The Philly Area's Industrial Buildings Are All But Full

Greater Philadelphia's industrial market is still the top sector for commercial real estate in the area, but it is crying out for new supply.

Although rents continue to rise, vacancy rates rose slightly across the Philadelphia area in the third quarter, according to a CBRE report. Rather than portending a tipping point for the market, the vacancy uptick is a "small blip" in a growing market, CBRE Director of Research Ian Anderson said.

Industrial vacancy in Greater Philadelphia was at 5.4% in Q3, a number that is just about as low as it can go, according to Anderson. The small increase was due to four new deliveries in the market, all in South Jersey, some of which was not fully occupied. The rate is significantly lower than it was in Q3 2016, when vacancy was 8.1%.

South Jersey has been the only viable area near Philadelphia for larger-format buildings, part of why it has been nearly as heavily targeted by industrial users and investors as the Lehigh Valley. The other part has nothing to do with Philly at all.

“The thing about South Jersey, especially Burlington County, that’s causing the market to heat up has to be attributed to New York City," Anderson said. "It’s the widening of the [New Jersey] Turnpike, the increasing demand for space, and it’s affecting South Jersey and the Lehigh Valley.”

South Jersey's rents are among the highest in the region, and continue to rise even as construction far outpaces Philly's Pennsylvania suburbs. It begs the question: Is the market in danger of being overheated?

“It’s a perfectly reasonable question, but the answer so far is no, based on the data we’re looking at, our brokers on the ground and the growing economy," Anderson said. "In the near term, the demand is still there to fill all of this space, and it surprises even us.”

Though New Castle County in Delaware has the space and the government support to be more competitive with South Jersey — and saw the only speculative industrial property in the market to break ground in the last quarter — the rest of the area looks to be more focused on last-mile facilities going forward. Until those get built, space will be at a premium.

Industrial buildings in both Bucks and Chester counties were less than 3% vacant in Q3, as competition with other sectors for land, and resistance from suburban communities to increased truck traffic, have hampered developers' ability to build industrial in areas suited for last-mile facilities, such as highway-adjacent King of Prussia.

“There’s such little space available in the [Pennsylvania] suburbs of Philly, and anecdotally, when new space does come on, or someone retrofits space, there’s strong demand," Anderson said. "Many times a potential tenant is not as concerned about price, they just need it."

Philadelphia could stand to benefit from the challenges facing its suburbs, with available land and out-of-use industrial buildings near highways in North Philadelphia seeming like ideal spots for last-mile distribution. But there has not been any activity there yet.

“I think it’s probably in the beginning stages — there’s some activity in West Philadelphia, and I’d expect to see more of it," Anderson said. "But the city's market is a bit of a laggard, so it will be a bit longer before it keeps up.”