Construction boom continues for Light Industrial properties along I-78/I-81 corridor

The overwhelming demand for light industrial and warehousing space along the I-78/I-81 corridor should last through the end of the year and likely beyond, said Vince Ranalli, executive vice president for CBRE.

The company has released its latest report on development in the corridor, which shows available space running out, new development on the upswing and an overall hike in leasing costs.

“We’re ahead of where we expected,” Ranalli said. “I don’t think anyone could have imaged since the pandemic how much space we would absorb.”

The corridor had a record-setting 7.9 million square feet of absorption in the second quarter of 2021 alone.

“That’s nearly 8 million square feet of space in one quarter. I remember when 8 million square feet was a good year,” he said. “It’s unprecedented and we see no signs of a slowdown.”

Overall vacancy fell to 5.8%, further underscoring the record demand for space.

To meet the demand, developers are building new facilities as fast as they can.

In 2020 5 million square feet of new construction was completed.  About 9 million square feet of new light industrial construction is in the pipeline.

The Northeast Pennsylvania and Lehigh Valley markets posted the highest occupancy gains in the second quarter, accounting for most of the net absorption.

In the Lehigh Valley, much of the occupancy growth was from the 3.6 million square feet of construction deliveries as very little existing Class A space is available within that market.

While the bulk of the construction remains in the Central Pennsylvania and Lehigh Valley markets, because of the lack of available properties in the Lehigh Valley and Central Pennsylvania area, the report shows gains in the Northeastern Pennsylvania region.

Northeastern Pennsylvania now represents 16.1% of the overall development in the corridor with 3.1 million square feet under construction.


Sticker Shock

Available land is the one thing slowing down development.

For those who do want the access in the Lehigh Valley, Ranalli said, they have to get creative.

Companies looking to build out their network of warehouse and logistics space are turning to brownfields sites, where they are knocking down old buildings and constructing new facilities.

Ranalli gave Bridge Point 78 in Phillipsburg, New Jersey as an example. The 3.85-million-square-foot industrial complex was created on the site of the former Ingersoll Rand.

In other cases, developers are knocking down old office buildings or shopping centers to build logistics facilities because of the changing market due to the shifting consumer preference towards ecommerce.

The demand for space, coupled with drastically rising construction costs has led rents to record highs, Ranalli said.

“Some tenants are really getting sticker shock,” he said.

According to the report, Northampton County has the highest average rent for industrial space at an average of $6.72 per square foot. Lehigh County is next with average leasing rates of $6.21.

By comparison the other regions are less expensive. The average rent for industrial space in York County was $5.21 and Dauphin County had an average lease rate of $5.46.

“In some cases we’re seeing Class A space at above $7 per square foot. It’s really unprecedented,” Ranalli said.

The corridor is still a bargain, rent wise for companies looking for light industrial properties in the Northeast when compared to North and Central New Jersey, so Ranalli said he expects rents to remain high for the foreseeable future

Along the interstates, a resilient commercial real estate market

While the shutdown of real estate and construction in Pennsylvania from the COVID-19 pandemic may have slowed down the market, a report by CBRE shows the region along the I-78/I81 corridor had robust commercial real estate activity during the second quarter. And it’s activity Bill Wolf, executive vice president at CBRE’s Allentown office, expects to be ongoing and sustainable.

The corridor stretches through the heart of Central Pennsylvania, the Lehigh Valley and into northeast Pennsylvania, but is strongest in Lehigh.

Wolf said COVID-19 may have set projects and deals back by about two months, but by the end of the second quarter commercial real estate deals were rebounding.

“Since late spring and early summer new activity and activity that had been on hold has been strong especially in the manufacturing sector,” he said.

Food & beverage manufacturers, third-party logistics companies, e-commerce and retailers drove demand while manufacturers and packaging companies rounded out most of the remaining leases signed so far in 2020.

Much of the demand came from food and consumer goods, which are increasing their product lines, and warehousing to keep items closer to the store shelves and the consumer market. Experiences with shortages of food and staple items such as toilet paper and cleaning supplies during the pandemic showed those in charge of logistics the importance of keeping a large supply these items close by.

“It used to be a company felt if they had enough stock for a three month demand that was good enough. That’s no longer the case,” he said.

With its large population size and proximity to other dense population areas such as New York and Philadelphia, the Lehigh Valley market remained the most sought-after location within the I-78/I-81 Corridor. Because of that contract rents remained the highest there compared to the rest of the market. 

In fact, Wolf said, development in the Lehigh Valley market has been so strong, it’s trickling down to the Harrisburg area and the northeast, which have more availability and lower prices.

“They have more availability of sites and will continue to benefit,” Wolf said. “The Lehigh Valley still has the most interest, but if the companies find space in the Lehigh Valley they may push elsewhere.”

Don Cunningham, president and CEO of the Lehigh Valley Economic Development Corp. agreed that while demand remains high post-COVID-19, the region’s market is having some difficulty meeting that demand.

“One of the biggest challenges is availability, the availability of buildings, land workers,” Cunningham said.

With commercial rent on average $1 per square foot more than those in Central and Northeast Pennsylvania, there is some fiscal draw to those regions.

“We’re no longer the cheap deal we were 10 years ago when we could undercut other areas on price,” said Cunningham. “You have to adapt and adjust.”

With a reasonably tight market overall in the corridor, CBRE is predicting a boost to the construction industry to provide the facilities companies are demanding.

CBRE expects another 10.3 million square feet of new construction projects to deliver in the remainder of this year along the I-78/I-81 corridor, with 3.2 million square feet already leased. 

Wolf said given current levels of demand posted so far this year, there is only about seven quarters worth of either existing or under construction supply of industrial space.

Overall, Wolf said CBRE is predicting that the commercial real estate market along the I-78/I-81 corridor will stay resilient post COVID-19 and will continue to grow.

“The 2020 market is stronger than it’s ever been,” he said.