Lehigh Valley Industrial Sector Sees Increasing Rents & Spec Construction
Executive Managing Director Jerry Moore, and Senior Executive Director Chuck Bower recently wrote an analysis of the Lehigh Valley industrial market for the Northeast Real Estate Business Journal. In their analysis they discuss how the Lehigh Valley has experienced record-low cap rates for modern, stabilized industrial buildings in the past 12 months and how that is affecting the industry currently and the impact they see it having on the future. See the excerpt below.
With increasing rental rates, strong investor demand for core product and record levels of speculative construction, spirits are high in the Lehigh Valley with regard to industrial real estate opportunities. The record volume of product deliveries the past two years underscores the strong industrial demand in the Lehigh Valley. Vacancy has dropped from 15.9 percent in the first quarter of 2009 to a record-low 4.9 percent at the end of 2015, according to CoStar. The average net industrial rental rate jumped 11.1 percent during the past 18 months, an even more impressive figure when compared against the 10-year average of 1.65 percent rental rate growth in Lehigh Valley for modern distribution buildings.
After many years of flat rental growth, year-end 2015 industrial leases were completed in the $4.75- to $4.95-per-square-foot range in the Allentown- Bethlehem-Easton, Pennsylvania MSA. In 2016, expect a modest increase in rental rates as the delivery of new construction across the northeastern Pennsylvania region will slow growth and push vacancy rates higher. Leasing activity has been broadly distributed along the regional I-78 and I-81/I-80 corridors. Within the valley, industrial growth has occurred primarily along the main interchanges of I-78, U.S. 22 and Route 33. In the past 12 months, many major tenant commitments have occurred in the market, including online retailer Zulily for 800,000 square feet at a Bethlehem fulfillment center; European retailer Primark Stores Ltd. for 677,000 square feet within the redeveloped Lehigh Valley Industrial Park VII; Stitch Fix for 483,990 square feet of warehouse space, also in Bethlehem; and Genco for 435,000 square feet of new Class A industrial space near the Lehigh Valley International Airport.
Although global macro-economic conditions have raised concern for slowing demand, there is no immediate expectation for a major market slowdown in leasing activity in 2016.
A flood of public and private capital into Lehigh Valley’s industrial sector, coupled with continued low-interest rates, has cap rates in the low 6 percent range. A strong sign of the investment times, the market has experienced record- low cap rates for modern, stabilized industrial buildings in the past 12 months, going as low as 5.5 to 5.9 percent with corresponding property values ranging from $85 to $95 per square foot. Further cap rate compression is not expected in 2016, but the impressive investment sales momentum from last year should continue.
For the complete analysis, click here.