Why Going Sideways Is Good: Philadelphia Industrial Vacancy Rates Stabilize Despite Robust Pipeline

The U.S. industrial vacancy rate has grown consistently since 2022, but some analysts believe the sector may be entering a new and better era.

Stabilizing vacancy rates in the Philadelphia market could be part of that trend.

The area's regional vacancy rate was 7.4% last quarter, according to data provided to Bisnow by CoStar, up just 2 basis points quarter-over-quarter and 0.4% year-over-year.

That marked a notable shift from Q4 2023 when the rate of 7% was up almost a full percentage point quarter-over-quarter and 2.4% year-over-year.

“The fact that vacancy moved sideways in the Philly industrial market is definitely a sign that it’s getting closer to turning the corner,” CoStar National Director for Industrial Market Analytics Adrian Ponsen said. “The fact that it’s no longer rising is telling you something.”

The shift in greater Philadelphia came as the number of U.S. markets where occupancy rates are increasing grew throughout 2024, Ponsen wrote in an analysis last month. That includes major markets like Detroit, Houston and Southern California’s Inland Empire. Smaller markets like Hartford, Connecticut, and Cincinnati, Ohio, also saw their vacancy rates begin to fall last year.

The shift in those markets can often be attributed to a shrinking pipeline of new industrial projects.

But Ponsen said the pipeline has continued to grow in greater Philly, and local industrial stakeholders shouldn’t bet against the prospect of more vacancy increases in the near future.

“I wouldn’t necessarily say that it’s going to be one of the first markets to turn the corner,” Ponsen said.

“I think part of the reason is that it’s the process of getting projects entitled,” he added. “Especially in New Jersey, it just takes longer.”

There were more than 4.3M SF of industrial projects under construction in the South Jersey suburbs last quarter, up from roughly 3.9M SF a year prior, according to two reports from Colliers. The trend is even stronger in Philly's Pennsylvania collar counties, where the metric grew from about 1.7M SF to nearly 3.1M SF.

Over the same period, the pipeline in the city proper shrank from about 3.6M SF to just under 2.7M SF.

The massive wave of new industrial projects that has defined greater Philly since the pandemic began hasn’t yet had a negative impact on rents. The region saw industrial rents grow by 57.6% over the five years leading up to October 2024, according to a report from CoStar Associate Director of Market Analytics Brenda Nguyen. That put it at No. 3 in the nation, behind only Phoenix and Atlanta.

Ponsen’s report also highlights the Scranton area. Vacancy along the Interstate 81 corridor, which runs all the way to Harrisburg and the Maryland border, fell from 8.2% to 7% quarter-over-quarter at the end of last year, according to CoStar data.

Like the nearby Lehigh Valley, Ponsen said this can partly be attributed to a limited amount of remaining developable land in the region.

“Scranton and Harrisburg are pretty mature markets,” he said. “They are running out of sites as well.”

Still, the amount of industrial space under construction along the corridor grew from 10.5M SF to 13.9M SF between Q4 2023 and Q4 2024, according to a regional report from Savills. 

“Development started near the population centers along I-81,” Ponsen said. “What you’re seeing is developers moving to less populated areas of I-81.”

Ponsen highlighted towns like Chambersburg, Greencastle and Hazleton as magnets for new industrial development.

Hazle Township, which surrounds Hazleton, is the site of a 15-building data center proposed by NorthPoint Development. NorthPoint hopes five of the buildings will come online early next year and that the rest of the project will be complete by Q2 2029.

On a national level, whether the national occupancy rate begins rising this year depends heavily on what happens in the nation's five largest industrial markets of Chicago, Dallas-Fort Worth, Los Angeles, New York City and Atlanta, which account for about a fifth of all U.S. industrial property stock, Ponsen wrote.