In the third quarter, we saw some interesting trends emerging in the local industrial real estate market that appear to be just the beginning of a bigger movement yet to come.
Five new buildings have already been delivered so far in 2016 and there are 11 more buildings under construction with a total RBA of 4,820,849 sqft of space. Furthermore, much of this space is currently unoccupied which will have a big impact on net absorption and vacancy rates, among other things.
Let’s take a look at the most important trends we saw take place in Q3 2016 in the Central Pennsylvania industrial real estate market followed by our analysis of the effect this will have on the market.
Select Year-to-Date Deliveries:
Five of the top 15 Select Year-to-Date Deliveries in the Greater Philadelphia market took place in Central PA. Of these five, two were delivered in Q1 and three were delivered in Q2. None were delivered in Q3. For a quick recap, here are the square footage and occupancy of the buildings that have been delivered in the Central PA market so far this year:
- 139 Fredericksburg Road (Lebanon Valley Distribution Center), 874,126 sqft and 0% occupied
- 545 Old Forge Road, 500,000 sqft and 0% occupied
- 10874 2nd Amendment Drive (Susquehanna Logistics Center), 423,300 sqft and 100% occupied
- 192 Kost Road, 422,400 sqft and 0% occupied
- 501 Old Forge Road (LogistiCenter 78-81), 405,000 sqft and 100% occupied (in the Q4)
Top Under-Construction Properties:
A large construction project broke ground this quarter in Central PA. United Business Park, located off Interstate 81 in Southampton Township plans to add 1,491,600 sqft of industrial space to the market by Q2 2017. This is one of two distribution centers that combined will offer about 2.7 million sqft of space in Franklin County. New Jersey-based Matrix Development Group is among the most active industrial developers in Pennsylvania and New Jersey. Sheetz will be the first tenant in this space in this space and they hope to offer other large companies like Proctor and Gamble who want to efficiently reach the Northeast and Mid-Atlantic populations.
Select Top Sales
Four of the nine Select Top Sales in the Greater Philadelphia Market between July 2015 and September 2016 have taken place here in Central PA. Though none have taken place specifically in Q3, here is a quick recap of the building that have been sold during this time:
- 1 True Temper Drive (Carlisle), 1,226,515 sqft for $90,150,000
- 234 Walnut Bottom Road – Park 81 (Shippensburg), 1,495,720 sqft for $83,000,000
- 100 Louis Parkway (Carlisle), 400,596 sqft for $28,850,000
- 1225 S Market Street (Mechanicsburg), 596,703 sqft for $21,350,000
Absorption and Demand:
This quarter, net absorption fell drastically from 164,650 sqft (Q2) to 28,978 sqft. Though still in the black, this is the lowest number we’ve seen for net absorption since Q2 2013 when it dipped into the red at negative 683,020 sqft. Only one building was delivered this quarter with an RBA of 165,800 sqft which is currently not occupied. Additionally, 11 buildings are under construction with a total RBA of 4,820,849 sqft of new space coming to the market soon. From what we’ve seen in the Top Under-Construction properties in the Q3 CoStar report, many of these are 0% occupied at this time. Should more unoccupied space hit the market, we could expect to see net absorption decrease even further, possibly dipping into the red.
Vacancy & Rental Rate:
The vacancy rate remained the same this quarter at 5.4% after its big increase from Q1 to Q2 where it jumped 0.6% to the highest rate we’ve seen since Q4 2014. Given the projects under construction, we might expect this to increase further in the coming quarters as these properties are delivered. While vacancy stayed steady, the quoted rental rate decreased by 1 cent to $4.29 per square foot.
Construction activity continues to be one of the prime drivers of the Central Pennsylvania industrial market. Speculative construction currently accounts for 70.5 percent of all construction projects. New construction has created opportunities for tenants in a market that has otherwise been difficult to enter. As developers noticed requirements are larger than quality options in the market, speculative projects broke ground to meet the needs of the active requirements.
Moving forward for the remainder of 2016, speculative construction will continue to exceed build-to-suit projects. While demand continues to be strong, a large volume of construction has delivered vacant this year, likely causing market conditions to shift to tenant favorable by 2018 due to large increases in Class A inventory and pending economic slowdown.
Based upon the data for Central PA’s industrial real estate market in Q3 2016, what do you find to be most interesting or important? Share your insight by commenting below!