Philly’s Industrial Market Is In A Storm, But It Should See Clearer Skies As Supply Eases In 2025

Philadelphia's industrial real estate business forecast will remain cloudy into 2025, area professionals say, mirroring the storms that are brewing nationally. 

That is causing nerves and rapid readjustment in the industry, but speakers at Bisnow's Philadelphia Industrial and Logistics Summit Tuesday in Conshohocken said they aren’t sitting on their hands and instead are doing deals to set themselves up well for better conditions in coming years.

Industrial has been on a downward trend of late. Leasing plunged 70% year-over-year in the first quarter, while deliveries remained above their historical average. 

Prologis shook the industry when it announced last week that it was revising its guidance down for its funds from operations, occupancy and earnings. Its stock dipped 6% the day executives announced the adjustment.

Change to its guidance so soon is concerning, one investment professional said during the event. 

"To see Prologis specifically, but also other industrial REITs, cut guidance this early in the year that they only set out a couple months ago is a little bit worrisome," Rob Goldstein, portfolio manager for CenterSquare Investment Management, said to an audience seated across the warehouse space at 70 Portland Road. "I mean, these are somewhat longer-term lease businesses where the visibility is higher than, say, multifamily where every year all of your rents are resetting."

Some of the pain in the market is coming from a wave of development. Nationally, 462.1M SF of industrial space was under construction at the end of the first quarter, according to Savills. While construction is down from 782.1M SF a year earlier, that is still higher than the 400M SF underway pre-pandemic. 

The national vacancy rate rose to 6.7% in Q1 from 4.5% last year. And in Philadelphia, industrial vacancies are projected to total 40M SF by the end of the year, a nearly two-decade high, Marcus & Millichap said in a market report published early this month.

Panelists said they believe tenants that aren't signing warehouse deals are simply waiting for the skies to clear a bit, which will improve demand in the next year or two. With that in mind, developers are slowing down, but they aren't slamming the brakes. Prologis predicts it will do $2.5B to $3B in development projects this year, a downward revision of $500M.  

Speculative developer Portman won't "sit around on land, but we're going to be very strategic about where we go," Managing Director John Gaskin said.

The group took over a project at the Vanguard property at 1130 Pottstown Pike last fall. The planned three-building, 1.9M SF industrial campus near Interstate 76 in Uwchlan Township has taken work to make it shovel-ready, he said.

"There is supply, but that supply will be absorbed," he said. "And where we want to be in this region is delivering product in '25, '26 and '27, and nothing's coming behind it."

Some merchant developers will get creative to work around the storms. Since those firms often build properties and sell them rather than holding them, they are considering incentives to get tenants.

"It could mean free rent, it means something that may be a little bit more meaningful to the tenant from an occupier perspective or, alternatively, can be meaningful to us," said Heath Abramsohn, the regional director for Rockefeller Group. "It can be hard to balance out."

As it backs off a bit from building, Prologis is keeping its eye on acquisitions.

"We're also looking to opportunistically acquire buildings, especially if we can acquire below-replacement-cost Class-A, state-of-the-art buildings in good locations because, obviously, we're perpetual holders in essence, so we want to buy the best stuff," Prologis investment officer Read Mortimer said.

Mortimer said rent isn't retreating in Pennsylvania like it is in other areas.

However, as more speculatively built properties open, the market may dictate that rates drop this year, according to the local Marcus & Millichap report. Average rent per SF is around $6 in the Philadelphia industrial sector, the report says.