Why do warehouses keep coming to Central Pa.?

//August 5, 2016

Why do warehouses keep coming to Central Pa.?

//August 5, 2016

And the push for more warehouses — much of it driven by investors who covet steady income from the properties — is fueling construction in new areas along Interstate 83, including parts of northern York County.

Blaze Cambruzzi, COO of Rock Commercial Real Estate LLC, called northern York County the “sleeping giant” of the region.

“That whole northern York marketplace has really got tremendous opportunity,” he said, citing the Dillsburg area as part of that marketplace. “Only now are we starting to see economic prosperity start to take shape.”

Goodman Birtcher, which is building two warehouses totaling about 1.8 million square feet in Newberry Township, might be the latest developer in that area, but it won’t be the last.

“Clearly, it’s a market that is still in demand,” said Ian Anderson, director of research and analysis for global real estate firm CBRE Group Inc.

The pace of construction is not likely to slow down, given trends in shipping: Companies are bracing for an influx of goods shipped through the Panama Canal, which is being widened, and online retailers want to get goods more quickly into consumers’ hands.

The emphasis on faster home deliveries will mean more facilities in closer proximity, said Pete Swan, associate professor of logistics and operations management at Penn State Harrisburg.

“It may not be as big as the big (warehouses) you see (now),” he said, “but more warehouses to accomplish same-day delivery.”

If there’s a local ceiling for big-box development, we’re “not there yet,” Swan added.  

What does the future hold?

Anderson said demand for space in Central Pennsylvania isn’t likely to waver anytime soon. But CBRE is already seeing smaller-scale interest — more 500,000-square-foot warehouses and less in the 1 million-plus range.

General contractors who specialize in the market, including Silver Spring Township-based R.S. Mowery & Sons Inc., see at least two years of “aggressive” development.

Beyond that, it’s hard to project, said David Cross, Mowery’s president and COO.

Most companies that need space in the midstate already have a presence here. Unless local zoning changes make new land eligible for development, available properties are largely known.

Of course, if the global economy slides into recession, it could slow the pace of development.

The wild card is the expansion of the Panama Canal, Swan said.

The wider canal is expected to shift more cargo traffic to the East Coast, which creates more need for warehouses.

And this region’s lower land costs compared to New Jersey should continue to attract developers to Central Pennsylvania and surrounding markets such as the Lehigh Valley.

But availability of workers to run these facilities could be a challenge, which could raise wages and work against Central Pennsylvania in the site selection process, according to CBRE.

However, people looking for better paying jobs will travel and the region’s strong highway network makes it easier to get to jobs, Cambruzzi said.

Employers might simply have to cast a wider net for workers, he said. And higher wages aren’t the only way to compete. More paid time off and flexible schedules — a four-day work week, for example — are added benefits employers could offer.

On the flip side, greater automation in today’s big boxes limits the size of the workforce needed at each facility, he said.

Who is building?

Food suppliers and wholesalers are driving a lot of the demand for new space, according to CBRE’s research. Third-party logistics companies also are expanding.

However, private equity firms and real estate investment trusts, those largely responsible for financing big development, are leading much of the actual construction.

Those groups, many based outside of Pennsylvania, can take bigger risks and pay more than local developers because they have much bigger pools of investors and can accept lower returns, Cambruzzi said. However, that return is likely better — at least more consistent — than the volatile stock market.  

“As long as there is demand for investment, you will see money going in,” Cambruzzi said.

But with big risks come greater secrecy about tenants, which is why most new warehouse projects are presented as speculative. Developers don’t want to risk losing a tenant to another project before they can deliver.

Once they do, they have a stable return rolling in.

Warehouses generally supply a large group of retail stores and have flexibility in their reach, so they are safer investments than individual stores that depend more on location to succeed.  

“As the economy slips, the performance might go down, but the warehouse is necessary to do business. It’s more centralized,” Cambruzzi said. “The warehouse is the commodity.”  

And large developers can leverage that commodity.

They often have stronger relationships with key tenants, relationships that can benefit both parties. Developers wants to expand their real estate holdings, while their tenants need more space to get to market faster.

What about rents?

Warehouse and distribution tenants in Central Pennsylvania paid 7.7 percent more to rent industrial space in the second quarter compared with the same period a year ago, according to global real estate firm CBRE Group Inc.

And demand continues to outpace supply, which should send rents even higher.

Higher land prices for warehouse development, meanwhile, could have a ripple effect on the value of other types of real estate, real estate and supply chain professionals said.

Warehouse trends

The industrial market continues to grow in Central Pennsylvania, with rental rates pushing new records as demand remains strong. But how does today’s market compare with the
market a decade ago? Here are some highlights from CBRE Group Inc.:

• Over the last 18 months, there have been five industrial buildings erected that were more than 1 million square feet in size. Between 2006 and 2008, there were none.

But that trend of big warehouses may be slowing in favor of smaller facilities designed to meet the demand for faster home deliveries, supply chain and real estate experts said. In order for an Amazon and others to achieve same-day delivery, they need more buildings closer to shoppers.

Package delivery giants such as Fedex and UPS are impacted by these trends as they handle most home deliveries.

• The greatest amount of industrial space under construction leading up the recession was 3.3 million square feet, a figure recorded in the fourth quarter of 2008. The highest point so far during the current cycle came in the third quarter of 2015, when 8.9 million square feet was under construction.

As the new warehouses popped up, the vacancy rate rose to 6.1 percent, up from a record low of 4.3 percent at the end of 2015. The highest vacancy rate was 13.4 percent in the fourth quarter of 2009.

• In the second quarter, 3.5 million square feet was under construction in Central Pennsylvania, down from 4 million square feet in the first quarter.

By comparison, about 5.4 million square feet was under construction in the Lehigh Valley in the second quarter.

In the Greater Philadelphia industrial market that CBRE tracks — which includes Northeast Pennsylvania, the Philadelphia area, southern New Jersey and a piece of Delaware — 11.5 million square feet were under construction.

Collectively, the larger regional market has nearly 462 million square feet of inventory.

Central Pennsylvania accounts for about 161 million square feet and is the largest industrial market in the state. By contrast, the Southeast has about 111 million square feet of inventory, and the Lehigh Valley about 69 million square feet.

By the numbers

CBRE Group Inc. recently released a second quarter report on the industrial market, an umbrella term that primarily refers to warehouses and distribution centers. Manufacturing facilities also fall in this category.

Here is what the company had to say about Central Pennsylvania, which includes Cumberland, Dauphin, Franklin, Lancaster, Lebanon and York counties:

• 13 million: The amount of industrial square footage tenants eyeing the midstate and surrounding markets in the Lehigh Valley and Northeast Pennsylvania were seeking.

• 9 million: The amount of industrial square footage in development.

• 6 million: The amount in square feet by which occupied industrial space has increased over the last year.

• 161 million: Existing inventory of industrial space.

• 94 percent: Occupancy rate of industrial real estate.

• $4.32: Average industrial rents are up from $4.01 per square foot last year. The previous high during the last decade was $4.27 per square foot in the fourth quarter of 2006. By comparison, the average in the Lehigh Valley was $4.68 in the second quarter.

• $4.72: Cumberland County had the highest price per square foot in Central Pennsylvania. Dauphin County had the lowest at $3.94 per square foot.