The industrial market has cooled down fast in Philadelphia since a sharp surge in demand for same-day delivery centers amid the pandemic in 2020.

For seven consecutive quarters, nearly two years, the vacancy rate for industrial buildings in the city's metropolitan area has grown. And a new report by Lee & Associates shows the rate has doubled since this time last year.

Like other industrial centers nationwide, tenants could not find space fast enough for distribution and other e-commerce-related services in 2020 and 2021, said Heather Kreiger, report author and regional research director for Lee & Associates.

Now, just as new warehouse walls have gone up, demand has fallen, according to the second-quarter report. As a result, the Philadelphia metro area’s industrial vacancy rate hit 10.54% over the three months ended in June, more than double the 4.61% rate during the same period in 2023.

Some signs point toward a better, steadier rate of vacancy to come.

“In Q1 2024, we started to see the market sort of level back out to normal ranges,” Kreiger said.

Since the rate of new construction will likely slow, especially if interest rate cuts are on the horizon, the market could stabilize well, she added. New construction starts totaled 1.1M SF for the quarter, down 2M SF over the second quarter of 2023.

“The level of new space that's going to be coming online through 2025 has decreased,” Kreiger said. “What that means is that without new space coming online, it gives the region time for these large-box vacancies to be absorbed by tenants coming into the market.”

Yet other factors could cause the metro's vacancy rate to continue growing.

The cost of being near the city and the type of space available are major downward pressures, Kreiger said. That problem could persist, with executives saying at an April Bisnow event that they planned to take their time waiting for cheaper space, even if it was not Class-A.

In addition, the “business tax in Philadelphia also doesn't help the situation in that general core market,” Kreiger said, noting the wage tax for all workers in the area. “If you look at the leasing rates between southern New Jersey and the metro area versus other areas of the market, like Central Pennsylvania and the Lehigh Valley, there's a vast difference between the leasing rates.”

However, even outer markets experienced vacancy issues as new buildings opened up to few or no tenants. Lehigh Valley megabuildings of 500K SF or larger are 70% vacant.

Southern New Jersey is also suffering and could take longer to balance out as more buildings open, Kreiger said, adding that Salem County alone is at a 19% vacancy rate. Overall, that region is experiencing an 11.79% vacancy rate, the report shows.

One major 588K SF distribution center just south of Philadelphia in Carneys Point, New Jersey, opened over the quarter. The site is attempting to find a tenant, according to LoopNet.

Such buildings can take time to fill, Kreiger said. New, empty buildings can affect the absorption rate, too, as they are counted among buildings that have had current tenants leave as negative absorption.

“Unfortunately, with the new construction coming online, with the projects that are proposed and could be coming online, it doesn't seem like that's going to ease up any time soon,” she said.