Larry Bergen, Colliers International
Metro Philadelphia’s industrial market saw strong demand, developer confidence and declining vacancy rates in 2015. Asking rents averaged $4.43 per square foot for the region, a 4 percent increase from 2014. The overall vacancy has decreased to 7.7 percent as demand kept pace with 5.7 million square feet of completed spec development. The only submarket that is posting greater than 10 percent vacancy is New Castle County, Delaware; however, New Castle’s vacancy rate was trending downward at the end of 2015.
We continue to see healthy demand for industrial space in 2016. There could be some impact from global uncertainties, but these will be offset by continued on-shoring of manufacturing requirements and last-mile delivery expansion.
Companies seeking between 25,000 to 80,000 square feet have seen limited availability in most submarkets, particularly for purchase. Due to strong demand and reduced availability for modern, net-leased, single-tenant buildings, some investors must consider lesser-quality assets and/or secondary locations.
Sale prices and rents have increased. It is not unusual for modern bulk facilities with long-term leases in place to trade in the $90-per-square-foot range. In one recent deal, a private investor paid more than $78 per square foot for the leaseback transaction of an 85-year-old manufacturing building. Asking rents increased in all submarkets. Free rent has decreased and the spread between asking and signing rents has narrowed. Annual rent escalations have been trending upward. For instance, 2.5 to 3 percent escalations have become more prevalent. Land prices are also increasing. In the inner-ring suburban Philadelphia counties, the $125,000-per-acre price threshold has steadily risen.
Approximately 9.4 million square feet of spec development is set for delivery in the first two quarters of 2016. There may be a temporary oversupply of bulk warehouse space until demand catches up. More than 6 million square feet of the spec supply will be added to the Lehigh Valley and Southern I-81/I-83 markets where vacancy rates are in the 5 to 6 percent range.
Multiple build-to-suit projects will come on line in early 2016, including buildings for WW Grainger and H&M in Burlington County, New Jersey.
Southern New Jersey has begun to see more activity from Central and North Jersey companies as those warehouse markets have tightened. Third-party logistics companies, food and e-commerce sectors have been very active. Last-mile delivery requirements have been increasing and are likely to be more prevalent in 2016. This includes companies like FedEx expanding package deliveries, as well as smaller companies such as pre-packaged meal providers. We expect to see more of the last-mile delivery companies looking at areas near interchanges of the Pennsylvania and New Jersey turnpikes within close proximity to population centers.
Liberty Property Trust, First Industrial, Duke Realty, Hillwood Properties, Exeter, USAA, MPRT and Dermody Properties are some of the most active developers. Duke, Cabot Properties and Gramercy Property Trust have been expanding their regional holdings, and private equity investors, such as Circle Industrial, have been entering the market. In addition, there were multiple mega-deals for investment fund portfolios changed that the ownership landscape in 2015, such as an affiliate of Global Logistics Properties acquiring Industrial Income Trust.
— By Larry Bergen, Senior Vice President, Principal | Philadelphia, Colliers International. This article originally appeared in the January/February 2016 issue of Northeast Real Estate Business magazine.