The coronavirus caused some minor disruption to Pennsylvania's Lehigh Valley logistics market through the second quarter, but fallout from the pandemic was largely limited to investment activity.
Roughly 60 deals closed through 2020’s tumultuous first two quarters, but only a handful finalized from April through June. With one exception, these were small properties trading between local buyers.
Given the uncertainty, its understandable why investment remains mostly muted through the third quarter; However, a June acquisition of the five-star, 475,000-square-foot LogistiCenter 33 could indicate investor confidence slowly coming back. The $62.5 million deal was easily the largest of the quarter and involved Black Creek Industrial. The Denver-based REIT acquired the asset for roughly $130 per square foot, comparing quite favorably to the market average near $85 per square foot.
Nearly everyone involved in the logistics industry remains bullish about its future, and it’s not hard to see why. The pandemic has forced the nation to rapidly adapt to online shopping, and e-commerce levels surged through the second quarter. According to Adobe’s Digital Economy Index, e-commerce growth has accelerated about five years in the past three months. Total online spending for May, at $82.5 billion, is up 77% from that same time in 2019.
Lehigh Valley is uniquely situated to take advantage of this trend. The market is at the intersection of I-79 and I-476, which allows distributors direct access to all the northeast’s major cities as well as other prominent shipping nodes like Nashville and Columbus.
Consequently, more than 10 million square feet was underway at the time of the shutdown, and builders still managed to deliver roughly 1 million square feet through the second quarter. The most notable of these new properties was at 7378 Airport Road, a 450,000-square-foot distribution center near the international airport in Bath.
The airport area has seen a flurry of construction and leasing activity in recent years. Within a five-mile radius, there’s close to 2.3 million square feet of logistics space underway, and it was here that the biggest lease of the second quarter finalized, when Geodis signed for a million square feet in April.
This type of sustained demand has given owners the confidence to continue building in the midst of a world-altering pandemic, and close to 2.3 million square feet broke ground between April and June.
While vacancies understandably softened somewhat through the second quarter, this is largely the result of incoming supply and a handful of moveouts. Because of the primacy of location in shipping, Lehigh attracts some of the biggest names in logistics, and it had a relatively low level of at-risk tenants when the coronavirus arrived. This should insulate owners of existing supply in the coming months, as millions of square feet in spec space arrives.
CoStar data shows less than half of this space was pre-leased at the end of second quarter, and an excess of supply might drag on rents. However, growth over the past several years has been otherwise healthy, and year over year changes remained positive through the second quarter. At the end of June, the average space in Lehigh was leasing for close to $6.20 per square foot, a year-over-year change of nearly 5%.
Lehigh will remain a market worth monitoring through the third quarter. New space arriving during so much uncertainty will test demand like never before and the speed of lease-up will likely impact both rents and investment volume.
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