The rapid evolution of e-commerce — including the relationships between the companies that manufacture product and the e-tailers that distribute and sell that product — is arguably the most significant factor impacting the Philadelphia-area and larger regional industrial real estate market today. And for those of us following this phenomenon closely, it feels like we may just be in the second inning of a nine-inning game at Citizens Bank Park.
Simply put, e-commerce is creating strong industrial demand. A number of new companies are popping up on the radar, particularly along Pennsylvania’s I-81/I-78 distribution corridor.
In the fourth quarter, Walmart’s 1.2 million-square-foot lease at a Liberty Property Trust asset in Bethlehem announced a new neighbor — Walmart again! Adjacent to Liberty’s building will be an additional 1 million square feet to be occupied by Walmart and the space is being developed by Majestic specifically for e-commerce.
Earlier in 2013, One Kings Lane leased 500,000 square feet from DCT Industrial in Kutztown. Amazon now has a 4.8 million-square-foot footprint in Pennsylvania with constant threats of additional growth. The list goes on.
These sizable transactions drove leasing volume up to nearly 9.7 million square feet at the end of the third quarter of 2013, a 23.5 percent year-over-year increase. Fourth quarter numbers are anticipated to outperform 2012, which was a very active year.
These transactions also have impacted the region’s vacancy rates. For example, the overall vacancy rate for the Lehigh Valley declined to 4.2 percent during the third quarter — its lowest level since 2001 and will be even lower upon release of our fourth quarter statistics. Walmart’s commitment, which took a vacant spec building off the market, was a major contributor.
Walmart’s lease also represented a milestone for the 1.7 million square feet of speculative construction completed in the I-81/I-78 corridor toward the end of 2012. That inventory, all of which was vacant at the time of delivery, is now 94 percent occupied. Coupled with tightening vacancy rates across the board, this has created a supply/demand balance that is making the development community happy.
Additional spec developments by Liberty Property Trust (800,000 square feet in Bethlehem), Clarion Partners/Trammell Crow (677,000 square feet in Bethlehem) and First Industrial Realty Trust (700,000 square feet in York) all are seeing strong interest from major users out in the marketplace.
As the number of modern big box availabilities continues to decrease, rents are steadily trending upward. We not only have recaptured the momentum lost during the Great Recession and rebounded back to peak market pricing, but in certain sectors we are redefining peak pricing. This is especially true in the Lehigh Valley submarket and for any Class A bulk availability in Central Pennsylvania.
Looking back and ahead, 2013 was a banner year for large build-to-suit construction completions as well as construction starts for major tenants like Proctor & Gamble, American Eagle, Dollar General and PetSmart. We expect to see a shift in 2014 that will bring strong levels of activity in the smaller and mid-size range. Hypothetically, this will prompt the development community, which has been so heavily focused on the 1 million-square-foot sector, to consider smaller projects that support local industrial activity.
Still, the overriding theme for the coming year will be the continued impact of e-commerce on the Pennsylvania industrial market.
Unrelated to e-commerce, in early 2013, Norfolk opened a new intermodal facility in Greencastle promoting the overall infrastructure for industrial users in Pennsylvania. Now, FedEx is moving forward with a massive build-to-suit terminal in the Lehigh Valley specifically to support the growing demand of e-commerce companies and the online purchasing trends. This new facility significantly boosts the delivery infrastructure the parcel services can access here and, really, the larger Mid-Atlantic region throughout the Northeast United States. This, in turn, will reinforce the market’s appeal for e-commerce tenants, and further benefit the landlords and real estate services providers that support them.
— By Gerry Blinebury Jr., Senior Director, Cushman & Wakefield. This article originally appeared in the January / February 2014 issue of Northeast Real Estate Business magazine.