Thursday, October 6, 2016

Philadelphia Industrial CRE Markets are Catching Up to Other Sectors

by Matthew Rothstein, Bisnow
If there’s one thing that differentiates industrial from the other forms of commercial real estate, it’s the way it interacts with the land around it. Office, residential and retail increasingly want to share the same spaces and create live/work/play environments. Most industrial spaces are still better served by largely keeping to themselves so trucks can move with ease and freedom.

Transportation has always been crucial to industrial spaces, but now it might be the most crucial factor. That’s because e-commerce has begun to dominate the retail economy, placing a premium on shipping and requiring more distribution centers. E-retailers generally require more facilities with a smaller footprint, easy access to more employees, and closer proximity to consumers than manufacturing plants, the industrial sector's classic use. “For projects that are a complicated product mix—things like supplying major retailers—[distribution] isn’t easily automated and requires a lot of employees to work it,” says PIDC’s Tom Dalfo. For Philadelphia, that's good news. “It’s not an easy thing to recruit a thousand people to work in a warehouse, but we have a very deep labor pool for that,” Tom says. What’s more, Philadelphia already has clearly defined industrial zones, which has empowered PIDC to facilitate land sales, development and financing. Industrial uses for land can often cause a conflict with NIMBYs (what doesn't these days?), who don’t want to be anywhere near the truck traffic that comes with an industrial building. “If there’s pre-existing residential, office or mixed-use in place, you tend to get significant resistance from townships during the entitlement process."

“In Philadelphia, that’s not really a challenge,” Tom says. “The properties that would be interesting to developers have been zoned as industrial for quite some time, and I think the neighboring residential populations and the city support that.” Even though industrial zones are kept separate, their presence in a city means they aren’t exactly isolated—a crucial point when trying to recruit a workforce. “The pattern of development is so tight in Philadelphia that [retail] doesn’t necessarily need to be integrated into the industrial district,” Tom says. Philly also benefits from its position among the Northeast’s cities, positioned to be a distribution base to both Washington, DC, and New York, with a better situation for industrial development than either. With all those factors in its favor, it’s no surprise that the industrial market in Philadelphia is trending upward. "The drivers of demand for industrial activity are very different than the drivers for residential and retail and commercial," Tom says. "That said, I think a rising tide lifts all boats, and investors who are active in the city now, and were not active five or 10 years ago, operate in many different areas. The extent that they’re in this market means they can deploy their investments a little more broadly than before.”

There is another connection, beyond proximity, between Philadelphia’s strong residential and commercial markets—there are more people and jobs here than there have been in years, and, if nothing else, that means more consumers need products shipped to them here. That demand has to be met by someone. In the surrounding area, industrial developments have more space to work with, and often house the larger distribution centers that service wider regions. There, just as in Philly proper, indicators for the market are positive. “Regionally, we're in the fifth year of steady institutional investor demand, significant tenant activity and rising rental rates, an active speculative market that risks outpacing near-term demand in certain locations.” With all these good signs for demand in the industrial market, many developers are building industrial sites on spec, which always presents a danger of overbuilding. In urban Philadelphia, building costs are too high to do so, but the greater region doesn’t always possess the same natural barrier to entry. “Some [investors] have chosen to develop in secondary locations while underwriting core market rental rates in order to establish a presence in this region. They’re taking risks beyond what MRP Industrial is comfortable promoting to our capital partners.” Their enthusiasm is understandable, but also risks creating something Philadelphia rarely has to deal with—a bubble. Still, there is little cause for anything but enthusiasm, especially with respect to Philadelphia’s urban market. It’s simply too well-positioned for the changing climate of industrial real estate for any other sentiment.

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