Newmark Grubb Knight Frank (NGKF) released its third quarter 2015 industrial reports for Greater Philadelphia and the I-81/78 Corridor. According to the reports, vacancy increased incrementally across the region this quarter due to large construction deliveries, while leasing activity remains robust.
During the third quarter of 2015, positive and negative absorption nearly reached parity across the Greater Philadelphia region, as only 72,000 square feet of tenancy growth was tallied. Vacancy increased 10 basis points to 9.0% as demand was moderately outpaced by approximately 370,000 square feet in new construction delivered to the market, including New Hudson Facades’ 180,000-square-foot building in Delaware County, which the company occupied upon completion. The Greater Philadelphia sector suffered an occupancy loss of over 900,000 square feet following Georgia-Pacific’s withdrawal out of the building at 3000 AM Drive in Quakertown, with plans to occupy Prologis Park 81 in the I-81/78 Corridor upon its delivery next quarter. Southern New Jersey drove the overwhelming majority of occupancy growth within the region - growth which informs the rise of speculative construction in the Burlington and Gloucester submarkets. There are currently seven speculative projects in the Greater Philadelphia region under construction, five of which are located in Southern New Jersey. According to Senior Managing Director Kurt Montagano, “The vacancy rate for the Southern New Jersey industrial market is the lowest it has been since before the Great Recession. With persistent, increasing demand and staggered delivery dates for speculative construction, the risk of oversupply in the Southern New Jersey region is low.” Pricing this quarter in the Southern New Jersey sector remained competitive and was lower than the market average, at $4.20 per square foot. The total average rent across the Greater Philadelphia region remained stable at $4.85 per square foot, led by the Philadelphia submarkets’ average asking rent of $5.07 per square foot.
Investor sales activity across the Philadelphia region remained strong this quarter, with more than $600 million in sales closed year-to-date. The largest investment sale in the third quarter was Gramercy Property Trust’s acquisition of 9355 Blue Grass Road in Philadelphia County for $102 per square foot. Eustace Wolfington, senior managing director, commented on the sale, “REITs are attracted to the stability of income and tenancy that prime industrial product offers, and will continue to eye the region for new acquisition opportunities.”
In the I-81/78 corridor, demand added approximately 800,000 square feet of tenancy gains to the year-to-date accumulation of nearly 4.3 million square feet of positive absorption. The vacancy rate across the region increased by 50 basis points to 6.7%, however, as 2.4 million square feet of construction completions delivered this quarter. Prologis’s new speculative distribution facility at 225 Allen Road comprised a little less than half of that total. Overall asking rents in the I-81/78 Corridor increased to $4.07 per square foot - the highest in six years - driven in part by new construction pricing edging towards $5 per square foot. In addition to the speculative construction completions posted this quarter, several million square feet of speculative construction will deliver by the year’s end, and vacancy will likely rise incrementally in reaction to the new availabilities on the market. However, as Tim Brogan, senior managing director, pointed out, “The vacancy rate in both Central Pennsylvania and in the Lehigh Valley, where most of the speculative construction is slated to deliver, is well below market average and the demand for high-quality industrial space remains increasingly vigorous in the region.” Guided by economic factors such as the charted increase across the nation in consumer spending and regional job growth, particularly in the trade and transportation industry, tenancy gains in the warehouse and distribution sector should eventually catch up to construction completions.
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