Mega warehouses dominate development pipeline

Transcription

1 Pennsylvania I-78/I-81 Industrial Corridor, Q3 17 Mega warehouses dominate development pipeline Net Absorption.9 Million sq. ft. Vacancy Rate 5.3% Asking Lease Rate (NNN) $. Development 1.1 Million sq. ft. Figure 1: Number of Million Sq. Ft.+ Warehouses Added to the Inventory 1 *Arrows indicate change from previous quarter () YTD, Delivered and Under Construction Source: CBRE Research, Q3 17 Construction activity remained historically high in spite of 3. million sq. ft. of new space delivering. While current construction levels were nearly unchanged, quarter-over-quarter, the composition of speculative versus built-to-suit activity swayed toward the former as developers remained confident in this market. Third-party-logistics companies continued to dominate occupancy growth, followed by manufacturers and wholesalers. But, from a size perspective, leases are trending toward 5, sq. ft. and greater as this market continues its rise as a prominent primary logistics node. Pricing continued to increase at a fast pace as supply struggles to keep up with demand. Given the number of active requirements in the market, vacancy is expected to remain low, further driving up rents. Demand for logistics space continued its lock-step pace with consumer spending in as much as supply allowed it. Development in the I-78/I-81 Corridor remained elevated in the third quarter with 1.1 million sq. ft. underway, including two groundbreakings on million sq. ft.+ warehouses. Ecommerce growth led to a boom in warehouses measuring a million sq. ft. or more constructed in the Corridor during the past 5 years. According to a national CBRE MarketFlash released earlier this year, this market leads the country in modern, million sq. ft.+ warehouse development. By nature of its geography and highway access, the Corridor is predominantly a first mile market (start of the logistics journey), so construction trends adapted to accommodate the larger volume regional distribution hubs now require. Demand justified the trend: all million-sq.-ft. buildings built since 1 have been leased. For the 9 facilities currently under construction, over a third of that space is preleased. Q3 17 CBRE Research 17, CBRE, Inc. 1

2 Figure : Industrial Market Statistics for All Properties Greater than 1, sq. ft. Submarket Inventory Total Vacancy Rate (%) Total Availability Rate (%) Completions Under Construction 17 YTD Total Net Absorption Avg. Asking Lease Rate ($NNN/PSF/YR) Cumberland County, PA 5,9, ,913,68 93,3.6 Dauphin County, PA 13,961, , Franklin County, PA 11,831, ,3, 5,.5 Lancaster County, PA 3,791, ,187.8 Lebanon County, PA 7,67, ,,,199, York County, PA 6,335, , 78, 6,1 3.9 Central PA Subtotal 16,956, ,18, 5,993,68,717,66.3 Berks County, PA 18,61, ,81, -, Lehigh County, PA 39,39, ,,635,8 1,166, Northampton County, PA 18,5, ,315,53,95 1,61,8.95 Lehigh Valley PA Subtotal 75,753, ,8,315 6,,95,38,88.85 Lackawanna County, PA 1,3, , Luzerne County, PA 3,1, ,38,16 1,63,5 1,1, Monroe County, PA 3,539, ,. Schuylkill County, PA 7,3,77.. 1,5 853, Northeast PA Subtotal 53,188, ,38,16 1,85,,587, TOTAL 93,898, ,66,75 1,59, 9,685,599. Q3 17 CBRE Research 17, CBRE, Inc.

3 ABSORPTION To date, the PA I-78/I-81 corridor tallied nearly 1 million sq. ft. of positive net absorption. About 1 in 5 leases signed this year totaled more than 5, sq. ft., pointing toward the trend of larger requirements driving development of more 1 million sq. ft. warehouses. Third-party-logistics companies account for nearly half of all leasing activity for the year, followed by manufacturers and wholesalers. Geographically, Central PA claims the bulk of occupancy gains during 17 with a lack of supply limiting Lehigh Valley s net absorption totals. A look at tenants currently touring the market indicates the trends both in larger requirements and user types will continue during the near term. VACANCY Since early 15, the vacancy rate along the PA I- 78/I-81 corridor hovered around the 6% mark. In spite of persistent large demand growth tallied since then, developers proved capable of keeping pace, adding more than 3 million sq. ft. of new space since the first quarter of 15. Consistently low vacancy coupled with stable, high demand growth levels will lead to more construction in the short-term as newly constructed buildings continue to enjoy significant pre-leasing. Furthermore, pricing should continue higher in the face of low supply levels. DEVELOPMENT PIPELINE Current development activity persists at historically higher-than-average levels with 1.1 million sq. ft. of new supply currently under construction. While construction completions tallied year-to-date are only half as much as 16 levels, another.7 million sq. ft. is slated to deliver before year s end, pushing 17 totals nearer last year s record-breaking measure of 16.9 million sq. ft. Since early 15, construction levels, generally, tracked above the 1 million-sq.-ft. mark with the last two quarters posting totals closer to 15 million sq. ft. The availability rate for buildings delivered since 15 sits at 19.8%, with most of that in buildings delivered this year. As such, developers remain bullish on the PA I-78/I-81 corridor as demand growth remains robust and pricing continues to rise. Figure 3: Net Absorption Million sq. ft Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Figure : Vacancy Rate (%) Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Figure 5: Completions Million sq. ft Q3 17 CBRE Research 17, CBRE, Inc. 3

4 LEASE RATES Overall asking rates rose to their highest historical levels during the third quarter. But, as has been the case, actual lease comp rates are higher than what asking rents reveal as most tenant demand in recent quarters signed at buildings either under construction or recently delivered. Newer buildings asking rents tend to be unlisted as developers want to take advantage of consistently rising rents. From a lease comparable perspective, Central PA Class A warehouse rents tend above the $.5 level while Lehigh Valley leases trend above the $5.75 mark. CAPITAL MARKETS Investment sales volume remains stable, mirroring recent quarters activity levels. While levels are off compared to 15 and early 16, a lack of sales opportunity given how much property traded hands recently is the main cause for tempering velocity as interest in this market remains high for market players. Specifically, private investors are driving demand in 17 at 56.% of buyers, a segment whose share rose sharply since 15 where it comprised 1.% of all buyers. Notably, REITs claim only 6.% of buyers during 17. But, again, this is more a result of REITs being active earlier in the cycle, already having laid claims to the assets they feel best fit their portfolio strategy Figure 6: Industrial Lease Rates Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Figure 7: Industrial Sales Transactions ($, Millions) Q3 9 Q3 11 Q3 13 Q3 15 Q3 17 CONSUMER SPENDING Consumer spending and demand for modern logistics space are inexorably connected. Following the Great Recession, for every 1% growth in year-over-year consumer spending, a similar million-sq.-ft. growth in warehouse demand within the PA I-78/I-81 Corridor is expected to follow in a one-year timeframe. In recent quarters, that relationship broke down somewhat. This was related to structural changes in warehouse development warehouses are getting taller, providing larger capacity. But the lack of supply, underpinned by robust development activity unable to move the vacancy pin far from the low-6%, high-5% mark in recent quarters, certainly accounts for some of the lagging logistics demand in light of significant consumer spending increases in recent quarters. Source: Real Capital Analytics (-Qtr. Aggregate). Figure 8: Consumer Spending vs. Logistics Demand Millions Sq. ft Q11 Q1 Q13 Q1 Q15 Q16 Q17 -Quarter Average Absorption (L) Y-O-Y Change in Spending (R) Source: Bureau of Economic Analysis; 17 CBRE Research Q3 17 CBRE Research 17, CBRE, Inc. 5

5 CONTACTS Ian Anderson Director of Research and Analysis LOCAL OFFICES Center City Philadelphia Two Liberty Place Allentown, PA Harrisburg, PA Joseph Gibson Research Operations Manager joseph.gibson@cbre.com Lisa DeNight Senior Research Analyst lisa.denight@cbre.com Andrew Landolfi Researcher andrew.landolfi@cbre.com Cira Center Mt. Laurel, NJ Wayne, PA Wilmington, DE Conshohocken, PA To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.