Scranton And Harrisburg Industrial Markets Heat Up As Lehigh Valley Nears Capacity

The Lehigh Valley has been a hotbed for the industrial sector since the pandemic kicked off a flurry of warehouse and third-party logistics activity in 2020. 

Nearly five years later, that submarket is cooling off. The amount of industrial space under construction in the Lehigh Valley has fallen by 54% year-over-year, according to third-quarter reports from CBRE for 2023 and 2024.

That could come down to relatively low rents, ample space for new construction and other local perks encouraging some prospective tenants to consider nearby cities like Scranton, Wilkes-Barre and Harrisburg.

Many companies would rather stay close to their existing workforce or an important nearby facility than save a few bucks on rent, industry players said.

But if a prospective tenant doesn’t have any existing ties to the East Coast, their search radius has become larger than it would have been a few years ago.

The trend can be partly attributed to the barriers to entry in the Lehigh Valley. The region’s higher rents and stable vacancy rate are underpinned by the limited amount of remaining undeveloped land zoned for industrial uses, said Summer Coulter, a partner and market leader with KBC Advisors.

This makes it hard to build new facilities, especially ones with footprints larger than 500K SF.

“I think the submarkets are seeing deals they wouldn’t have gotten a look at before,” Coulter said of other regions in Eastern Pennsylvania. “Those searches are blending. Now, you’ll see occupiers looking in all of the markets at once.”

Scranton, Wilkes-Barre and Harrisburg have an edge in those situations, said Cresa Managing Principal Eric Zahniser, a member of the firm’s industrial services group.

“If they’re agnostic to the location, they’re going to pick Central Pennsylvania or Northeast Pennsylvania over the Lehigh Valley,” he said.

Industrial In ‘The Office’ Country

Allentown and Bethlehem are far from down and out, said CBRE Executive Vice President Sean Bleiler, a member of the firm’s Lehigh Valley industrial team.

“Logistics typically win over rental rates,” he said.

But not always.

Class-A industrial leases in Northeast Pennsylvania went for $7 per SF on average last quarter, CBRE reported. That is much lower than the $12- and $16-per-SF rents tenants are facing in the Lehigh Valley and Philadelphia, respectively.

Operating costs are also relatively low in the Scranton area, especially as some municipalities in the Lehigh Valley are raising their property taxes, Zahniser said.

“The economics there are still quite favorable from a real estate cost perspective,” he said.

Northeast Pennsylvania is farther from major population centers than the Lehigh Valley, but not by much. It is still within a day’s drive of 50% of the population in the U.S. and Canada, Zahniser said.

The region might not remain such a good value for long. Rents there have grown 16% year-over-year, according to a Q3 report from KBC. That is more than anywhere else in Eastern Pennsylvania outside of metro Philly.

Northeast Pennsylvania's deep industrial history means there is a wide array of existing warehouses and manufacturing spaces to choose from, and developers are also building out large industrial projects on the far southern outskirts of the Scranton/Wilkes-Barre urbanized area.

KBC found that the largest industrial project under construction in Northeast Pennsylvania is NorthPoint Development’s 1M SF facility on Route 1 in Hazelton, a booming town 30 miles south of Wilkes-Barre. Work is expected to wrap up in Q1.

Spaces that large are hard to come by in the Lehigh Valley, where most industrial facilities are between 250K SF and 500K SF, Bleiler said.

Zahniser said Mericle Commercial Real Estate Services is the “dominant force” in Northeast Pennsylvania industrial real estate, “especially if you want a higher-quality building that’s not a megabuilding.”

Most of Mericle's offerings are within a few miles of the Lackawanna River in the region’s traditional urban core. There are 25 listings on the company’s website between Nanticoke and Dickson City.

State Capital Is A Regional 'Bright Spot' 

Northeast Pennsylvania hasn't been immune to decreases in industrial leasing activity in 2024. There were only 10 leases signed this year, down from 24 in 2021, according to data provided by CBRE.

But greater Harrisburg has managed to buck the trend. The region around the state capital saw 17 new industrial leases this year, up from just nine in 2023, CBRE reported.

Sales in the area’s industrial market totaled $754M in the first 11 months of 2024, according to a report from CoStar. That’s more than the $511M spent in 2022 and 2023 combined.

“That’s really been the bright spot of the market,” Bleiler said of the Capital Region. “It’s been very robust over the past 12 months.”

Coulter described the corridor between Harrisburg and York as a “really tight market.”

Central Pennsylvania has a vacancy rate of 6.6%, CBRE reported, lower than the 9.2% in Northeast Pennsylvania and 8% in the Lehigh Valley.

But at just $8 per SF on average for Class-A space, the Capital Region’s industrial rents are only slightly higher than Northeast Pennsylvania.

Greater Harrisburg is also considered a better labor market than the Scranton area, although it isn't as well regarded as the labor pool in the Lehigh Valley, Zahniser said.

Meanwhile, Central Pennsylvania has also become a better destination for e-commerce businesses thanks to the increased parcel capacity FedEx and UPS have implemented in the region, Bleiler said.

Harrisburg is farther from New York City than the Lehigh Valley and Scranton, but it is also closer to Washington, D.C. This has made it an attractive option for businesses serving that market, Zahniser said.

The Capital Region also has the largest average building size of any major industrial market in Eastern Pennsylvania, according to CBRE.

“There was a disproportionate amount of large-box leasing there,” Coulter said.

Recent large deals include an unnamed e-commerce company’s 1M SF lease at the Core5 Logistics Center in Middletown, across the Susquehanna River from Harrisburg, as reported by KBC. 

NorthPoint has also been building out two sizable industrial projects at the Manchester Commerce Center in York. The larger project, which spans 818K SF, is scheduled to wrap up in Q1, while the smaller, 586K SF development is due by the end of 2024.

Reading, Delaware And Maryland Could Also See More Action

A few smaller markets also stand to gain from the trends fueling growth in Northeast Pennsylvania and the Capital Region, even if they don’t get as much attention.

Reading is roughly the same distance from Philadelphia as the Lehigh Valley, and Coulter said it has a strong labor market that has helped it attract several build-to-suit industrial projects in recent years.

Interstate 76, a toll road, is one of the main auto arteries serving Reading. At one time, some real estate professionals believed the toll would be a major deterrent to development, but things haven’t panned out that way, Coulter said.

The parts of Delaware and Maryland with easy access to Interstate 95 are also seeing a lot of spec construction, Bleiler said.

“In the last three years, Delaware has become a viable option for a lot of tenants,” he said.

New Castle and Cecil counties have reputations as strong labor markets, Coulter said.

But Zahniser doesn’t expect to see much industrial activity south of Newark in the more remote parts of the Delmarva Peninsula.

“There’s been some (spec construction) in Middletown, but it seems like that’s petered out,” he said. “It’s farther from the ports and it’s farther from the population centers.”

KBC’s Eastern Pennsylvania report also covers Hagerstown, Maryland. The city is near the Pennsylvania border and served by Interstate 81, which runs all the way to Scranton.

That is where two of the region’s biggest leases of 2024 were secured, KBC reported. The culinary e-commerce site WebstaurantStore signed a 1.2M SF lease at the Currwood Logistics Park. An unnamed e-commerce company signed another 1.2M SF at the nearby Interstate Trade Center.

Hagerstown's distance from maritime shipping hubs is apparently not a major drawback as tenants spread their wings beyond traditional industrial hot spots.

“Some companies are figuring out that they don’t need to be on top of the ports,” Bleiler said.