By Brenda Nguyen Costar
Following a record year of building completions in 2023, Philadelphia's industrial development momentum has slowed down considerably in early 2024. Increased financing costs and an accumulation of unleased inventory have prompted developers to exercise caution as industrial rent growth slows across the market.
The industrial leasing heydays of 2021 and 2022 propelled developers to pursue a record-breaking volume of new development in recent years. In 2023 alone, nearly 21.7 million square feet of industrial space spanning 80 buildings were completed, including six structures exceeding 1 million square feet.
Industrial development activity was concentrated in Burlington, Bucks, Cecil and Gloucester counties, which collectively accounted for 80% of the industrial space completed over the past 12 months.
This recent surge brought Philadelphia's three-year cumulative delivery total to 52.7 million square feet, reflecting a substantial 7.7% growth in the region's industrial footprint. However, the surge in new supply pressured Philadelphia's industrial vacancy rate to rise from a historic low of 4% in mid-2021 to 7% in the first quarter of 2024. In particular, Burlington County has reached a 12% vacancy rate—among the highest in the region.
However, the number of new industrial projects starting construction has incrementally subsided as developers and lenders adopt a more cautious approach. New construction starts across the region have declined by 50% from 2022 levels.
As the number of new developments underway has dwindled, the Philadelphia region will see a quieter year in terms of completions in 2025. This development slowdown is expected to align with an anticipated improvement in economic growth and a reduction in interest rates, potentially strengthening leasing demand just as the reduced amount of new space hits the market.
In the meantime, with another 11.4 million square feet underway, the average vacancy for industrial space is expected to trend upward for several more quarters before stabilizing.
The amount of available inventory has already grown by 50% to 61 million square feet within the Philadelphia region in the first quarter of 2024, a stark contrast from the 40.5 million square feet that were listed as available in mid-2022. Industrial property owners should anticipate a more competitive lease-up environment through at least mid-2024.
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