valley and Northeast Pennsylvania, according to a first-quarter report.

The corridor saw just under 200,000 square feet of absorption in the first quarter, the smallest quarterly tally in four years, according to CBRE. The total fell due to some consolidation and vacating of space by larger tenants in the midstate, such as Ozburn-Hessey Logistics. 

Despite the downward tick in demand, the region saw rents jump 18 cents from the fourth quarter to $4.37 per square foot in the first quarter, according to CBRE.

“This increase is mainly due to higher-priced new warehouse/distribution product hitting the market or in the development pipeline, along with consistently low vacancy rates throughout each submarket,” CBRE said.

CBRE said a growing percentage of new warehouse products are built-to-suit, suggesting developers are “wary of oversupplying the market with spec space.” About 34 percent of development underway along the I-78/I-81 corridor is build-to-suit.

Still, nearly 13 million square feet of industrial space was under construction in the first quarter, up from about 10.5 million in the fourth quarter of 2016. And about 1.1 million square feet was completed in the first quarter.

“CBRE Research does not foresee a fall into contraction for this market in 2017; rather, a sustained period of balance between supply and demand,” the firm wrote.

In Central Pennsylvania, about 4 million square feet of space was under construction. The midstate is the largest submarket in the commonwealth with 162.7 million square feet of industrial real estate.

By comparison, the Lehigh Valley had 6.3 million square feet under construction and is one of the tightest and most expensive markets, with lease rates averaging $4.63 per square foot. Northampton County was sitting at $4.88 per square foot in the first quarter, the highest rate in the region.

Central Pennsylvania averaged $4.42 per square foot in the first quarter, up from $4.36 in the fourth quarter. Cumberland County was the most expensive county in the midstate, with average lease rates of $4.76 per square foot in the first quarter. 

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