2:30 PM
Newmark Grubb Knight Frank (NGKF) released its fourth quarter 2015 industrial reports today for the Greater Philadelphia region and the I-81/78 Corridor. The reports indicate that the I-81/78 Corridor and the Greater Philadelphia markets are healthily expanding.
Speculative development has accelerated over the past few years to satisfy the growing demand in both sections. A significant number of those projects, delivered in the fourth quarter of 2015, accounted for a record 5.2 million square feet of new speculative space during the 2015 calendar year. Of these deliveries, the Greater Philadelphia market added 563,200 square feet of Class A warehouse space, all within Southern New Jersey. Net absorption in Southern New Jersey’s submarkets far outpaced this amount of new speculative space added to the inventory. Over 2.1 million square feet of tenancy growth was charted in Southern New Jersey, driven in large part by Seldat Distribution’s sublease and occupancy of the 1,048,631-square-foot warehouse at 1900 River Road, and Subaru’s occupancy of its 1,030,050-square-foot built-to-suit at 2020 Route 130, both located in the Burlington County submarket. These transactions have reduced vacancy by 110 basis points year-over-year to close 2015 at 8.5 percent. Kurt Montagano, senior managing director, noted, “The Southern New Jersey industrial market is operating at a strong, sustainable pace and the demand we’re seeing supports future additions to the speculative supply, set to deliver in 2016.”
While Southern New Jersey performed the strongest of the Greater Philadelphia submarkets this quarter, Southeastern Pennsylvania and Delaware’s New Castle County also charted robust growth. Southeastern Pennsylvania absorbed 350,534 square feet of space occupancy over the past three months, which trimmed vacancy 10 basis points from the previous quarter to 8.0 percent, which is the tightest industrial vacancy rate in the Greater Philadelphia region. New Castle County essentially erased the demand retraction of the previous quarter by adding almost 100,000 square feet of new tenancy. Overall, vacancy in the Greater Philadelphia region decreased 20 basis points quarter-over-quarter to 8.8 percent.
Average asking rents grew, albeit at a tempered pace, in the fourth quarter. In the Greater Philadelphia region, pricing increased from $4.85 per square foot in the third quarter to $4.87 per square foot. Similar modest rent growth was seen in the I-81/78 region, where rents gained $0.04 from the previous quarter to close the quarter at $4.11 per square foot. Over the next year, rent growth is expected to continue as pricing still has gains to be made before approaching pre-recession levels. New construction is already commanding higher-than-market-average rates, and as vacancy gets tighter, landlords will be justified in increasing asking rents.
In the I-81/78 Corridor, speculative construction deliveries were 4.6 million square feet in the fourth quarter, the largest amount of new speculative product added to this market since before the Great Recession. Absorption continued to surge, posting its most impressive quarterly gain of 2015 with over 2.9 million square feet of occupancy growth, but that figure trailed construction completions. This caused an uptick in vacancy by 90 basis points to 7.6 percent. Senior Managing Director Tim Brogan noted that even with elevated amounts of construction in the pipeline, the current market fundamentals are different than they were prior to the recession. “Developers are more cautious. They’re building at a rate of 2.7 percent of the existing total market inventory right now, which demonstrates a more reasonable development environment than it was in the height of 2007, when the pace of new construction grew to over 5 percent of the total existing inventory.” With an abundance of new product added to the market this quarter, it will take time for supply and demand to reach equilibrium but with industrial space in such high demand and construction levels starting to abate, vacancy is expected to level off in the coming year.
Investor sales activity across the Philadelphia region and throughout the I-81/78 Corridor was robust in the fourth quarter, not just in terms of individual deals, but for portfolio transactions as well. Liberty Property Trust sold its 37-property office and flex portfolio in Horsham to Workspace Property Trust for $245 million and Global Logistic Properties Industrial closed on a multi-state purchase that included 10 properties in the Greater Philadelphia region. In the I-81/78 Corridor, the most notable capital sale was the purchase of 234 Walnut Bottom Road for $83 million. Referring to the transaction, Senior Managing Director Stephen Bonge said, “Investors know good opportunities when they see them. When you consider the product, quality industrial space leased long-term by strong tenants, it’s no wonder more investors are shifting their focus to these types of properties.”
Looking forward, the job growth witnessed in both the Greater Philadelphia region and the I-81/78 Corridor is likely to continue in 2016, driven largely by sectors that traditionally occupy industrial space, such as construction, trade, transportation and utilities. These indicators bode well for the industrial market to continue growing in the quarters to come. Senior Managing Director Eustace Wolfington looked even further ahead and noted that “the deepening of the Delaware River shipping channel and the planned 2017 Panama Canal expansion will undoubtedly lead to increased activity in Philadelphia’s port, leading to an even higher demand for warehouse and distribution product in the years to come.”
About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NGKF’s 12,800 professionals operate from more than 370 offices in established and emerging property markets on six continents.
With roots dating back to 1929, NGKF’s strong foundation makes it one of the most trusted names in commercial real estate. NGKF’s full-service platform comprises BGC’s real estate services segment, offering commercial real estate tenants, landlords, investors and developers a wide range of services including leasing; capital markets services, including investment sales, debt placement, appraisal, and valuation services; commercial mortgage brokerage services; as well as corporate advisory services, consulting, project and development management, and property and corporate facilities management services. For further information, visit www.ngkf.com.
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