Wednesday, June 21, 2023

Mega Industrial Leases Drying Up Across the Philadelphia Region

 By Brenda Nguyen Costar

The Philadelphia region’s industrial market has experienced a significant shift in leasing trends. Historically, about five industrial leases exceeding 500,000 square feet were signed each year since 2015. But halfway into 2023, no industrial leases of that size cohort have been recorded.

Over the past six years, top retailers such as Amazon, Walmart and Burlington were responsible for the largest industrial leases in the region, with several lease deals surpassing 1 million square feet. In the past six months, however, retailers have applied the brakes on their leasing activity. Third-party logistics companies have become the primary renters of the largest spaces. Nevertheless, these leases have not reached the scale of the mega-warehouses seen in recent years.

The largest industrial lease signed so far in 2023 is for a modest 350,000 square feet. Barry Callebaut, a cocoa producer, signed a seven-year lease at the Delco Logistics Center. in Eddystone, Pennsylvania. The company aims to optimize its local production and distribution network with the new warehouse, near the Philadelphia International Airport.

Only three additional leases in the past six months have exceeded 250,000 square feet. YesWay Logistics, Champion Services and Dependable Express – all transportation and warehousing companies – leased approximately 250,000 square feet each in the region.

High interest rates and concerns of an impending recession later in 2023 have impacted the leasing environment, particularly for massive industrial spaces. However, leasing activity remains robust for small industrial spaces under 25,000 square feet, which aligns with previous years' performance.

Around 90% of the 380 industrial lease transactions in 2023 have been for spaces below 25,000 square feet, in line with historical trends. Despite the dominance of large leases in the news headlines, smaller industrial spaces have consistently accounted for 80% to 90% of total lease transactions since 2019.

The slowdown in demand for large spaces is expected to affect the leasing of the 16 ongoing industrial developments with at least 500,000 square feet available on the market. However, as the overall macroeconomic environment stabilizes, especially interest rates, it is anticipated that many of these large industrial projects scheduled to complete in the next 12 to 18 months will gradually lease up, albeit at a slower pace and with some short-term challenges."

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