Industrial vacancy rates in key Northeast Corridor at lowest level in six years, firm says

The industrial real estate corridor encompassing Philadelphia, central Pennsylvania, northern Delaware, and southern New Jersey reported its best second-quarter vacancy readings since before the Great Recession, with virtually all of the occupancy gains coming from an increase in warehousing and distribution demand instead of from traditional manufacturing.

The region, which covers about 14,000 square miles and is bisected by Interstate 81 running north to south and Interstate 78 running east to west, reported a vacancy rate of 8.2 percent in the second quarter, according to data from Newmark Grubb Knight Frank Rutherford, a New York-based commercial real estate advisory firm. Vacancy rates hit 9 percent in the first quarter of 2013 and were at 8.8 percent in the first quarter of 2012, according to Newmark Grubb data. The highest vacancy rate in the past six years was 10.9 percent in the third quarter of 2009.

Kevin McGowan, a Newmark Grubb director based in Wayne, Pa., a Philadelphia suburb, said the last time the market's industrial vacancy rates were this low was in mid-2007.

McGowan said demand for warehousing and distribution services have grown by 23 million square feet since the first quarter of 2008. By contrast, demand for manufacturing and so-called flex space, which can be used in combination with office, retail, and research and development operations, grew by only 3.6 million square feet, according to McGowan.

"Demand is [being] more driven by the supply chain model," McGowan said in an e-mail. The I-81/I-78 corridor will become the "sweet spot" for regional distribution in the mid-Atlantic territory as long as oil prices don't spike as violently as they did in 2007-08, McGowan said. A pickup in the region's consumer spending patterns is a key driver behind the growth in warehousing and DC demand, the firm said.

The region remains a buyer's market for industrial rental and leasing space due to an abundance of developable land and construction costs that are at or below levels in the middle of the last decade, McGowan said. "Landlords with existing facilities can't push prices up too far" or they will risk losing tenants to customized build-to-suit facilities, he said.

Though no new supply was added to the market in the quarter, there was still 570,000 more square feet in the pipeline at the end of the period than a year earlier, according to Newmark data. The central Pennsylvania and Lehigh Valley regions, in particular, showed solid improvement in the quarter, the firm said. While rental rates in the regions are not increasing, landlords are making fewer concessions such as free or significantly reduced starting rents, Newmark said. The trend indicates that landlords are starting to gain leverage at the negotiating table, according to the firm.