Demand is strong for shallow-bay industrial suites across greater Philadelphia. But despite the market's low vacancy, construction costs have made it hard for developers to add new product to the market.
)
Industrial spaces of 50K SF or below had a direct vacancy rate of 4.4% in the region last quarter, compared to 18.4% for spaces between 500K SF and 750K SF, according to CBRE. The brokerage found no sub-50K SF deliveries this year and no new projects in the pipeline.
But one developer has found a creative way to bring new shallow-bay suites online.
Alliance HP purchased a 143K SF underutilized office building in Plymouth Meeting for $11.3M in March 2024 and set out to adapt it into a flex industrial space. Today, 1 Innovation Drive is 100% leased to six tenants ranging from 10K SF to 45K SF, according to Alliance HP Greater Philadelphia Market Leader Jake Maldonado.
“That's a product type that nobody's building ground up,” he said earlier this month at Bisnow’s Greater Philadelphia Industrial and Logistics Summit, held at the Philadelphia Marriott Downtown.
“That was definitely a success story of taking a single-story office asset that was obsolete and turning it into a functional small-bay industrial/flex building.”
The property overlooking the intersection of I-276 and I-476 in the shadow of the Plymouth Meeting Mall is defined by “demographics-driven” services tenants, Maldonado said.
The roster includes Donnelly’s Home Comfort Specialists, a plumbing and HVAC firm that took 34K SF after relocating from Lansdale, and the medical device company Nevro Corp., which signed a lease for 13,600 SF running through 2033. Maldonado also mentioned a restoration contractor and an e-commerce tenant.
)
“They very much are looking at, ‘I can serve high-income rooftops very quickly from this location,’” he said.
Construction costs have ballooned nationwide in the wake of the pandemic, but shallow-bay projects face particularly strong headwinds on that front.
They tend to be closer to major population centers, which means they have higher land costs than hulking logistics centers that can be built farther out. But the legal and administrative expenses associated with the entitlement process aren't any lower than they would be for a big-box warehouse.
Big-box developers also don't need to worry about walls, offices and utilities that need to be constructed to serve each suite within a shallow-bay facility, which add significant per-square-foot expenses to construction budgets.
That is part of why the sub-50K SF spaces Alliance created are exceptionally rare in greater Philadelphia.
)
The way Alliance HP thought about the existing building’s redevelopment potential was unique when it first hit the market.
“At the time, a lot of folks were underwriting this as a scrape, a teardown, a new construction build,” Maldonado said.
“When you're underwriting an acquisition that way, there's usually going to be a contingency tied to approvals for the building that you want to build, and so we sort of knew, given who we are, what we do, that we weren't going to be competitive in that space.”
While the 16-foot clear heights are not optimal for logistics users that much of the new warehouse construction across greater Philly has targeted, the location was prime, and the site has more than 4,000 parking spaces. Alliance HP also installed 16 new loading spaces around the building.
The firm has achieved success with its small-bay portfolio, particularly with spaces below 20K SF.
)
“We definitely see a rent premium,” Maldonado said. “It’s sort of graded the smaller you get”
Shallow-bay and light industrial spaces are in high demand from an acquisition standpoint, and sellers have taken note, according to Endurance Real Estate Group principal Ben Cohen.
“Those are getting priced very aggressively,” he said.
Vacancy is much higher among larger industrial spaces in greater Philly, according to CBRE, but subdividing them would not be an economical way to increase occupancy in most cases.
The constant division and redivision for different-sized tenants is one of the most expensive parts of the shallow-bay business, Greek Real Estate Partners Managing Partner David Greek said.
“It is very expensive to do the first division,” he said.
“You divide when you have to and not earlier than that,” Greek added. “If you can plan for it up front, you can be in a better position to do it when you need to.”
)
)
)
)
)
)
)
)
)
)
)
)