Metro Philadelphia Industrial, Q4 2017

Supply constraints pushed

rents higher in 2017
Net Absorption Vacancy Rate Asking Lease Rate (NNN) Development
632,440 sq. ft. 5.5% $4.47 2.96 Million sq. ft.

Figure 1: Supply vs. Demand *Arrows indicate change from previous quarter

7
Millions (Sq. ft.)

6
5
4
3
2
1
0
Southeast PA Southern NJ Northern DE
2017 Net Absorption Q4 2017 Vacant Space
Source: CBRE Research Q4 2017

Metropolitan Philadelphia’s industrial market

• Vacancy across Metropolitan Philadelphia shrunk
210 basis points, year-over-year, pushing supply
availability to its lowest rate in the
post-recession era.
• Rising asking rents showed no signs of slowing
against the backdrop of supply constraints and
persistent demand. While speculative construction
activity remained relatively muted and largely
relegated to the Southern NJ portion of the market,
pricing trends may lead developers to break ground
on more of these types of projects.
• In the Southeastern PA portion of the market, some
supply relief will come in form of the renovation of
the former Rohm & Haas facility in Spring House, PA
where several recent leases are starting to fill the first
phases of redevelopment there. This project will add
much needed flex and lab space to the market.
• Investment sales activity was most robust in the
Southern NJ region. There, most of the product
traded is new development acquired by institutional
owners in search of yield outside gateway markets.
enjoyed the largest occupancy gains since 2006 as
more than 7.1 million sq. ft. of positive absorption
pushed vacancy down 210 basis points (bps.) to
5.5%. This pushed average asking rents up 8.8%,
year-over-year, to $4.47 NNN. To understand how
starkly the supply and demand imbalance grew
during 2017, consider how much space has been
absorbed in the past 12 months in relation to the
amount of existing available supply now: Using
2017 net absorption levels, there is 4.0 years’ worth
of supply in Southeast PA, 1.3 years in Northern DE
and only 0.6 years in Southern NJ. While
construction activity will relieve some supply
pressure in Southern NJ where 2.7 million sq. ft. of
space is being developed, nearly half of that space
is already pre-leased. This imbalance across the
market will continue to push rents higher in the
metropolitan region.

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 METRO PHILADELPHIA INDUSTRIAL

Figure 2: Industrial Market Statistics for All Properties Greater than 100,000 sq. ft.

Total Total Under 2017 YTD Total Avg. Asking

Submarket Inventory Vacancy Rate Availability Rate Completions Construction Net Absorption Lease Rate
(SF) (%) (%) (SF) (SF) (SF) ($NNN/PSF/YR)
Bucks County, PA 27,433,847 2.0% 4.2% 0 0 1,082,048 $4.90

Chester County, PA 12,269,153 8.1% 8.6% 0 0 -551,578 ---

Delaware County 10,605,300 9.3% 12.8% 0 0 -69,608 $4.35

Montgomery County, PA 30,624,046 5.8% 8.6% 0 0 472,308 $5.00

Philadelphia County, PA 29,496,462 7.0% 9.0% 0 175,000 628,936 $4.00

Southeastern PA Subtotal 110,428,808 5.8% 8.0% 0 175,000 1,562,106 $4.41

Burlington County, NJ 27,163,559 4.4% 5.0% 192,402 440,440 2,988,900 $4.80

Camden County, NJ 14,562,405 4.8% 5.8% 0 600,000 108,915 $3.88

Gloucester County, NJ 18,367,146 7.8% 8.3% 480,480 1,640,300 2,116,943 $4.76

Southern NJ Subtotal 60,093,110 5.6% 6.2% 672,882 2,680,740 5,214,758 $4.44

New Castle County, DE 13,912,828 3.4% 4.9% 0 100,000 375,808 $5.68

TOTAL 184,434,746 5.5% 7.2% 672,882 2,955,740 7,152,672 $4.47

Source: CBRE Research, Q4 2017.

Figure 3: Vacancy Rates by County.

(%) 10
9
8
7
6
5
4
3
2
1
0
Delaware Chester Gloucester Philadelphia Montgomery Camden Burlington New Castle Bucks

Source: CBRE Research, Q4 2017.

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 METRO PHILADELPHIA INDUSTRIAL

ABSORPTION

In 2017, the Metro Philadelphia market saw over

7 million sq. ft. of positive net absorption. Figure 4: Net Absorption
Demand for space in Metro Philadelphia was
3.0
driven by e-commerce and third-party logistics

Million sq. ft.

companies throughout the year, specifically in 2.5
the Southern NJ portion which tallied 5.2
million sq. ft. of the positive net absorption. 2.0
High pricing for warehouse space in Central NJ 1.5
and North NJ continued to push demand
southward. For instance, when BH Foto & 1.0
Electronics out of New York searched for a NJ
0.5
distribution site, it landed in Burlington
County, partly because of more affordable rents. 0.0
Southeastern PA and Northern DE also grew Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017
occupancy this year by 1.5 million sq. ft. and
375,000 sq. ft. respectively. The lack of available, Source: CBRE Research, Q4 2017.
quality product in the Southeastern PA
submarket is forcing tenants to consider older,
Figure 5: Vacancy Rate
less functional sites.
(%) 10.0
VACANCY
9.0
The vacancy rate for Metro Philadelphia
decreased 210 bps. since Q4 2016, settling at 8.0
5.5% as demand outpaced supply this year.
7.0
Southern NJ had 3.7 million sq. ft. added to its
inventory in 2017, 85% of which is already 6.0
leased. Development limitations in
5.0
Southeastern PA will keep the vacancy rate low
since no new, available supply will be added in 4.0
the short term. The 100,000 sq. ft. speculative Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017
building that broke ground Q3 2017 in Northern
DE will add much needed supply to the market Source: CBRE Research, Q4 2017.
currently at an ultra-low vacancy rate of 3.4%.

DEVELOPMENT PIPELINE Figure 6: Completions

The Metro Philadelphia market has 6.0

Million sq. ft.

approximately 3 million sq. ft. of product

currently under construction, most of which is
4.5
mainly focused in Southern NJ, where 2.6
million sq. ft. is under construction. The dearth
of supply there will keep developers bullish in 3.0
the short term. The flex segment of the market
in Southeastern PA could see a boost in activity 1.5
as the re-development project at Spring House
Innovation Park in Lower Gwynedd, PA gains 0.0
momentum; tenants who have recently signed
leases there include Evertree North America,
Clinlogix, Oriental Yuhong North American, Source: CBRE Research, Q4 2017.
and AgroFresh Solutions.

Q4 2017 CBRE Research © 2017, CBRE, Inc. | 3

 METRO PHILADELPHIA INDUSTRIAL

LEASE RATES
Figure 7: Industrial Lease Rates
Average asking rents posted gains for the fourth
consecutive quarter. Again, a lack of supply put 4.50

Per Sq. ft. Per Year ($, NNN)

significant upward pressure on pricing this past
4.40
year. The confluence of restricted supply and
rapidly rising rents provides developers more 4.30
reason to break ground on speculative projects
which are much needed in many segments of the 4.20
market such as Southern NJ and Montgomery and 4.10
Chester Counties in PA. Furthermore, the region’s
relatively inexpensive pricing compared to 4.00
neighboring markets allows for plenty of room for 3.90
rents to grow.
Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017

CAPITAL MARKETS Source: CBRE Research, Q4 2017.

Sales activity continued to grow during the past

few quarters within the greater metropolitan area. Figure 8: Industrial Sales Transactions
Most of the activity was chasing newly-built
1,400

($, Millions)
Southern NJ logistics buildings as well as a flex
portfolio in Moorestown bought by Brennan 1,200
Investment Group from Mack-Cali. One notable
1,000
trend observed by capital markets sales
professionals was buyers, who would traditionally 800
seek opportunities in gateway markets, 600
increasingly investing their money in Burlington,
Camden and Gloucester counties, seeking higher 400
returns compared to those offered by Northern NJ 200
and Central NJ industrial product. On the PA side
0
of the market, interest remained high for product
Q4 2009 Q4 2011 Q4 2013 Q4 2015 Q4 2017
but opportunities were limited. Most buyers are
optimistic in rent growth for the region and are Source: Real Capital Analytics (4-Qtr. Aggregate).
considering value-add opportunities as well as the
traditional core-stabilized assets.

OUTLOOK

The Philadelphia Metro industrial market will be welcomed by a growing roster of

enjoyed an exciting year of expansion in
2017, and is positioned for future growth.
Low vacancy will persist in 2018; even with
nearly 10 million sq. ft. of new space added
to the inventory over the past three years,
the market is simply not supplying new
stock fast enough to satisfy demand. Flat
rent performance was a past constraint but
this year rent growth accelerated by 8.8%,
indicating an opportunity for increased
development in 2018. New warehouses
occupiers looking for space in the market.
CBRE Research tracks such requirements,
and in Q4 2017, that pipeline has well
surpassed 2016 levels. The importance for
e-commerce and logistics companies to
locate near major population centers has
elevated the Philadelphia Metro to a key
location in the supply chain, and this
demand for quality warehouse space will
continue to drive the Philadelphia Metro
market to success in 2018.

Q4 2017 CBRE Research © 2017 CBRE, Inc. | 5

 METRO PHILADELPHIA INDUSTRIAL

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Lisa DeNight
Senior Research Analyst Conshohocken, PA
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lisa.denight@cbre.com
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Andrew Landolfi or to access additional research reports,
Researcher please visit the Global Research Gateway at
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andrew.landolfi@cbre.com

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