Philadelphia-area industrial developers shift to smaller footprints as vacancy increases

 By Paul Schwedelson – Reporter, Philadelphia Business Journal

After a surge in industrial demand and massive warehouses built throughout the Philadelphia region, demand for industrial is trending toward smaller spaces.

Few tenants are seeking more than 500,000 square feet of industrial space, Colliers Market Research Director Rose Penny said. The slowdown in demand for that much space is due to a combination of factors like tenants looking elsewhere for cheaper deals, high interest rates and tenants not needing as much space as they did during the pandemic.

That means recently built industrial warehouses larger than that size will likely need to be leased to multiple tenants to fill the building.

“I think maybe there was a slight disconnect in what the actual majority of demand was,” Penny said.

Instead of large-scale users that could fill up an entire new large building on their own, Penny said demand has been more robust in the Philadelphia region for space between 100,000 square feet and 300,000 square feet.

“Once [property owners] started being willing to divide, they’re seeing more activity,” Penny said.

The shift in the industrial market is taking place as the Philadelphia region’s overall vacancy rate was 7% in the second quarter, according to Colliers’ second quarter report. That’s the fifth straight quarter in which the vacancy rate increased, a change from when the vacancy rate was as low as 2% just a few years ago.

Throughout the past year, the industrial market has cooled following a huge increase in demand during the pandemic. In a low interest rate environment, developers were quick to build new supply to alleviate the market conditions. Now, after a year of cooling, developers with empty buildings are grappling with what to do next.

“There’s some that may hold on for that larger tenant, but I think they’re going to start dividing," Penny said.

There’s likely to be 900,000 square feet of new leases signed in the third quarter, Penny said, but that comes as 4.4 million square feet is also set to be delivered to the market. So even as demand picks up, there’s even more supply to fill.

As a result, Penny foresees the vacancy rate fluctuating for the next year before the market settles in. Instead of asking rates being lowered, Penny expects property owners to offer more concessions like free rent. The average asking rental rate per square foot in the Philadelphia region was $11.19 in the second quarter, according to Colliers.

Larger industrial users could be looking to lease space in the Lehigh Valley, Penny said, because rents there may be less than along the I-95 corridor. The average asking rental rate per square foot in the Lehigh Valley in the second quarter was $11.02 compared to $12.23 in Southern New Jersey’s Burlington County.

Examples of smaller buildings are popping up across the region. Crow Holdings Development is planning a 150,000-square-foot industrial building in Northeast Philadelphia, hoping to hit a “sweet spot” in the market in response to most new buildings having more than 300,000 square feet of space.

Full story: https://tinyurl.com/mp8xd6k7