The Philadelphia industrial real estate market had a strong quarter characterized by positive absorption, rising rents, and very low vacancy rates. Despite relatively slow purchasing and leasing activity, landlords are in a strong position due to constrained building supply.
Unemployment rates in Philadelphia are higher than the national average, but job growth is strong. Activity in industrial markets was relatively uneven, with some submarkets, such as Lehigh Valley and Southern New Jersey, performing significantly higher than others.
Area Overview and Demographics
The largest city in Pennsylvania, Philadelphia has a population of 1.5 million as of 2023.
The median age is 34, and the median household income is $49,127. Philadelphia is one of the most historically important cities in the United States and was one of the major centers of the American Revolution.
Philadelphia has a temperate maritime climate, with hot, muggy summers and cold winters. Temperatures can vary throughout the year, and rain and snowfall are common in spring, fall, and winter. The city has relatively poor air quality due to particulate pollution and smog.
Philadelphia’s close proximity to other megapolises on the Eastern Seaboard has contributed to its large economy. The city has substantial activity in the tech, financial services, IT, manufacturing, and tourism industries. Several Fortune 500 companies have headquarters in Philadelphia, including Rite Aid, Comcast, and PNC Financial Services Group.
Summary of Philadelphia Industrial Performance in Q3 2022
The Philadelphia industrial real estate market had a strong quarter in Q3 2022. Total absorption was positive at 5.6 million square feet – significantly up from 4.19 million in Q2 2022 but down from 9.34 million in Q1 2022. The Burlington submarket alone was responsible for nearly 40% of the total quarterly absorption at 2.08 million square feet.
Vacancies also fell to 3.1% in Q3 2022 from 3.27% in Q2 2022. This quarter represents the fifteenth consecutive quarter in the Philadelphia industrial space with sub-5% vacancy rates. Vacancies were lowest in the Gloucester submarket at 1.2% and were the highest in the Cumberland submarket at 8.8%.
What Are Industrial Rents Like in Philadelphia?
Average industrial rents rose 3.8% to $9.33 per square foot in Q3 2022 from $.9.00 per square foot in Q2 2022. Rental increases between Q2 and Q3 were not as high as between Q1 and Q2, but the quarterly increase represents a 19.78% year-over-year growth rate. Average annual rent escalations were between 3.5% and 4%.
The submarkets with the highest asking rates for industrial space were Chester, Montgomery, Burlington, and Gloucester at $12.03, $10.10, $10.07, and $10.07, respectively. High rental growths are due to the relatively constrained supply that puts landlords at an advantage.
Purchase & Leasing Activity
Leasing activity remained mostly the same this quarter as previously in the year. Leasing activity has been subdued in 2022 compared to 2021 due to supply constraints – the same factors driving rental increases.
New construction, in particular, is not leasing as well as last year, with only about 40% of new construction added this quarter being pre-leased.
High-interest rates are also having an effect on pricing. Several land sites have undergone repricing to reflect higher interest rates and construction costs. Sales, in general, were fewer this quarter, though some areas, such as the suburbs, saw growing sales volume in Q3 2022.
Notable Industrial Space Deals in Philadelphia in Q3 2022
Sales transactions in Philadelphia were lower overall, but many large building sales occurred, including:
- Pontegadea’s $137 million purchase or 1.04 million square feet at 555 Nestle Way;
- WPT Capital Advisor’s $239 million purchase of 770,000 square feet at 1500 E 2nd Street;
- Lineage Logistics $49.5 million purchase of 189,068 square feet at 601 Crossroads Blvd;
- Hines’s $57 million purchase of 155,200 square feet at 466 Devon Park Drive; and,
- American Real Estate Partner’s $118 million purchase of 1.02 million square feet at 560 Merrimac Ave.
Notable leases signed include Soho Studio’s 503,490 square feet lease at 6 Campus Drive, GOAT’s 341,000 square foot lease at 3895 Eastgate Blvd, and Sysco Corporation’s 453,000 square foot lease at 800 Willowbrook Rd.
New Industrial Development Activity in Philadelphia in Q3 2022
Philadelphia added 4.9 million square feet of industrial space in Q3 2022, ending the quarter at a total inventory of 511.96 million square feet. This quarterly addition is higher than Q2 2022 at 4.13 million square feet but lower than Q1 2023 at 9.34 million square feet.
Philadelphia currently has 21.1 million square feet of industrial space under construction. Submarkets with the highest construction activity are Burlington and Bucks, with 6.7 million and 3.9 million under construction, respectively.
Market Forecast for Philadeplhia’s Industrial Market in 2023
Philadelphia’s industrial market is very strong and is expected to continue its trajectory into the new year. Philadelphia should add over 7 million square feet in space by the end of 2022, which may slightly increase vacancy rates. Either way, landlords can expect annual rental escalations of at least 3% to 4%.
Philadelphia’s construction efforts might be slightly hampered by rising interest rates and community opposition to industrial sites. However, land sites might get repriced due to changing demand and rental expectations.
Takeaways for Industrial Investors
Industrial investors in Philadelphia are entering 2023 with strong economic fundamentals and market activity. Even though rental rate growth seems to have plateaued from earlier in the year, the low vacancy rate means landlords have ample leverage to negotiate favorable asking rates.
The only cause for worry is potential construction delays for future projects. Philadelphia has an impressive array of planned projects, but developers have reasons to be cautious.
As always, stay vigilant, do your research, and be happy investing.