Philadelphia’s Industrial Market Is Ready for More Speculative Development
Demand for industrial space in Philadelphia and suburban Pennsylvania counties has been strong over the last five years. The last meaningful wave of speculative construction occurred in 2002. Couple that with the fact that much of the area’s industrial inventory was built prior to 1980, and we have a market that is ready to absorb a rising volume of speculative product.
Organic growth and new-to-market requirements have absorbed most of the quality supply, leaving inventory that is at 40 to 50 years old and functionally obsolete for many requirements of today’s e-commerce users.
Activity has been slower in the year’s first six months as companies have been more cautious about planning for future growth. Another factor has been the lack of quality-space options, with less than 1 percent of the inventory considered institutional, Class A space.
This dearth of quality space is reflected in the single-digit vacancies. Developers, tenants and brokers will be watching closely as over 5 million square feet of speculative industrial space is projected to deliver in the next 12 to 24 months.
Strong Urban Demand
There is pent-up demand from local warehouse and manufacturing companies as well as increasing demand from third-party logistics (3PLs) users, food distribution and e-commerce companies. This demand revolves heavily around last-mile, same-day and short-window delivery options to the commercial and residential base, as well as the ability to pull from deep, urban labor markets.
Asking rents have increased by 10 percent, or 53 cents per square foot, since the end of 2017 to $5.99 per square foot on a triple-net basis. Prospective tenants realizes that the efficient, modern space will come at a higher price and has become receptive to considering the rents for new construction or entertaining renewal strategies.
With upward pressure on rents, along with cap rate compression, property values have naturally increased. The average sale price for a user building has increased by 25 percent in the last two years. While the average is $56.25 per square foot, a well-located, 40-year-old building in the 20,000- to 30,000-square-foot range may easily sell for over $75 per square foot.
The return of speculative development will be particularly concentrated along the I-95/I-295 corridor. In this densely populated urbanized area, there are few tracts available for more industrial development. The majority of new development is taking place in this area due to its proximity to the vast urban populations between Washington and New York, with Philadelphia in the middle.
Developers have been acquiring existing office and industrial buildings to renovate or raze and redevelop, and showing increased interest in environmentally challenged, brownfield sites for redevelopment. With land prices in the Lehigh Valley approaching historic highs, spec development along the Route 309 and I-476 corridors has increased to capture demand spillover.
Colliers International is currently leasing Boulevard Logistics Center in northeast Philadelphia. Activity has been strong, and renovations are underway for the remaining 120,000-square-foot section of 11501 Roosevelt Boulevard, space that features 31-foot clear heights. The adjacent lot has been cleared and ready for construction of a 465,000-square-foot distribution facility with 36-foot clear heights.
Also in the northeast, construction is finishing up at Philadelphia Logistics Center, a 207,370-square-foot spec building. In Bucks County, the 235,240-square-foot I-95 Trade Center in Bensalem is underway. Lastly, Urban Outfitters is taking occupancy of a 309,000-square-foot distribution center for its Nuuly clothing rental subscription service.
Construction is done on Building 1 at Pennridge Airport Business Park in Perkasie. The 101,920-square-foot asset with 32-foot clear heights was developed with manufacturing, pharmaceutical and other integrated uses in mind.
There has been significant interest from operations located within the adjacent submarkets, as well as from those companies looking to expand into suburban Philadelphia. Additionally, MRP Industrial completed construction of two buildings totaling 114,000 and 145,400 square feet in Quakertown.
Regionally-based developers with existing sites under control such as Nappen and Associates, Herring Properties, Alliance HSP and Greek Development have been active and recently joined by national developers NorthPoint Development, MRP, Ridge Development and Core5 Industrial Partners.
Modern, net-leased bulk facilities are trading for over $100 per square foot, but we have few of these opportunities in the immediate Philadelphia market. FAR prices for land have increased sharply, topping $20 per square foot.
Looking forward, Philadelphia Energy Solutions’ demise has fueled much speculation about the fate of its refinery location. With 1,400-plus acres in an extremely well-located urban location, a variety of industrial and perhaps other commercial developments could be in store for portions of this vast site.
This will not happen quickly, but it offers a tremendous opportunity if strong market fundamentals hold and all parties cooperate to allow for a controlled redevelopment.
— By Richard Gorodesky, senior managing director; Michael Golarz, senior vice president; and Tom Golarz, vice president, Colliers International. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.