Tuesday, December 19, 2023

High interest rates tame region's industrial market, but rents and new development remain strong

 By Paul Schwedelson – Reporter, Philadelphia Business Journal

Philadelphia's industrial real estate market in 2023 was marked by moderating prices and less intense demand after two years of peak activity.

“From a broad standpoint, everything starts really with the interest rate environment. Sales and leasing, no one has been untouched by it. Starting off the year, fundamentals were incredibly strong. They still are, but the headwinds of the interest rate environment has definitely cooled down everything.”

During the Covid-19 pandemic, as companies rushed to improve their e-commerce operations, tenant demand for warehouse and distribution space reached historic highs. While demand for industrial properties is still elevated, the urgent rush is no longer in play. Meanwhile, pricing had to be adjusted to accommodate what tenants and buyers can now afford in a more challenging economic environment.

Asking rent for industrial space in the Philadelphia region is around $11 per square foot. That’s up 8% from a year ago, which is strong growth but slower than the double-digit rent increases in previous years. He expects rent growth to be more incremental moving forward, with the market unlikely to see the big surges it experienced during the pandemic.

As a result of the shifting landscape, sellers may not be able to command as much for their properties since buyers need to factor in higher financing costs.

“The challenge this year has been bridging the gap between expectations of the year in the past vs. what’s really affordable today. Doesn’t mean that deals still haven’t gotten done.”

The effects on the region's industrial market have varied depending on geography and property size. In South Jersey, for example, enough new supply has hit the market that vacancy rates in the third quarter reached around 9.5%, according to Colliers. That’s a big increase from a low of 2% a year or two ago. In five southeast Pennsylvania counties, the vacancy rate was between 4% and 4.5% in the third quarter.

Full story: https://tinyurl.com/mskjye6c


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