COVER STORY, APRIL 2011

STEADY & STABLE
The Philly industrial market is seeing investor interest, absorption and speculation about spec development.
By Jaime Lackey

Exterior of the brand new Philadelphia Wholesale Produce Market. (PRNewsFoto/O'Neill Properties Group, Salvatore A. Boccuti)

Coming out of a downturn, positive news often comes first from the “tortoise” markets — those slow-and-steady areas that do not overbuild in the good times that precede a downturn. Such is the case with Philadelphia’s industrial market, which seems to be gaining solid footing and even preparing for growth in the strongest submarkets.

Generally speaking, the Philadelphia industrial market includes the nine counties in southeastern Pennsylvania and southern New Jersey that make up the Philadelphia metropolitan statistical area, as well as the corridors of interstates 78 and 81, which extend through Allentown, Scranton, Wilkes-Barre and Harrisburg, north and west of Philadelphia.

“Overall, the Philadelphia industrial metro market has demonstrated fundamental stability over the last few years. Rental rates did suffer losses of 20 to 30 percent through most submarkets due to lack of demand.

However, vacancy did not really spike,” says Paul Torosian, an executive director of Cushman & Wakefield’s Philadelphia office. “This has never been a market that gets too far out balance. We’ve never been a supply market, so we didn’t suffer from overbuilding.”

According to Cushman & Wakefield’s numbers, the nine-county Philadelphia industrial metro market contains 281 million square feet of space. At the end of fourth quarter 2010, vacancy was 8.2 percent. For comparison, the vacancy rate was 9.8 percent in 2005, 7.7 percent at its lowest point in late 2007, and hit its highest point during the downturn at 9.1 percent in late 2009. (In the nine-county Philadelphia industrial metro market Cushman & Wakefield tracks Class A and B industrial buildings of at least 10,000 square feet used for manufacturing, warehousing and distribution. These numbers do not include high technology uses.)

In the 213 million-square-foot I-81/I-78 industrial market, vacancy dropped from 14.6 percent at the end of 2009 to 12 percent at the end of 2010, the lowest year-end overall vacancy since 2006. (Cushman & Wakefield tracks manufacturing, warehousing and distribution buildings above 90,000 square feet in this market.)

“Just like everywhere else, Philadelphia’s industrial activity slowed in 2007 and came to a halt in 2008, but we’ve come out of a stalled situation quicker than many areas,” says Brian Knowles, managing director of the
Industrial/Supply Chain & Logistics Solutions team with
the Philadelphia office of Jones Lang LaSalle Americas. “In 2010, we saw good absorption of buildings that were completed in 2007 and 2008. Consumer goods and food industry led the way for this activity.”

Knowles notes that there are still ample opportunities in most submarkets for companies that are looking for buildings of more than 100,000 square feet but the inventory for the large distribution facilities (500,000 square feet or larger) has experienced solid absorption. This dynamic has begun to place landlords in a more favorable position in discussions for the super-regional distribution center prospects.

“The best story in the area is the Lehigh Valley,” Knowles says. “Deal by deal, landlords in the broader Lehigh Valley submarket have been able to fill space. We may even see a spec building going up by the end of the year. That would have been hard to imagine 18 months ago.”

Knowles also believes there could be signs of development at Majestic Bethlehem Center, a 441-acre master-planned intermodal business park, this year or early next year. Another area to watch is Antrim Business Commons Industrial Park in Greencastle; Norfolk Southern is building a $100 million rail truck intermodal terminal at the site.

In the meantime, the greater Philadelphia area has seen several build-to-suit projects completed in the last 2 years. The Philadelphia Wholesale Produce Market, The Home Depot and Ollie’s Bargain Outlet have added 1.74 million square feet to the market.

The Philadelphia Wholesale Produce Market officially opened in early April. O’Neill Properties Group developed the 667,000-square-foot facility, which is owned by the Commonwealth of Pennsylvania, on a former brownfields site. This is the first building of its kind in the United States: it has a fully refrigerated facility that runs through the entire building. This means that food items will be constantly refrigerated from truck transport to loading docks to cold storage at the distribution center. The facility will feature 228 enclosed and fully refrigerated 50-foot wide dock areas, 40-foot ceiling heights, a skylight running the length and width of the building to provide natural lighting, a central walking concourse open to the public, and second-floor office space with secure access.

Mericle Commercial Real Estate Services built a 465,000-square foot project for The Home Depot along I-81 in Pittston in first quarter 2010.

On the southern end of I-81 in York, Kinsley Properties completed a 603,000-square-foot facility for Ollie’s Bargain Outlet at the end of 2010.

In another build-to-suit project, DP Partners is finalizing a 255,000-square-foot Penn Jersey Paper Company building located in Philadelphia County.

Investors seem to be regaining interest in the market as well.

“When rents crashed and construction stopped, investment stalled. We started seeing investment activity in late 2010 and we will continue to see increased activity in 2011 and 2012,” Knowles predicts.

The most notable recent acquisition is Hillwood Investment Properties’ approximately $54 million purchase of a 1.17 million-square-foot property located at 950 Centerville Road in Newville in March. Office Depot occupies half of the building, which is located at Key Distribution Center. Hillwood Investment Properties also purchased a 602,500-square-foot industrial building at 1700 Ritner Highway in Carlisle for $16.27 million in summer 2010, and Endurance Real Estate acquired a 385,800-square-foot warehouse and distribution facility at Commerce Circle in Lehigh Valley for $15.9 million in the third quarter of 2010.

While both Knowles and Torosian see stability and predict continued improvement across Philadelphia’s industrial market, Torosian does believe the effects of the downturn won’t disappear overnight.

He says, “The majority of industrial markets in the Philadelphia region are stable. Developers may be giving some consideration to spec development in Allentown and central Pennsylvania. However, given the depth of the downturn, there just haven’t been enough positive quarters to give everyone comfort. We cannot underestimate the psychological significance of the downturn on consumers, developers and sources of funding. I think everyone will continue to be cautious, especially following recent news out of Japan and the Middle East.”

The Navy Yard: Still Making History Aker Philadelphia Shipyard is located at The Navy Yard. The Philadelphia Navy Yard dates back to 1776, but this historic development is now home to leading technology companies. “The Navy Yard’s infrastructure, workforce, existing building stock, new development capacity and access to highways, rail and the Port of Philadelphia are ideal for manufacturing, warehousing and distribution,” says Mark Seltzer, director of Management & Development with the Philadelphia Industrial Development Corporation (PIDC). The Navy Yard works well for companies ranging from traditional manufacturing to the high-tech assembly and manufacturing that marks a new era of growth for the region,” Seltzer adds. The 1,200-acre development has 3.3 million square feet of existing industrial buildings, along with the unique dry docks and piers.  The Navy Yard is home to Aker Philadelphia Shipyard, the most modern and successful commercial shipbuilding facility in the United States. Aker’s shipyard comprises 110 acres, and it employs more than 1,000 people, who have completed 16 ships worth $2 billion. Serving as an anchor to the industrial campus, Aker’s supplier network has occupied space within The Navy Yard to support this booming sector and giving Aker the ability to construct 2.5 new ships per year.  Also at The Navy Yard, the Tasty Baking Company has completed its new 350,000-square-foot baking and distribution facility. The state-of-the-art LEED-certified new construction facility offers unprecedented access to highways and rail. Tasty Baking’s corporate headquarters are also in The Navy Yard; the company is a tenant in Three Crescent Drive, The Navy Yard Corporate Center’s newest Class A office building.  Seltzer also notes that Liberty Property Trust and Synterra Partners have commenced construction, speculatively, on the first phase of a 170,000-square-foot development at The Navy Yard. “This high-finish flex space is aimed toward the user who requires a combination of office, manufacturing and distribution functions in one space. This state-of-the-art space will be particularly attractive to high-technology users in the advanced manufacturing sector,” Seltzer says. — Jaime Lackey

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.