Colliers Names Lehigh Valley One of '10 Emerging Industrial Markets to Watch in 2019"

BETHLEHEM, PA—The Lehigh Valley region is one of ten “emerging industrial markets to watch” for the second straight year in a research report from Colliers International.

At the national level, Colliers warns that while 2019 should be another strong year for industrial property, there are signs that demand may start tapering off in the coming quarters. In the Lehigh Valley occupier interest does not appear to be diminished.

Colliers market brokers Steve Cooper, Mark Chubb, Michael Zerbe, Summer Coulter and logistics analyst Kirsten Kurz all contributed Lehigh Valley perspective to the overall report.

Among the report’s findings about the Lehigh Valley:

Distributors, manufacturers and 3PLs continue to move into Lehigh Valley to take advantage of logistics benefits and opportunities. The Lehigh Valley’s building boom was originally enabled by significant underdeveloped farm land and land where factories once stood, though the supply of developable industrial land is now limited. Some of its communities, like Allentown, Bethlehem, Nazareth and Easton are experiencing population growth. Lehigh Valley’s location gives the region’s occupiers quick access to some of the largest cities in the U.S. In fact, nearly 62 million people live within 250 miles of the market’s core, 21% of which are millennials, Colliers says.

The Lehigh Valley’s location puts occupiers close to many logistics hubs. Nearby Philadelphia International Airport is one of the 20 largest cargo airports in the country. The region is also home to Lehigh Valley International Airport, ranked the fastest-growing cargo airport in the US. The region offers access to many major roadways including the Pennsylvania Turnpike, Interstates 78 and 80, and close access to the New Jersey Turnpike. Aside from roadways, the ports in New Jersey, New York, Philadelphia and Wilmington are within a few hours drive.

Warehouse wages in the Lehigh Valley are in line with the US average at $13.97 per hour, which is lower than the $14.29 per hour average in nearby Philadelphia.

Despite a large amount of development, overall vacancy rates decreased to 4.5% in 2018. Vacancy rates remain significantly lower when compared to the recession-high vacancy rate of 14.7% in 2008. Vacancy rates dropped in most size ranges and the biggest decline was in spaces lower than 25,000 and greater than 500,000 square feet, where there is little to no existing vacant product.

Despite another year of solid deliveries expected in 2019, the continued demand in the market will keep vacancy rates low for the foreseeable future, the Colliers report says.

Many large retailers, wholesalers and 3PLs continue to make Lehigh Valley their home. In 2018, the market posted just over 4.6 million square feet of occupancy gains, the sixth consecutive year overall net absorption surpassed three million square feet. Since 2013, the market has posted 29 million square feet of positive absorption, equal to 32% of the total market inventory. As occupiers continue to expand their footprint to service the highest populated region in the country, Lehigh Valley will continue to be a sought-after market, keeping activity robust and absorption positive in 2019.

The growing demand from e-commerce occupiers to be in Lehigh Valley to service the large nearby population have kept development robust the past five years. In 2018, more than 3.2 million square feet was completed. While this didn’t match the record development in 2017, it was still an impressive number. Since 2013, nearly 26 million square feet of industrial development has completed, meaning 30% of the existing inventory in Lehigh Valley market is less than six years old. Despite strong new development in the past five years, under-construction increased at year-end 2018 to 4.4 million square feet.

Land sites are becoming harder to find however, and many developers will start to look at redevelopments of older office and industrial product to quench demand for modern distribution facilities in the coming quarters.

Despite the strong activity, asking rates dipped slightly to $6.13 per square foot per year in 2018. This dip was a direct result of a lack of class A space on the market. With vacancy rates at decade lows, even class B space will increase in demand in the coming year which will drive up the average asking rate in 2019. Institutional investors will continue to put capital into the region in the coming year, increase sales prices and driving down cap rates.

UPDATE, 02/22/2019, 3:00 p.m.: Reseach analysts at Colliers say that a reference in an earlier version of this article to a possible tapering off of demand for industrial space over the next several quarters referred to an overall national view, not specifically to the Lehigh Valley. The Colliers team also notes that while the original boom in industrial development in the Lehigh Valley was largely due to the availability of underdeveloped farmland and unused factory space, the supply of  developable property is now limited. The article has been updated to reflect this additional perspective.