Research

I-81/78 Corridor - PA
2Q15 INDUSTRIAL MARKET

Speculative development on
the rise
Demand for industrial space grew along the I-81/78 Corridor for the 25th
consecutive quarter, as another 915,000 square feet of positive
absorption pushed overall vacancy down 10 basis points to settle at
6.2%. The construction pipeline expanded by 3.9 million square feet; 2.3
million square feet is on a build-to-suit basis. The entirety of the newly
added build-to-suit space is slated for Uline, which occupies several
buildings across the Lehigh Valley and wants to consolidate several of
these operations onto one campus. Liberty Property Trust broke ground
on the first two buildings of its Liberty Business Center III campus on Mill
Creek Road in Allentown, Pennsylvania, for Uline.

Supply Additions Slated to Surge in Coming Quarters

A broader look at development reveals a trend favoring speculative
projects above build-to-suit requirements. Currently, 61.7% of
construction is taking place on a speculative basis, compared with just
22.5% in the third quarter of 2013. Of the speculative space delivered
since then, only 30.8% remains available, and all of that space is in
buildings delivered within the past year. Strong pricing gains along with
persistent demand growth allowed for this shift toward riskier
development projects. However, because the Class A logistics vacancy
rate for both Central Pennsylvania and the Lehigh Valley, where all new
construction is currently underway, sits below the 5.0% mark, the amount
of risk associated with speculative development is low.
Although speculative construction claimed larger portions of total
construction in the past two years, overdevelopment seems unlikely in
the short run. During the previous cycle, significant construction
completions pushed vacancy up 550 basis points from the second
quarter of 2007 through the third quarter of 2009 to settle at 11.5%. This
had the greatest negative impact on Central Pennsylvanias warehouse
market, where vacancy grew 960 basis points to 16.3% from third-quarter
2007 through third-quarter 2009. During that time, 1.2 million square feet
of occupancy losses were outpaced by more than 6.4 million square feet
of new supply added to the market. By comparison, only 5.1 million
square feet of distribution product was developed in the four years from
fourth-quarter 2009 through fourth-quarter 2013. Furthermore, almost all
of the space added during the 2007 to 2009 timeframe was on a
speculative basis, whereas two-thirds of the inventory added during the
latter timeframe was on a build-to-suit basis, with speculative additions
only coming online in 2012 or later.

Current Conditions
Speculative construction accounts for 61.7% of current
development activity, up from just 22.5% in third quarter
2013.
Rents for Class A logistics space continue to rise while
demand remains consistent. These factors should drive
continued construction activity.
Lack of opportunity, rather than demand, accounts for
decreasing investment sales volume.
Market Analysis
Asking Rent and Vacancy
$6

14%

$5

12%

$4

10%

$3

8%

$2

6%

$1

4%
Av erage Asking Rent (Price/SF)

Net Absorption
Square Feet, Millions
6000000
4000000
2000000
0
-2000000
-4000000

Market Summary
Current
Quarter
Total Inventory
Vacancy Rate
Quarterly Net Absorption

Overdevelopment Unlikely
The recent uptick in speculative development across the entire market
bears less risk. Average asking rents for existing Class A logistics space
grew to $4.37/SF in second quarter-2015, compared with $3.92/SF in
second-quarter 2013. New construction rents are closer to the

Vacancy (%)

Average Asking Rent

Under Construction
Deliveries

302MSF

Prior
Quarter
301MSF

Year Ago 12 Month

Period Forecast
294MSF

6.2%

6.3%

7.7%

914,675

2.5MSF

1.7MSF

$3.96

$3.84

$3.86

10.3MSF

8MSF

5.5MSF

425,000

644,502

2.4MSF

Research
I-81/78 Corridor - PA
2Q15 INDUSTRIAL MARKET

mid-to-high-$4.00/SF range, as vacancy for Class A logistics product sits at just 5.4%. Although similar fundamentals defined the logistics market shortly
before the last recession, much fewer large blocks of space are available. Whereas nearly a dozen blocks of 500,000 square feet or greater existed in
the market at the end of 2007, only five blocks of existing space in that size range are currently available.
From a demand perspective, third-party logistics companies and retailers claimed the lions share of occupancy growth during the first half of 2015. Most
recently, NFI Industries took occupancy at the 618,850-square-foot former Liz Claiborne distribution facility in Mount Pocono, Pennsylvania, while also
signing a lease for the 231,500-square-foot warehouse that is under construction in the West Hills Business Center in Allentown. That building is
expected to complete construction by the end of this year. In Central Pennsylvania, ThredUp, an online consignment and thrift store, took occupancy
within 137,300 square feet of space at 5050 Louise Drive in Mechanicsburg, Pennsylvania. Fougera Pharmaceuticals had vacated the building in early
2014.

New construction rents are nearer the mid-to-high-$4.00 range, as

vacancy for Class A logistics product sits at just 5.4%.
From an investment standpoint, volume has decelerated since reaching a peak in 2013, largely a result of a lack of opportunities: More than one-fifth of
the warehouse inventory changed hands in the past two-and-a-half years. REITs accounted for more than half of all buyers during that time, on a squarefootage basis, while private and institutional buyers represented the bulk of the remaining buyer types. This product has been, and continues to be,
viewed as an attractive investment vehicle, due to the markets persistent demand growth, low vacancies and stable pricing. REITs in particular made no
secret of their strategies to focus on these property types along with core-stabilized downtown office buildings. At present, buildings are trading in the
$60.00/SF to $70.00/SF range, with cap rates around the 7.0% mark or slightly lower.

Lease/User Transactions

Tenant

Building
Square Feet
650
Boulder Dr
483,200

Submarket

Type

Amazon.com

Lehigh Valley

Renewal

NFI Industries

9677 West Hill Ct

231,500

Lehigh Valley

New

Hearth & Home

9747
Commerce Cir
173,701

Lehigh Valley

Renewal/Expansion

Warehouse Specialists Inc

8250
Industrial Blvd
50,000

Lehigh Valley

Sublease

Select Sales Transactions

Building
3700 Industrial Rd

Submarket
Square Feet
Central
735,600PA

$43,380,418

Sale Price

$58.97

1700 Ritner Hwy

Central
602,500PA

$35,531,133

$58.97

6736 Tilghman St

Lehigh Valley
150,598

$9,423,272

$62.57

5035 Ritter Rd

Central
56,556 PA

$10,100,00

$178.58

1818 Vultee St

Lehigh
37,540 Valley

$1,925,000

$51.28

Price/SF

Research
I-81/78 Corridor - PA
2Q15 INDUSTRIAL MARKET

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Submarket Statistics
Total
Inventory
(SF)

Under
Construction
(SF)

Total
Vacancy
Rate

155,857,125

4,013,150

5.4 %

543,182

2,058,586

$4.01

$6.72

$3.98

Lehigh Valley

83,087,888

6,313,340

4.5 %

152,318

1,037,101

$4.65

$7.85

$5.09

Northeastern PA

62,877,279

10.3 %

219,175

323,515

$3.30

$6.78

$3.30

301,822,292

10,326,490

6.2 %

914,675

3,419,202

$3.81

$7.18

$3.96

Under
Construction
(SF)

Total
Vacancy
Rate

Central PA

Market Total

Qtr
Absorption
(SF)

YTD
Absorption
(SF)

WH/Dist
Asking Rent
(Price/SF)

Submarket Statistics by Subtype

Total
Inventory
(SF)
Warehouse/Distribution
R&D/Flex

188,167,301

10,308,490

Qtr
Absorption
(SF)

YTD
Absorption
(SF)

Total
Asking Rent
(Price/SF)

7%

712,051

3,112,191

$3.81

11,528,486

18,000

10%

17,065

30,323

$7.18

General Industrial

102,126,505

4.4%

185,559

276,688

$3.62

Total

301,822,292

9,756,490

6.2 %

914,675

3,419,202

$3.96

R&D/Flex
Total
Asking Rent Asking Rent
(Price/SF)
(Price/SF)

Research
I-81/78 Corridor - PA
2Q15 INDUSTRIAL MARKET

Economic Conditions

Employment By Industry

Employment across the I-81/78 Corridor continued to rise in recent

quarters, alongside growth in the construction, trade and transportation
industries. The growth in these industries is directly linked to the rise in
consumer spending, which in May of this year posted its largest monthly
gain since August 2009. Employments steady gains across the country
since the end of the last recession are certainly fueling much of the
increase in consumer spending. However, wages, which have remained
largely flat since the end of the recession, have recently showed signs of
upward pressure. As jobs are added at a faster pace than is needed to
maintain equilibrium, a supply and demand threshold is being crossed,
pushing some leverage toward labor. If this trend maintains momentum,
expect consumer spending to continue to climb, pointing toward more
warehouse demand and supply additions within the I-81/78 Corridor in
the near term.

Harrisburg-Carlisle MSA, Annual Av erage 2015

14%

1%

Trade/Transportation/Utilitie
s

17%

Health
Business & Prof essional

3%
4%

Gov ernment

6%

15%

Manuf acturing
Leisure/Hospitality

8%

Financial Activ ities

Other Serv ices

12%

5%

Construction

15%

Education
Inf ormation

Source: U.S. Bureau of Labor Statistics

Unemployment Rate

Payroll Employment

Seasonally Adjusted

Total Nonf arm, Not Seasonally Adjusted, 12-Month % Change

12.5%

3%

10.0%

2%

7.5%

1%

5.0%

0%

2.5%

-1%

0.0%

-2%
United States

United States

Harrisburg-Carlisle MSA

Harrisburg-Carlisle MSA

Source: U.S. Bureau of Labor Statistics, U.S. Dept. of Labor,

Philadelphia Federal Reserv e Bank

Source: U.S. Bureau of Labor Statistics

Personal Spending

Employment Growth by Industry

Spending in $Billions

Harrisburg-Carlisle MSA, May 2015, 12-Month % Change

115.000

Total Nonf arm

Construction
Manuf acturing
Trade/Transportation/Utilities
Inf ormation
Financial Activ ities
Business & Prof essional
Education & Health
Leisure/Hospitality
Other Serv ices
Gov ernment

110.000
105.000
100.000
95.000
90.000
85.000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-2.0%

Source: U.S. Department of Commerce, Bureau of Economic Analy sis

-0.5%

Source: U.S Bureau of Labor Statistics

1.0%

2.5%

4.0%

5.5%

Research

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880 E Swedesford Rd
Wayne, PA 19087
610.265.0600

Newmark Grubb Knight Frank United States Office Locations

Joe Gibson
Research Manager
610.879.4506
jgibson@ngkf.com

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has
been revised. With this expansion and refinement in our data, there may be adjustments in historical
statistics including availability, asking rents, absorption and effective rents.
Newmark Grubb Knight Frank Research Reports are also available at www.ngkf.com/research
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