While fluctuating market conditions and increased construction expenses have led to a slowdown in financing and groundbreakings for some new projects, many that are already underway are continuing. Even though demand has softened, supply-side dynamics in early 2023 remain robust due to the delayed nature of real estate development.
The categories where Philadelphia has eclipsed other Mid-Atlantic markets include the most new industrial space added over the past 12 months, at 15.3 million square feet; the most new space under construction, at 27.7 million square feet; and the highest annual absorption volume, at 11.1 million square feet. Of the industrial property projects under construction in the Philadelphia region, approximately 25% have been pre-leased.
By comparison, New York, the second highest performer across the Mid-Atlantic, delivered 9 million square feet in the past 12 months, has 21.8 million square feet under construction and clocked in a negative annual absorption rate of -1.2 million square feet.
Philadelphia’s proximity to one of the largest ports in the country, the ports of New York and New Jersey, has positioned the metropolitan area to capture spillover demand from New York and Northern New Jersey. The port’s 25% increase in processing volumes from 2020 had temporarily elevated the port to become the country’s busiest in late-2022, further fueling strong industrial growth in nearby locales.
Philadelphia was equipped to attract occupiers seeking alternatives to New York and Northern New Jersey’s highly saturated, traffic-burdened and costlier markets. Operationally, the Philadelphia area can serve the country’s densest populations within a day’s drive at about half the rent expenses of New York and a steep discount to average industrial rents in Washington D.C., Northern New Jersey and Boston. These factors have geographically and economically positioned the Philadelphia area to capitalize on recent spillover demand. Additionally, Philadelphia's port is the largest refrigerated port in the country.
Burlington County in southern New Jersey has helped to significantly drive the Philadelphia area’s recent industrial real estate performance. This county alone accounts for 32% of Philadelphia’s inventory under construction, 36% of annual delivery, and nearly 50% of annual net absorption. When evaluating smaller locales across the U.S., Burlington County is among the top 10 highest-performing industrial submarkets among the 2,900 covered by CoStar. Cecil County and Gloucester County have also significantly contributed to Philadelphia’s overall industrial performance.
Philadelphia’s supply-side metrics are solid, but at the same time, it begs the question of whether demand is sufficient to absorb the immense amount of new space that will hit the market over the next couple of years. While 7 million square feet, or 25%, of developments under construction, have already been pre-leased, 31 million square feet remains available across existing industrial sites in the Philadelphia area. In a simplified snapshot, this results in 52 million square feet of available spaces actively looking for occupants.
It will be interesting to see if leasing momentum keeps up with the performance seen between 2020-22, which averaged 28.5 million square feet of space absorbed annually. At that rate, the numbers look manageable, even with moderately softened demand ahead.
Given Philadelphia’s recent absorption performance, strategic location and economic advantages mentioned earlier, it is a well-established contender to continue attracting retailers, manufacturers and third-party logistics companies over the short and long term.
by By Brenda Nguyen Costar
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