By Taylor Williams
So much for “survive ’til ’25.”
Until a couple months ago, industrial owners in the markets of New Jersey and Eastern Pennsylvania had good reason to believe that 2025 would be a year in which ground-up development got back on track. And in those markets, which are defined by their density and sticky tenant demand, new supply is rarely a bad thing.
According to the latest data available from Colliers, industrial vacancy rates in Philadelphia County, Southern New Jersey and the Lehigh Valley all rose in the fourth quarter by anywhere from 80 to 150 basis points. The regionwide vacancy rate stood at roughly 7 percent at the end of 2024, up from 6 percent in the fourth quarter of 2023.
The Colliers report also noted that while more than 6 million square feet of predominantly speculative product came on line in the first quarter of 2025, subsequent deliveries were forecast to decline by 40 to 50 percent in each ensuing quarter, “signaling a slowdown in supply for the remainder of the year.”
Demand in the region remains healthy but has undoubtedly moderated from record levels that prevailed several years ago, according to Scott Mertz, SIOR, president at regional brokerage firm NAI Mertz
“While large, big box spaces no longer lease immediately upon completion, there is still active tenant interest in the market,” Mertz says. “To address this, landlords are becoming more flexible, subdividing larger spaces to cater to users seeking spaces of about 100,000 square feet. Landlords are also getting more creative in their leasing proposals, offering free rent and other incentives to continue to capture peak lease rates.”
Mertz adds that in response to the softer demand, construction starts have pulled back, which reflects a “more measured approach to new development.”
Heading into this year, an illusory pattern of interest rate cuts had taken shape; the industry was generally optimistic about a new pro-business administration, and investment sales activity in the region was starting to pick back up. Market conditions appeared to be aligning such that developers could start scouting sites, entitling land, applying for permits and talking to lenders.
Those preliminary activities would still have taken quite some time to translate into new, leasable product. Nonetheless, such steps would have marked strong moves toward restoring supply-demand equilibrium. Instead, following fresh injections of uncertainty into the economy — on-again, off-again tariff threats, stalling of interest rate cuts due to renewed fears of inflation, massive overhaul of the federal government — industrial owners find themselves giving more consideration to alternative methods of adding supply.
Dov Hertz, founder and president of New York City-based DH Property Holdings, no longer expects 2025 to be a year of powerful interest rate relief that might have otherwise kickstarted the next wave of ground-up industrial development in the region.
“We’re somewhat optimistic that vacant space will be absorbed over the next 12 months, but right now, new development, especially anything of 250,000 square feet or more, just doesn’t pay unless it’s a unique situation of some sort,” he says.
DH Property Holdings, in partnership with Corebridge Financial, did recently complete ground-up construction of a pair of industrial buildings totaling 760,000 square feet in northeastern Philadelphia. But construction of that project began in early 2023, when interest rates had only just begun to rise. More recently, the company pivoted on both the scope and location of its work by undertaking an office-to-industrial conversion project in Chelmsford, Massachusetts.
Hertz says that although the debt and equity markets are still more navigable and open for business now than they were 12 to 18 months ago, he still sees value in deals that require less capitalization than ground-up development.
“We see potential in value-add industrial investment and are seeing that market pick up for two reasons,” he explains. “Sellers are becoming more realistic about pricing, and tenants, depending on the market, are still demanding space for smaller, shallow-bay product. There’s a lot of demand for those spaces, so as leases are turning, we’re seeing tenants renew at considerably higher rents.”
Why It Makes Sense
Strategies like rehabbing older spaces or seeking obsolete office buildings for potential redevelopment are not exactly novel, nor have they been nonexistent over the past couple years as organic growth has faltered. Yet the extent to which more firms pursue those initiatives this year could be a barometer of how the region’s industrial developers and investors — and the capital sources that back them — feel about the larger economy.
Sources say that right now, raising money for value-add deals is generally a much easier sell than obtaining financing for new construction.
“Development is inherently risky; entitlements are hard to work through, especially in the Northeast and Mid-Atlantic,” notes Rob Borny, east region partner at Dermody, a Nevada-based firm that is active in the region. “While Dermody continues to primarily pursue well-located development sites, we also look at acquiring existing buildings where we can add value. Buying existing buildings, enhancing them and finding added value de-risks the investment from the perspective of timing and entitlements compared to development. This approach also offers a way to deploy capital and meet an immediate need in the market.”
In spring 2023, Dermody purchased a 7.8-acre site at 110 Belmont Drive in the Central New Jersey community of Somerset and subsequently developed this 151,756-square-foot facility known as LogistiCenter at Somerset. Newly built, small-scale facilities like this remain in high demand as leasing patterns in the region continue to show signs of getting smaller.
David Greek, managing partner at regional development firm Greek Real Estate Partners, has also found that capital sources are more amenable to value-add or conversion plays. This is especially applicable to institutional capital providers, which were among the first debt and equity sources to hit the sidelines when economic conditions soured and are usually among the last to get back in the game.
“That’s where a lot of the investment market and fundraising is currently focused,” Greek says of the value-add space. “In terms of the ability to capitalize a deal, those [ground-up development] plays are mostly available as pertains to institutional capital. There’s also been a large pullback on industrial construction starts, which began last year and continued into 2025.”
Even if debt and equity providers were eager to finance ground-up construction, there aren’t a ton of opportunities to do so right now, Greek adds. Sellers of raw land and stabilized facilities alike have generally been in no hurry to sell in the last two years, as pricing has cooled despite the fact that rents have continued to perform well, albeit less spectacularly.
Borny oversees Dermody’s projects and investments in the Mid-Atlantic and New York-New Jersey markets. He views his company as a purpose-driven developer at heart that has recently embraced value-add deals simply because market conditions encourage them. In his view, there are several small ways that owners can add value without breaking the bank.
“Making major improvements and renovations such as raising a building’s roof might be a stretch for some groups, but if you’re just enhancing the building, making new office space or improving loading areas or docks, it’s an easier ask from capital sources,” he says. “Capital has been challenged and risk-averse of late, which is why we are seeing many investors focus on buying existing buildings versus targeting development sites. People do want to deploy money and get off the sideline at some point, and it’s easier to go for buying smaller existing buildings to improve.”
Hertz believes that various markets of the Northeast have the inventory to justify these particular business plans and also sees numerous cost-effective ways to actualize them.
“There is a significant supply of Class B industrial buildings, and you don’t necessarily have to do major construction for value-add deals,” he says. “It’s really more about upgrading dock doors or office space or repaving the parking lots or putting on new roofs. The core and shell are basically in decent enough condition such that it’s different from starting from scratch.”
Easier Said Than Done
The industrial value-add and conversion spaces are becoming more crowded as more groups digest economic data points that conflict with prior expectations and dim their hopes for a 2025 development boom driven by falling interest rates. Margins on those deals are inevitably becoming thinner, and owners are finding it increasingly tougher to underwrite and achieve yields that will attract picky capital providers.
“There’s been a decent amount of opportunity to buy those [value-add] deals, and there’s a decent amount of that product in the area — enough that buyers seeking those deals have thus far been able to find them,” Greek explains. “But it’s become the most competitive area of the market because it’s the investment that makes the most sense on paper given the current macroeconomic trends.”
“When we see a portfolio of several Class B buildings with a mark-to-market or value-add story in the lease structure, we expect that 20 to 25 groups will bid on it,” he continues. “So the deal gets priced to perfection, and it’s tough to make a profit when deals are priced so tightly.”
Sources also say that while value-add deals inherently carry less risk than ground-up development, they are by no means devoid of risk. Those deals tend to be more palatable, however, when they involve multi-tenant properties.
“The focus of value-add strategies has at times shifted away from single-tenant properties, which often require substantial capital expenditures to attract high-quality tenants,” explains Jonathan Klear, senior vice president at NAI Mertz. “Instead, there is a growing emphasis on shallow-bay, multi-tenant properties. By targeting these assets, investors are able to realize their desired returns by bringing rents in line with current market rates upon lease renewal or tenant turnover.”
The flip side of this approach, however, is that multi-tenant facilities have more demanding management requirements.
“With single-tenant buildings, you can manage with lean infrastructure, but with multi-tenant, you need more and different leasing and property managers,” says Greek. “So it’s not just about finding the right opportunity, but also about having the right infrastructure or partners that are capable of really driving the value within these assets. They require more hands-on management, and not all groups are set up to provide that.”
Sweet Spots
All sources interviewed for this story agree that in terms of leasing, smaller deals and spaces — call it 200,000 square feet or less — generally offer more opportunities in the current market.
Greek Real Estate Partners recently renewed its lease with Iron Mountain, a cybersecurity firm and data center operator, at this 60,000-square-foot building within Bristol Industrial Park in Levittown, Pennsylvania. The current changes and shifts in development patterns within the broader industrial market also bring with them stronger pushes to attract and retain new subsets of tenants like this.
“For deals of 100,000 square feet or less, there’s still strong demand and a willingness to pay market rents,” says Hertz. “With larger deals, the demand and/or willingness to pay rents that warrant new development isn’t there, which is a big part of why we’re not seeing new development.”
Smaller-scale, multi-tenant product is indeed fashionable at the moment, but as Borny notes, those deals aren’t for everybody. In addition to the aforementioned property management demands, small, older product isn’t likely to attract investment-grade tenants that can easily afford top-tier rents.
“Users [of that product] tend to be more localized businesses that are more subject to fluctuations in the economy — local service providers and contractors like HVAC companies or cleaning companies that serve the broader market,” he explains.
“Whether they have short- or long-term leases, when a recession hits, they’re much more susceptible, which puts the lease and credit of the cash flow at risk. This is why Dermody prefers building new buildings or purchasing existing buildings in core locations that attract customers with strong credit,” Borny concludes.
Hertz also says that tenants in these deals are typically local service providers in industries that serve the broader commercial and residential construction markets. The common thread among them all is that they don’t need ultra-high clear heights, advanced racking and sorting machinery and huge swaths of car and trailer parking, all of which tend to be key requirements of today’s e-commerce and distribution users.
Regardless of the user base, however, any multi-tenant industrial property with a low remaining weighted average lease term (WALT) is likely to command strong investor interest in this market. Although rents have held fairly steady in recent months — Colliers reports an increase of 10 cents per square foot in the greater Philadelphia area between the fourth quarters of 2023 and 2024 — this trend speaks to the overall healthy demand that this region always seems to enjoy.
“Spaces that have not been actively managed or have longer-term leases in place that are rolling or expiring in the next several years — that’s been a fairly simple and popular business plan,” says Greek. “The criteria around that are a WALT of three years or less and rents that are 20 to 30 percent below market rates — that’s the sweet spot for those deals.”
— This article originally appeared in the March/April 2025 issue of Northeast Real Estate Business magazine.