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Lehigh Valley Industrial Market Expanding With New Development Along Improved Highway

A satellite image of the Lehigh Valley region in Pennsylvania, with Route 33 highlighted in red, extending north from Interstate 78.

The Lehigh Valley is perhaps the second-most-valuable industrial real estate market in the U.S., and new reporting emphasizes how the definition of desirable land within the area has expanded.

Millions of square feet of warehouse development has been planned and put under construction along the stretch of Route 33 between Interstates 78 and 80 since the completion of a $40M interchange improvement in 2015, the Philadelphia Business Journal reports. Duke Realty Corp., one of the earliest movers on the corridor, has already developed a 1.1M SF facility, leased it to Amazon and sold it for $154M.

Duke, which is under agreement to be acquired by Prologis, has 2.7M SF of total development planned in the town of Palmer, while third-party logistics company J.G. Petrucci has a development proposal of its own, PBJ reports. Tenants that have already signed leases along Route 33 include other 3PL giants like XPO Logistics and FedEx, in addition to Amazon.

California-based Carson Cos. is currently building a 407K SF distribution center in Palmer as part of a proposed five-building, 1.2M SF complex, PBJ reports.

Carson signed electrical equipment company ABB to a 341K SF lease at a different warehouse at the complex in the second quarter, according to Newmark's market report. Including the ABB lease, the Lehigh Valley experienced 1M SF of positive absorption in the quarter.

Despite that leasing success, construction is moving at such a rapid pace in the submarket that vacancy increased by 50 basis points in Q2 while asking rents decreased 2.8%, with 1M SF of speculative warehouse space coming online and not yet leased, Newmark reports. Another 7.1M SF worth of distribution centers are under construction, all of it set to deliver in the next 12 months. 

Demand seems to be ebbing after nearly two years of frenzy for industrial real estate across the country, with Amazon's pullback serving as poster child for the shift — even as construction continues to accelerate. A continually worsening economic outlook and possibly imminent recession may dampen demand further.

But along Route 33 and across the Lehigh Valley, new construction remains the most in-demand product type, leading to optimism that the current pipeline will be absorbed, per Newmark. Reports of swollen inventories may be a sign that despite the increased cost of capital and sagging consumer demand, retailers and logistics providers may have little choice but to keep taking on warehouse space.