The Reis Philadelphia industrial market was mixed in the second quarter, with solid improvement for Flex/R&D space but little net absorption and no rent gains for warehouse/distribution. Most of the positive industrial action is farther out. “Strong absorption in the Lehigh Valley and the Southern I-81/I-83 corridor was offset by occupancy losses in the suburban Philadelphia counties and Southern New Jersey,” according to Colliers. This source reports “the regional industrial market lost momentum during the first two quarters of 2012” as “demand barely kept up with the additional supply from space contractions.”
Reis reports a 10.8% vacancy rate for warehouse/ distribution space in the metro Philadelphia area for the second quarter of 2012, essentially unchanged from the prior two quarters, and up 40 basis points from a year earlier. The national rate of 12.7% is down 80 basis points year-over-year. The local rate did fall 20 basis points to 10.6% in July, but Reis predicts a 10.7% rate for year-end 2012. For Flex/R&D space, Reis reports a vacancy rate of 12.2%, down 80 basis points from the prior quarter and 190 year-over-year. The U.S. second quarter rate is 14.7%, down 80 basis points year-over-year. The local rate fell another 30 basis points to 11.9% in July, but Reis predicts an increase to 12.6% at year-end.
Cushman & Wakefield reports a vacancy rate of 6.4% for an area similar to the Reis market, down 230 basis points from the cyclical high in mid-2009. For a broader region including all of Eastern Pennsylvania and Northern Delaware, Colliers puts the rate at 10.1%, down 20 basis points in the first half of 2012. Reis predicts that after increasing in the second half of 2012, the vacancy rate for both warehouse/distribution and Flex/R&D space will edge down slowly through 2016, to 9.8% and 12.0% during that year.
SUPPLY AND DEMAND
Warehouse/ distribution net absorption was just 3,000 square feet in the second quarter of 2012, bringing the half-year total to just plus 119,000 square feet. The quarter’s Reis forecast for 2012 had been just 473,000 square feet of net absorption, but that was before a solid total of 408,000 square feet was recorded in July. Reis already expects a demand boom for the 2013 to 2015 period, with net absorption at about 2 million square feet per year. But new supply is forecast at more than 1.5 million square feet each year, limiting the decrease in vacancy.
Second quarter demand was stronger in the Flex/R&D segment, with 340,000 square feet of net absorption. The first quarter was negative, however, and the half-year total was just 222,000 square feet. The Reis forecast for the second half of 2012 was barely positive, but 178,000 square feet of net absorption was recorded for July. In August, meanwhile, a 509,050-square-foot flex facility for Subaru broke ground in New Jersey (see Special Real Estate Factors). Aside from this facility, Flex/R&D new supply is forecast to be limited through 2016, but demand is expected to be limited as well, with annual net absorption generally at 250,000 square feet or less.
Other market watchers report stronger demand, but generally in build-to-suit facilities and/or outside the Reis market area. For a market area similar to Reis, Cushman & Wakefield reports 1.9 million square feet of overall net absorption for the first half of 2012. “A good portion of this activity can be attributed to the latest uptick in flex leases experienced in the market,” according to this source, while “construction activity remains limited, particularly on the speculative side.” According to Colliers, however, second quarter net absorption in the Reis market area, including the city of Philadelphia, close in Pennsylvania suburbs, and Southern New Jersey, net absorption totaled negative 1.6 million square feet for the quarter and negative 2.2 million square feet for the first half of the year.
Demand was stronger in farther out portions of Eastern Pennsylvania, these sources reported.
Warehouse/ distribution rents were unchanged in the second quarter, at $4.31 psf for the asking average and $3.94 psf for the effective average. At the time they were down 0.5% by both measures over twelve months. In July, however, rents increased by 0.2% asking and 0.3% effective, and modest gains of 0.9% asking and 1.3% effective are forecast for 2012 as a whole. This would follow the modest losses of 2010 and 2011. The effective average is forecast to post modest annual gains of 2.3% to 2.8% during the 2013 to 2016 period.
Flex/R&D rents continue to be strong. In the second quarter the average asking rent rose 0.1% to $7.05 psf, while the average effective rent increased 0.5% to $6.40 psf. Gains of 0.1% and 0.2% were recorded in July, and increases of 0.7% and 0.6% are expected for the year as a whole. As for warehouse/distribution space, Flex/R&D rents are expected to be limited from 2013 to 2016, topping out at around 2.5% annually. For both types of industrial space Metro Philadelphia rents are lower than in the U.S. as a whole, despite being located in the generally high-cost Northeast. The inventory, however, is older here as a result of its early industrial development.
Cushman & Wakefield reports a direct asking rent of $4.94 psf, down 2.2% from a year earlier. The figures for warehouse/distribution and office/service are reported at $4.35 psf and $7.92 psf, respectively. “Rental rates remain deflated but should move upwards over the next year as demand in the market increases further,” this source predicts. Competition will be limited since “there is no speculative construction expected to hit the market within the next 12 months.” For a broader market area including all of Eastern Pennsylvania and Northern Delaware, Colliers reports an average asking rent of $4.24 psf. “Landlords are trying to hold the line on rents and concessions, but competition for tenants will be increasing in the larger size ranges,” according to this source.