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While many industrial real estate analysts say the area is currently a “landlord-favored market,” CBRE Vice Chairman Bill Wolf said the second quarter saw some balance return to the market along the I-78/I-81 corridor, allowing potential tenants to find opportunities.
He said that in the second quarter, tenants were able to pay about 10 percent less rent than before because vacant properties remained on the market longer.
“Rents have remained stable because some landlords are prioritizing occupancy over waiting for the last nickel or dime,” Wolf said.
He noted that sublease availability has increased fivefold compared to mid-2022, before the market moved into a higher interest rate era.
He said this could be coming from companies that expanded their inventory and rushed to add warehouse or logistics space, only to decide they no longer need that space.
He said that now that the effects of the COVID-19 pandemic are over, many businesses are less interested than before in keeping large amounts of inventory close to customers.
“You could say they took on more than they were capable of doing,” Wolf said.
Most of that activity was in the third-party logistics sector, the fastest growing industry in the wake of supply chain challenges caused by the pandemic.
3PL companies put about 1.2 million square feet of space on the market for sublease, roughly 75% of the total sublease vacancy added in the quarter.
Both Lehigh and Northampton counties had negative net absorption rates in the second quarter, while Berks County saw a small, what Wolf called a “negligible” increase.
Demand may continue to weaken, but Wolf said he expects the market is not in a position to add excess supply through construction in the short term, which will impact the balance.
According to the latest CBRE industrial real estate report for the I-78/I-81 corridor, developers continue to grapple with rising vacancy rates, with just 2 million square feet of new projects breaking ground this quarter.
The total amount of land under construction currently is 8.7 million square feet, significantly lower than the post-pandemic average of 21 million square feet and even lower than the pre-pandemic 2018 and 2019 average of 14.2 million square feet, according to the report.
Wolf said the decline in construction is a direct result of the Federal Reserve's policies of raising interest rates to tame inflation and stabilize the economy.
One trend that is beginning to emerge, Wolf said, is the geographic distribution of leasing activity.
Demand within the I-78/I-81 corridor is currently concentrated in the Central Pennsylvania and Lehigh Valley regions of the market, primarily due to its location.
But as the price gap widened, the bulk of the demand has flowed to the Northeastern Pennsylvania submarket, he said.
Before Class A logistics rent growth began in earnest in 2021, the Northeast submarket averaged roughly 20% of leasing activity.
That percentage has changed to an average of 33.1% since interest rate increases began, as rents in central Pennsylvania and the Lehigh Valley region have become significantly higher than rents in northeastern Pennsylvania.
According to the report, average asking rents for Class A logistics facilities in Northeastern Pennsylvania were 5.6% and 30.2% lower than in Central Pennsylvania and the Lehigh Valley, respectively.
But Wolf said while the current market is a good opportunity for tenants, he doesn't expect it to be permanent, and for businesses looking to expand their space, now may be the time to consider signing a lease.
“The second half of the year will be strong and this fluctuation will present a short-term opportunity for occupiers,” he said.