Monday, November 16, 2020

Something Big is Going on in Little Reading, PA for Real Estate and Development

by Ben Atwood Costar

Reading is officially Pennsylvania's most mysterious market.

Those following the industrial development unfolding along the Interstate 81 corridor can't help but notice some anomalies in this small market's data set that might indicate something big is afoot.

For instance: This was a dormant region until 2017 when, out of nowhere, construction popped off like a firecracker. Over the past four years, there’s been more than 11 million square feet of industrial construction, but in the 20 years prior to that period, developers added just over 7 million square feet.

In the midst of a pandemic, Reading isn't letting up. Since July, developers have broken ground on nearly 4 million square feet of new space here. That’s roughly equivalent to the market's total inventory expansion between 2004 and 2016, and much of this is speculative, meaning no tenant has been locked in before construction began.

On the surface this makes some sense, as Reading is in a nice spot for shippers. It sits on I-81, which allows goods to be moved into New York City and its sprawling suburbs in a few hours, and the interstate also serves as a direct pipeline from shipping nodes from the west and south. Reading’s also close to the I-476/I-81 intersection that makes Lehigh Valley so popular, and most of the new and underway facilities can reach that interchange within half an hour.

But it takes a lot of conviction to build on spec, and Reading's overhead data does not inspire confidence. The vacancy rate is near 13% and demand has not kept pace with the recent supply wave at all. Absorption levels from 2016 to 2019 were piddling, and a survey of the new properties shows that more than 65% is empty.

Obviously, the companies behind these projects don’t throw darts on a map when deciding where to build next. For some reason, these developers with decades of experience felt confident enough to commence construction on these massive facilities, even with the market’s historic lack of demand.

Why? The coronavirus probably plays a big part. While the pandemic has created enormous uncertainty in the office and retail sectors, it has sent e-commerce traffic through the roof and likely changed how Americans shop forever.

Across the country, industrial demand is heating back up. CoStar data shows national leasing activity for the third quarter was at some of the highest levels seen in a decade, and sifting through Reading’s data and local news reveals peculiar anecdotes.

For instance, Amazon is bolstering its presence notably within the market. Since August, the e-commerce titan announced its intentions to expand its Reading footprint by more than 1.5 million square feet in two distribution centers. Interestingly, local officials say they didn’t court Amazon — the behemoth just showed up.

Previous CoStar Insight articles noted a number of at-risk tenants occupying large space in Reading and warned some softening could be possible. But as we enter the last few months of 2020, this hasn’t happened.

In fact, local industrial demand has strengthened, and the market’s vacancies are tightening.

Amazon isn't the only tenant sniffing around and other large deals have been closed since the second quarter. CoStar forecasts Reading will absorb just over 3.5 million square feet of industrial space by the end of 2020, which is more than the combined demand the market saw between 2014 and 2019.

Where Reading goes from here is anyone’s guess. This situation has never happened before, and the coronavirus still casts a shadow of uncertainty across everything. But the acceleration of e-commerce, the strengthening local demand and the confidence national logistics developers are showing in the market mean that lots of eyes may remain glued on central Pennsylvania for some time.

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