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Greater Philadelphia Industrial, Q3 2016

Persistent demand and measured


development stabilize growth
Net Absorption

Vacancy Rate

4.4 Million sq. ft.

Asking Lease Rate (NNN)

6.4 %

$4.19

Sq. ft. (Millions)

Figure 1: Greater Philadelphia Industrial Demand, Supply and Vacancy

Development

13.0 Million sq. ft.

*Arrows indicate change from previous quarter

18

18 (%)

15

15

12

12

3
0

0
2010

2011

2012
2013
2014
Net Absorption
Completions

2015
Vacancy

2016

Source: CBRE Research, Q3 2016.


Vacancy stabilized as the rate of construction
deliveries kept pace with demand growth.
Overall average asking rents continued to climb at a
modest rate while lease comparables reveal more
significant rent growth, specifically for newly
constructed distribution buildings along the 78/81
Corridor.
Speculative construction continues to account for the
majority of development activity. More than 85% of
speculative construction remained available at
quarters end but recent activity suggests that some of
that space will be leased ahead of construction
completion.
Investment sales volume ticked up 25%, quarter-overquarter, with private capital accounting for the
majority of acquisitions during 2016. REIT, crossborder, and institutional investors round out the
remainder of activity as investors of all types
continued to regard industrial product in the

Following a deluge of new product that completed


in early 2016, the subsequent rise in vacancy has
been reversed by recent, robust demand. Given the
new-found balance between supply and demand,
rents persisted in their upward trajectory. And, with
consumer spending rising at a steady pace along
with manufacturers continuing to grow in the
region, demand is poised to maintain its current
growth trajectory. Furthermore, a shrinking supply
of desirable developable land along with holdover
risk-aversion from the Great Recession, current
levels of active construction are lower than their
peak realized at the end of 2015. The confluence of
these factors point toward measured growth across
the industrial market in both inventory and rental
rates. These factors are not lost on investors who
remain focused on acquiring core-stabilized assets
within this market.

Philadelphia region as attractive investment vehicles.

Q3 2016 CBRE Research

2016, CBRE, Inc. |

GREATER PHILADELPHIA INDUSTRIAL


Figure 2: Industrial Market Statistics for All Properties Greater than 100,000 sq. ft.

Inventory
(SF)

Total
Vacancy Rate
(%)

Total
Availability Rate
(%)

Completions
(SF)

Under
Construction
(SF)

Cumberland County, PA

48,673,536

5.9%

6.2%

2,345,628

1,145,047

$4.72

Dauphin County, PA

14,240,054

8.9%

11.8%

362,839

$3.58

Franklin County, PA

11,831,160

2.1%

6.3%

$4.60

Lancaster County, PA

34,859,714

1.1%

1.7%

164,337

$4.16

Lebanon County, PA

5,955,793

32.3%

32.3%

398,250

-117,160

$4.37

York County, PA

45,218,299

5.1%

6.3%

754,881

1,372,821

$3.78

Central PA Subtotal

160,778,556

5.6%

6.7%

3,498,759

2,927,884

$4.31

Berks County, PA

17,928,310

2.3%

5.2%

133,232

728,148

$4.47

Lehigh County, PA

36,782,119

2.2%

3.4%

1,200,000

4,830,000

2,010,650

$4.47

Northampton County, PA

15,265,357

2.5%

3.0%

2,349,375

2,914,336

$5.07

Lehigh Valley PA Subtotal 69,975,786

2.3%

3.7%

1,200,000

7,312,607

5,653,134

$4.63

Lackawanna County, PA

12,203,547

17.8%

18.2%

-236,970

$3.60

Luzerne County, PA

28,599,324

4.6%

5.3%

591,356

1,102,559

$3.67

Monroe County, PA

3,539,901

0.4%

1.3%

-2,300

$4.00

Schuylkill County, PA

6,422,272

9.1%

10.6%

455,000

$3.95

Northeast PA Subtotal

50,765,044

8.1%

8.8%

591,356

1318289

$3.71

Bucks County, PA

27,433,847

7.0%

7.4%

137,827

$4.52

Chester County, PA

12,269,153

2.4%

5.4%

14,397

$3.29

Delaware County

10,605,300

8.2%

9.4%

260,797

$4.00

Montgomery County, PA

30,370,845

5.8%

7.3%

305,733

200,000

551,226

$4.56

Philadelphia County, PA

30,273,441

11.4%

13.9%

145,000

23,705

$3.96

Southeast PA Subtotal

110,952,586

7.5%

9.1%

450,733

200,000

987,952

$4.20

Burlington County, NJ

25,123,872

9.4%

11.8%

1,367,640

2,837,213

$4.15

Camden County, NJ

14,753,405

4.5%

6.2%

600,000

-138,965

$3.39

Gloucester County, NJ

16,059,696

10.4%

13.4%

252,681

$4.15

Southern NJ Subtotal

55,936,973

8.4%

10.8%

1,967,640

2,950,929

$4.04

New Castle County, DE

14,306,828

11.9%

15.7%

253,651

$4.38

TOTAL

462,715,773

6.4%

7.8%

2,242,089

12,979,006

14,091,839

$4.19

Submarket

2016 YTD Total


Avg. Asking
Net Absorption
Lease Rate
(SF)
($NNN/PSF/YR)

Source: CBRE Research, Q3 2016.


Q3 2016 CBRE Research

2016, CBRE, Inc. |

GREATER PHILADELPHIA INDUSTRIAL

ABSORPTION

VACANCY

Vacancy stabilized this quarter as a 70 basis point


drop erased vacancy gains posted earlier in the
year as a function of completed construction. The
lowest vacancy rate this quarter came from the
Lehigh Valley, where only 2.3% of industrial space
remained vacant. To date, of the 14.7 million sq.
ft. of new product added during 2016, 10 million
sq. ft. was absorbed leaving just 4.4 million sq. ft.
of this space available. While a significant amount
of new space was added to the market during Q1
2016, the pace of completions since tended lower
than demand growth, pointing toward stabilized
growth within the region, precluding oversupply
during the short term.

Figure 3: Net Absorption

Sq. ft. (Millions)

Another 4.5 million sq. ft. of demand growth


places year-to-date totals at 15.6 million sq. ft.
From a geographic perspective, demand along the
78/81 Corridor is pushing west toward the 78/81
split in Berks County as tenants struggle to find
space within the Lehigh Valley. Demand for space
within the Lehigh Valley is driven largely by
requirements that need access to New York City.
Whichever tenants have more mid-Atlanticfocused requirements, the move westward along I78 allows for more available product at a lower
lease rate. In Philadelphia and the surrounding
counties, manufacturers drive demand. The
availability of skilled labor accounts for this trend.

8
6
4
2
0
Q3 2014

Q1 2015

Q3 2015

Q1 2016

Q3 2016

Q3 2015

Q1 2016

Q3 2016

Source: CBRE Research, Q3 2016.

Figure 4: Vacancy Rate

(%) 10
9
8
7
6
5
Q3 2014

Q1 2015

Source: CBRE Research, Q3 2016.


Figure 5: Completions

The bulk of construction activity in the


Philadelphia market remains concentrated in the
Lehigh Valley, with 11 buildings under
construction totaling 7,312,607 SF. Land scarcity
as well as tightening development regulations
within the Valley may dampen construction
activity within Lehigh and Northampton Counties
as opposed to softening demand. As such,
developers are eying opportunities further west
along I-78. In southern New Jersey, a few projects
are slated for ground-breaking as recently
completed buildings are enjoying leasing activity.
Q3 2016 CBRE Research

Sq. ft. (Millions)

DEVELOPMENT PIPELINE

16
14
12
10
8
6
4
2
0
2011

2012

2013

2014

2015

2016

Source: CBRE Research, Q3 2016.

2016, CBRE, Inc. |

GREATER PHILADELPHIA INDUSTRIAL

LEASE RATES

CAPITAL MARKETS

Investment sales activity remained stable with the


four-quarter average hovering above the $500
million mark where it sat since the end of last year.
The most active buyers, year-to-date, are private
investors who claim 32.4% of acquisitions.
Institutional, cross-border, REIT, and users
account for a near-equal share of the remaining
activity. Users, specifically, were most active in
Philadelphia or its surrounding counties while the
78/81 Corridor portion of the market continued to
attract the attention of institution and crossborder money.
LABOR MARKET

Industrial employment, which includes


manufacturing, trade, transportation and utilities,
continues to post modest gains in the Greater
Philadelphia region. While this points toward a
healthier regional economy, it also creates
challenges for tenants who require an ample labor
supply for running their operations. And while
factors such as location remain paramount when
distributors review market availabilities, access to
labor is becoming a larger aspect of decision
making when tenants decide on where to locate
new facilities.

Q3 2016 CBRE Research

Per Sq. ft. Per Year ($, NNN)

Figure 6: Industrial Lease Rates

4.25
4.20
4.15
4.10
4.05
4.00
3.95
3.90
3.85
Q3 2014

Q1 2015

Q3 2015

Q1 2016

Q3 2016

Source: CBRE Research, Q3 2016.


Figure 7: Industrial Sales Transactions

($, Millions)

Overall asking rents moved sideways during Q3


2016. On a product-type basis, flex and
manufacturing space posted the largest rent gains,
7.0% and 3.9% respectively, while asking rents for
warehouse space slipped somewhat. For the latter,
recent lease comparables, specifically for Lehigh
Valley warehouse leases, suggest rising rents for
newer distribution space. This trend is not
necessarily seen in asking rent measures as much
of the newer space is leased ahead of delivery,
precluding these prices from the market average
rents of available space. For flex and
manufacturing space, the dearth of development
as well as available modern space is putting
upward pressure on pricing.

700
600
500
400
300
200
100
0
Q1 2009 Q3 2010 Q1 2012 Q3 2013 Q1 2015 Q3 2016

Source: Real Capital Analytics (4-qtr. Average) (Q3 2016 Estimated).


Figure 8: Y-O-Y Industrial Employment Change, Greater
Philadelphia Region

(%) 4
2
0
-2
-4
-6
-8
Jan-07

Apr-09

Jul-11

Oct-13

Jan-16

Source: U.S. Bureau of Labor Statistics.

2016, CBRE, Inc. |

GREATER PHILADELPHIA INDUSTRIAL

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