Location Is Everything Again In Philly-Area Industrial — And That's A Problem

After industrial development spent two pandemic years in hyperdrive, it has settled back into the same very good asset class it had been in the previous few years — with one key wrinkle.

High interest rates have cooled demand for industrial development from both tenants and lenders this year, re-establishing location as a primary factor in a project’s viability, panelists said at Bisnow’s Philadelphia Industrial and Logistics Update event on Aug. 9 at 101 East County Line Road in Hatboro, Pennsylvania.

But after years of breakneck construction, most of the Philly region’s remaining viable development sites are close to residential areas, panelists said. Though NIMBY opposition to industrial development is nothing new, development opponents are louder and more sophisticated than they have ever been, Endurance Real Estate Group co-founder and principal Ben Cohen said.

“We’ve all known NIMBY our whole lives,” Marathon Engineering & Environmental Services Director of Engineering Dave Fleming said. “And we've all experienced that; anybody in the development game experiences that. However, in the industrial sector? It's really grown. And there's a lot of organization with the internet today. I can't tell you how many nights I've been screamed at.”

The e-commerce explosion kicked off by the pandemic briefly made development of warehouses feasible in locations that would have previously been dismissed as too far away from highway exits or population density, Colliers Executive Vice President Summer Coulter said.

“If you go back to 18 months ago, every industrial site was good,” she said. “Everybody had money, you couldn't deploy capital fast enough. Certainly, the financial market changes have impacted that. Anything tertiary that was in place is dead. There's a lot of buyer interest for anything [in a] core, but it's challenging because those are land-constrained markets.”

Pennsylvania and New Jersey are two of the most difficult states in the U.S. for getting industrial projects entitled because of the power held by each individual township, panelists said. Not only has that increased the amount of time it takes to take a building from idea to reality, it has made the process more expensive because of the increased resources developers need to get their projects across the finish line.

“There are deals that I've been working on for five years at this point in time, which are still not there,” Rockefeller Group Vice President and Regional Director Heath Abramsohn said. “Everything that we're doing is subject to approvals. And if you don't have that, there's a price to be paid for that and/or there's additional risk. It's definitely costing more money now as well, just to get these approvals done.”

It is no longer enough for a project’s land to have industrial zoning because of the willingness of organized opposition to fight developers in court, panelists said.

The most popular part of the Philadelphia metropolitan area for industrial development is South Jersey, and residents in several small towns are fighting tooth and nail against the next wave of industrial development, the Philadelphia Inquirer reports.

The mass adoption of videoconferencing prompted by the pandemic, plus the organizing power of social media, has given residents a stronger collective voice, Brennan Investment Group Managing Principal Chris Massey said.

“You're inevitably going to have a lot of pushback, even if you're zoned properly,” Cohen said. “The focus is probably noise and truck traffic, light pollution — all the things that can disturb a residential setting. And, I would say, residential people, they're getting more sophisticated. Sometimes they're raising money and engaging attorneys to do whatever they can to kind of dampen the effects or just kill the development deal altogether.”

“Zoning doesn't matter,” Abramsohn said. “It just doesn't. Even if it's zoned by-right, that doesn't mean you're going to get it approved.”

Even if the cost of capital has made many prospective tenants a little more hesitant to commit to long and large leases, rent continues to grow, partially as a result of landlords passing on increased development costs to tenants, Abramsohn said.

Unsurprisingly, land for industrial development is also still expensive within infill markets, but the market for development sites has become nonexistent unless the sites have already been taken through local approvals.

“A lot of what we were chasing when things were frenzied were nonapproved deals,” Bridge Industrial Northeast Region partner Jeff Milanaik said. “And taking that nonapproval risk was huge. I did a couple, but I was sweating bullets on them. Today, I don't know if there's anybody who's going to take a deal that doesn't have a full set of approvals on it.” 

NIMBYism in the region is pervasive enough to have a marketwide dampening effect on the forthcoming supply pipeline, panelists said. Despite the headaches that come from appearing in the court of public opinion, the overall effect could wind up as a net positive if supply is constrained enough to withstand the drop in tenant demand. 

“There's a lot of constraints here,” Abramsohn said. “That's definitely helping curb the supply coming onto the market, and it's ultimately helping the supply/demand metrics and leasing rates.”