Monday, August 14, 2023

Philadelphia's Industrial Rent Performance Outlasts Other Property Types


Average Rent Growth for Region’s Industrial Sector Remains Elevated Even As CoStar Forecasts Performance To Normalize Amid Market Rebalance

By Brenda Nguyen

Rent growth across Philadelphia's commercial properties has exhibited a roller-coaster-like trajectory since the onset of the pandemic, which saw numerous new rent records in recent years. While the region's overall rent performance has since normalized toward pre-pandemic levels in recent quarters, the industrial sector in Philadelphia stands out as an exception with its annual rent gains remaining stubbornly elevated.

Industrial rent growth in Philadelphia has been impressive, exceeding the rates of increase for the multifamily, retail and office sectors, even in the years before the pandemic. Industrial properties averaged an annual growth rate of 5% between 2015 and 2019, well above the growth rates for multifamily at 2.6%, retail at 2% and office at 3.3% annual average increases.

It is important to keep in mind that these rent growth figures represent aggregate market-level numbers, and there are nuanced dynamics at play. The ongoing flight to quality trend, evident across nearly all property types, continues to drive stronger rent growth for modern and high-quality properties. In contrast, obsolete properties will likely see much slower rent growth or even declines

Additionally, the heightened pace of construction in the industrial and multifamily sectors has played a major role in slowing average rent growth in certain development hotspots. Both sectors have witnessed record levels of construction activity, further blunting rent growth as more supply enters the market.

While still elevated, the moderation in the rent growth for industrial property from a peak of 13% in mid-2020 to the current quarter's 10.4% annual rate growth indicates that this property asset is gradually returning to its pre-pandemic five-year average of 5%. Nevertheless, CoStar forecasts that industrial rents will continue to outpace growth rates for the other three property types in the foreseeable future.

The industrial sector's eye-catching trajectory began as early as 2016 when the sector broke away from the rent trends observed in other property types, yielding higher returns for investors. This growth was fueled by several coinciding factors, including increased demand for e-commerce and same-day deliveries and the region's strategic location that facilitates the efficient distribution of goods to the country's densest populations.

Despite a slowdown in demand in recent years, Philadelphia's industrial long-term prospects remain strong as the region continues to attract local, national and international retailers, third-party logistics providers, and manufacturers.

As the market evolves, investors and stakeholders should closely monitor these supply-demand trends and the underlying drivers that shape Philadelphia's industrial real estate sector. With its promising performance and potential for continued growth, the industrial sector remains an area of interest and opportunity for renters and investors seeking resilient and attractive returns in the region's real estate market.

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