Newmark Grubb Knight Frank (NGKF) has released its second quarter 2015 industrial reports for the greater Philadelphia region and the I-81/78 Corridor. According to the reports, development activity is orienting more toward speculative projects.
Within the greater Philadelphia industrial market, one million square feet of occupancy gains were modestly outpaced by 1.2 million square feet of construction completions. While the amount of supply under construction remains stable near the recent four year average of 3.5 million square feet, the portion of speculative space comprising current development is on the rise.
Senior Managing Director Eustace Wolfington noted, “Although developers had been somewhat cautious following the downturn last cycle, rising rents and strong demand increased their appetite for risk in recent quarters.” He continued, “Capital market forces are also pushing toward greater speculative construction. Having just returned from the Milken Institute Global Conference, one overarching theme rang clear to me: investors remain averse to high risk and continue to hone their interest in U.S. opportunities in order to preserve capital in the wake of global economic and geopolitical unrest in much of the remaining portions of the globe. This addition of capital to the commercial real estate market will compress capitalization rates, further growing developers’ appetite for speculative construction.”
As modern distribution product is added to the market, some existing industrial space is being creatively adapted for reuse. Destination Maternity’s former headquarters in Northern Liberties is slated to be converted into innovative office space to capitalize on the ongoing transformation of the neighborhood into a vibrant work community.
Investor sales activity across the Philadelphia region remains strong; in fact, with more than $423 million in sales closed during the first half of the year alone, 2015 is on track to overtake the previous years’ totals. While investment sales volume along the I-81/78 corridor decreased this quarter, it points to a lack of opportunity rather than a lack of interest, given that more than one fifth of the warehouse inventory has changed hands over the past two-and-a-half years.
Senior Managing Director Steve Bonge asserts, “Well-tenanted, stabilized industrial product in Eastern PA has been and will continue to be a focus for REITs and other investors.”
From a leasing perspective, the I-81/78 corridor endured its 25th consecutive quarter of sustained demand for industrial space, as average asking rents grew 3.1% quarter-over-quarter, and vacancy fell ten basis points, thus supporting the rise of speculative development in the Lehigh Valley and across Central Pennsylvania. Currently, speculative construction accounts for 61.7% of development activity.
“The risk of oversupply as a result of this speculative development is low”, said Tim Brogan, senior managing director. “This quarter saw the largest increase in consumer spending since 2009, and that’s going to fuel continued demand for warehouse and distribution space along major trade corridors”.
Indeed, third party logistics companies and retailers were the largest leasers of product this quarter; NFI Industries occupied a 618,850-square-foot distribution facility in Mount Pocono, Pennsylvania, while also signing a lease for the 231,500-square-foot warehouse that is under construction in Allentown. Retailers like ThredUp and Hearth & Home also inked significant leases. With a vacancy rate below 5% in the Lehigh Valley and in Central PA for Class A logistics space, and rents for new construction commanding well above the $4.00/SF mark, expect the expansion phase within the I-81/78 corridor to continue.
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