Pennsylvania Industrial Rents Stall Out As Leasing Market Finally Normalizes
The challenging and unpredictable state of the financial markets has finally taken the steam out of the Lehigh Valley, Central and Northeast Pennsylvania industrial markets.
Amid a dramatic slowdown in construction deliveries, rent growth dropped to 1.4% in the third quarter across the three submarkets in the Interstate 81/Interstate 78 region of Pennsylvania, according to data from Savills Research & Data Services.
Rents grew over 15% in the third quarter last year. In the latest report, the I-81/I-78 corridor's rent growth lagged behind the national average of 1.6%.
Vacancy cracked 5% in Q3 for the first time since early 2022, and net absorption slowed to 2.3M SF, despite the end of five straight quarters with over 5M SF of new deliveries, Savills found. Although 3.9M SF of new construction opened in the quarter, overall inventory in the region rose by nearly 45M SF over the past 12 months.
A year after the impact of rapidly rising interest rates began to outpace white-hot tenant demand, the remaining construction pipeline has thinned out to 13.5M SF, a 61% drop-off from a year prior, according to Savills data. Cushman & Wakefield estimated nearly 15M SF of industrial development under construction across the region in its Q3 data reported by American City Business Journals.
Some of that tenant demand may have been overly aggressive, given sublease availability spiked nationwide in Q3. More than 22M SF hit the sublease market in the quarter, driving availability to an all-time high of 139M SF, Savills reported. In the I-81/I-78 region, sublease availability hit 3.6M SF, nearly five times what it had been in Q3 2022, Savills Head of Industrial Research Mark Russo told Bisnow.
With larger average footprints than the distribution centers in and around Philadelphia and less constraint on land, the highway access points of the Lehigh Valley can still land tenants that need massive regional hubs. In the quarter's largest lease, ID Logistics Group subsidiary Kane Logistics took 921K SF on Route 940, Savills reported.
But if tenant demand continues to soften as interest rates stay higher, vacancy could rise rapidly, as over 11M SF of the construction in the region tracked by C&W is speculative, ACBJ reported.
