Lehigh Valley Warehouse Sector 'Coming Down To Reality' As Pandemic Boom Wears Off

Lehigh Valley has been the golden child of Pennsylvania's industrial market since the pandemic turbocharged demand for warehouses nearly overnight five years ago.

Now the glow has faded.

Asking rents in Lehigh Valley are falling, vacancy is rising and the pipeline is shrinking as developers pull back from the submarket, according to Savills’ second-quarter industrial report for the I-81/78 corridor.

“They’re coming down to reality a little,” Savills Research Manager Daniela Stundel said of Lehigh Valley developers.

The submarket’s pipeline contracted to 384K SF last quarter, just 12% of what was under construction there a year earlier. 

Asking rents are down 2.7% year-over-year to $9.86 per SF, while vacancy sits at 8.8% after two consecutive quarters of growth.

The downturn is a marked change of pace for the region.

The 32M SF of new construction delivered in Lehigh Valley between Q2 2020 and last quarter made it No. 2 in the eastern half of the Keystone State, behind only Central Pennsylvania. But the rate of expansion — supply rose 44% from 2017 to today — was faster in Lehigh Valley than other submarkets.

Lehigh Valley’s asking rents skyrocketed 116% between Q2 2019 and last quarter, beating out Central Pennsylvania’s 99% increase over the same period.

The slowdown isn’t limited to Lehigh Valley. The construction pipeline for the whole region covered by the Savills report is down 66% YOY. Similar trends are hampering activity in greater Philadelphia and Northern New Jersey, Savills Industrial Research Manager Chris Bauers said. 

More than 160M SF delivered across Eastern Pennsylvania and metro Philadelphia since Q2 2020, and now demand for speculative warehouse construction is diminishing.

“From a developer’s perspective, if they still have three projects they’re trying to lease up, they’re not super eager to start a fourth,” Bauers said.

The I-81/78 corridor had 1.9M SF more move-outs than move-ins last quarter. Much of that negative absorption can be attributed to a 1.3M SF distribution center Big Lots vacated in Schuylkill County after the chain went out of business.

Vacancy rates also increased in Central and Northeast Pennsylvania amid a wave of deliveries. The pipelines in both regions, which sit at 2.4M SF and 1.9M SF, respectively, are much more robust than in Lehigh Valley.

That is partly because land prices there are lower than in the Allentown area, Stundel said. This dichotomy became even more pronounced as the supply of developable parcels in Lehigh Valley has shrunk dramatically in recent years.

But asking rents are still rising in Central and Northeast Pennsylvania. They now sit at $7.62 and $7.37 per SF, respectively, which is still more than $2 less than the rate in Lehigh Valley.

This is partly because landlords don’t have much space in their budgets to lower asking rents, particularly in markets like this where concessions are commonplace, Bauers said.

“You can lower rents, but you only have so much leeway for them to meet obligations to their lenders,” he said.

Tenants seem to see a lot of promise in Central Pennsylvania.

The submarket dominated Savills’ list of the largest leases and projects for the region last quarter. That includes Grocery Outlet’s 507K SF lease at 2040 N. Union St. in Middletown and NorthPoint Development’s 587K SF delivery at 300 Canal Road in York.

Central Pennsylvania is slightly farther from the ports in Newark and Philadelphia than Lehigh Valley, but Bauers said it benefits from its better access to Baltimore and Washington, D.C.

The largest lease of last quarter came from Northeast Pennsylvania. RJW Logistics Group inked a more than 1M SF lease at 450 E. Arthur Gardner Highway in Hazleton.

PNK Holdings LLC is also building out nearly 700K SF of speculative space on Route 940 in nearby Blakeslee.