Philadelphia’s small-bay industrial market retains strength despite climbing expenses

By Brenda Nguyen CoStar Analytics

Philadelphia's industrial market demonstrated resilience in early 2025, maintaining strong tenant demand despite the national slowdown in leasing activity. Vacancy rates rose as new inventory hit the market, but net absorption, the net change in occupancy, increased year-over-year. Key submarkets such as Burlington, New Castle and Bucks counties continued driving the region’s leasing momentum. Industrial properties also hit a four-year streak as the top investment choice regionally, by dollar volume. Against this backdrop, here’s what CoStar is hearing from players in the Philadelphia industrial market in early 2025.

Momentum for industrial spaces smaller than 300,000 square feet has been consistent, but leasing in larger buildings has been quite slow

One broker commented that small-bay facilities, those smaller than 100,000 square feet, are doing particularly well. The broker's team regularly gives site tours for tenants in this size segment. Meanwhile, the “home run” buildings have not received the traction landlords were hoping for in the past year. Based on CoStar data, only eight leases for more than 300,000 square feet have been signed in the past year, compared to nearly 700 leases for spaces smaller than 100,000 square feet.

Developers have delayed breaking ground on big-box developments but continue to move forward on warehouses ranging between 150,000 and 300,000 square feet

A couple of lenders mentioned they are becoming wary of financing large speculative industrial properties due to recent market saturation and higher vacancy rates in big-box facilities. Instead, they're favoring smaller industrial projects, perceived as less risky due to the consistency of demand. The concentration of smaller projects breaking ground reduced the volume of construction starts in the second half of 2024 to the lowest levels since 2018.

Several companies with leases in the city are seeking new locations in the suburbs following the surge in property taxes from recent reassessments

A handful of brokers commented that some industrial buildings in Northeast Philadelphia saw property taxes double following the city’s updated property assessments in recent years. Bucks County, as a bordering suburban submarket along I-95, has become a popular alternative location for tenants considering relocation.

Land prices have been a bigger deterrent than interest rates for new small-bay development

One developer mentioned that sellers are asking too much for their land, and it’s difficult to make the numbers pencil out with construction costs and achievable rents. Developers can work with higher interest rates, he says, but the cost basis makes many prospective projects not viable.

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