Aug. 30, 2024
A few years ago, it appeared as though warehouses were growing out of fields in the Lehigh Valley like mushrooms would after a storm—that is, if mushrooms relied on easy access to major highways.
Joseph Gibson, associate director of research tracking Pennsylvania for CBRE, a company that provides commercial real estate services, stated that during any given period from the end of 2020 to the middle of 2022, there was roughly 10 million square feet [of industrial real estate] under development in the area. That is a remarkably high and conspicuous level.
Lehigh Valley Economic Development Corp. president George Lewis' special assistant stated that 8.4 million square feet of space came online in the region in 2021 alone. In contrast, fewer than 4 million square feet of storage were finished in 2023. In just two years, the amount of new space entering the market has decreased by half, and less industrial space is being built, according to Lewis.
Gibson stated that less than 2 million square feet of industrial space—roughly one-fifth of the peak—were under construction by the end of the previous year. According to the most recent quarterly report from CBRE, around one million square feet of industrial buildings were under construction in Lehigh and Northampton counties as of the end of June. Before the epidemic, we had, on average, roughly 6 million square feet under development at any given moment. Thus, even in comparison to that, we are currently in a lull, Gibson added.
Though analysts agree that the warehouse market in the Valley has slowed, it is by no means in free collapse. It is less evident if the slowdown is the result of a brief lull or if the contentious warehouse boom is finished. According to the most recent quarterly report from CBRE, which examines the industrial real estate market in the area, the rate at which tenants are occupying industrial buildings has been declining yearly since 2021.
More industrial and warehouse space is vacant as a result. In the Valley, vacancy rates have been rising for the past 1.5 years, and as of the end of June, they stood at 6.7%. Since the fourth quarter of 2023, landlords' asking rents for Class A space have remained essentially unchanged, indicating that the leasing market is getting close to reaching a new equilibrium. According to the CBRE research, "developers continued to react to existing conditions." "The market is not positioned to add surplus supply via building in the near future, even though demand may continue to weaken."
Not surprisingly, there was some cooling as the pandemic subsided. At that point, according to Gibson, "demand achieved a fever pitch that had never been reached before, and quite honestly, we all knew was unsustainable." 2020 saw a huge increase in online commerce as more people shunned in-person interactions. As a result, the warehouse network that supports e-commerce has to expand at an equally rapid rate.
For the majority of 2021 and 2022, the percentage of retail sales that happen online remained relatively unchanged. Growth returned in 2023, if more slowly, according to CBRE analysis. Demand for new warehouse space decreased as the pandemic surge subsided and many businesses that require large-scale warehouse space scaled back their ambitions for expansion. Another indication of the shifting nature of the market is the fact that over the past year, a record number of third-party logistics companies have subleased a portion of their warehouse space, tripling the total amount of space available for sublease. Certain signs suggest that there is a robust underlying demand for the structures; lease activity, for instance, has increased in the area after hitting a low in the middle of 2023.
This does not always mean that the market is slowing down. Simply put, the market is a little bit more steady and less bubbly, according to Gibson. The current decrease is mostly due to increased borrowing costs brought on by the Federal Reserve's rate rises from March 2022 to July 2023.
Gibson remarked, "The interest rates are high." To put it even more precisely, it is erratic interest rates. People could simply factor it into their financial models if [rates] were higher but we knew they would remain that way for a long time. For the past few months, the Federal Reserve's rate-setters have held borrowing costs unchanged, but they have hinted that a reduction is probably on the way in September. Lewis stated, "We will know when we see the market open up a little bit more for developers generally and when we see interest rates go down." "whether the current slowdown in development we are witnessing is caused by interest rates, or if it is something more enduring."
The Lehigh Valley's thirst for warehouses has changed away from the market. As construction has increased, criticism from resident organizations has emerged. According to the Lehigh Valley Planning Commission, about 44 million square feet, or more than 1,000 acres, of industrial and warehouse space were approved in Lehigh and Northampton counties between 2015 and 2023. Northampton County Executive Lamont McClure stated that the county did not require any new warehouses in his State of the County speech last year. "I am not here to announce that the expansion of warehouses is coming to an end. In an interview earlier this year, McClure stated, "But what I am here to tell you today is that the Lehigh Valley, and in Northampton County in particular, is coming to an end of the period of warehouse proliferation."
He dates his personal resistance to the "proliferation of warehouses" to late 2017. "White-knuckling down 78, in fear for my life, because there is a vehicle to the right of me and a truck to the left of me," McClure, a former county councilman, claimed he had already grown accustomed to the situation. However, McClure claimed that after seeing that the county is a "net importer" of labor—that is, more individuals commute into the county for work than leave the county to find employment elsewhere—his perspective solidified. He explained that the influx of workers implies that the balance between economic growth and the costs of housing them has shifted, and new logistics facilities represent a balancing act between these two factors.
"I came to the conclusion that we do not need any additional workers since we are importing labor and there are already enough jobs in these warehouses for all of us who live here," McClure stated. "Because it is making our roadways more unsafe, negatively impacting our quality of life, and potentially negatively harming our health." He claimed that even though he has been opposed for a while, the real slowdown has just been apparent for the past year. McClure cites increased municipal resistance to it, as well as external economic pressures. He clarified, "I am not saying there will not ever be another warehouse erected in the Lehigh Valley or in Northampton County." "What I am trying to express is that this gold rush is about to cease."
The municipal governments in the area have had financial consequences as a result of the development slowdown. Once upon a time, rapidly accelerating development maintained government budgets in balance with tax receipts during a period of growing prices. Local governments are under financial strain as a result of the recent slump since new development can no longer keep up with growing expenses.
For instance, district Business Administration Director Leslie Frisbie stated at a budget workshop in the Parkland School District in April that authorities would have to increase property taxes due to the slowing industrial development. Even if there were more residential projects in her district, it was insufficient. According to Frisbie, the district would receive roughly $5,000 in property tax revenue from a new single-family home, as opposed to $500,000 from a warehouse. She remarked, "We are starting to see that slow." "An alternative source of money is required at this point, and the reliance on real estate tax increases is basically where that source lies."
In June, the school system passed a budget that included a roughly 5% increase in property taxes. According to the experts, the most likely scenario for the upcoming months and years is that building will resume as loan rates decline, helped along by steady demand from e-commerce, logistics, and distribution firms. According to CBRE's Gibson, "there is no reason not to anticipate that we do not see a return to something a little closer to pre-pandemic levels until things become a little bit more economically secure."
Research from CBRE indicates that the relatively moderate rise of e-commerce over 2023 indicates a more lasting trend. According to the company's researchers, over the next ten years, the percentage of retail transactions that are completed online will increase, increasing the need for additional warehouse space. International businesses aiming to establish facilities in the United States to shield supply chains from recent interruptions to international shipping may generate further demand.
According to analysts, the newly constructed buildings will eventually find tenants as long as businesses require additional warehouse space, thus construction will need to pick back up speed to keep up. Vincent Ranalli, Executive Vice President of CBRE, stated that many developers have not been inactive during the previous year. As the market improves, they will have projects prepared for building to start. Gibson stated that as a result, the market is most likely as soft as it gets. However, a full recovery is not assured, not even to pre-pandemic levels.
"I do not belong to the group that believes this boom will end soon. I simply do not see it happening," Ranalli remarked. "The paucity of available sites could delay things down." The LVEDC's Lewis stated: "I think, certainly, we definitely have gone over a tipping point in terms of how much growth we are going to be able to absorb here if we do not see the construction pick up to, say, 2020–2021 levels with lower borrowing rates accessible to builders." Then there is the matter of space availability.
If there is nothing left to construct in the Lehigh Valley, it does not matter how quickly the demand for new warehouse space rises or how inexpensively developers can borrow money. According to Ranall, "development in the Lehigh Valley is getting harder and harder." "There are fewer properties available that are near highways and have utilities that are fully operational. And there is undoubtedly greater resistance.
Being large enough, near major highways, and for sale are not sufficient criteria for a possible warehouse site. Additionally, the property must be zoned for warehouses, or the local government in charge of the area must be prepared to make an exception.The amount of land that can be developed for large-scale industrial development has decreased due to public opposition to the construction of large-scale warehouses. In certain areas, like as Upper Mt. Bethel Township in Northampton County's Slate Belt, voters have elected officials who are wary of warehouses to local offices, and these authorities have not always been friendly toward developers submitting plans for big industrial developments.
Simultaneously, Lehigh and Northampton counties have made agricultural preservation a top priority, particularly to thwart further development. An increasing number of towns, including Moore Township, Lower Nazareth, Upper Mount Bethel, and Hanover, are retaliating. These people would find it less and less fascinating, McClure said. Municipalities that approve new construction may object, which could result in a more challenging and costly application procedure. The majority of projects require approval from the local government in order to proceed.
Lewis remarked, "If developers have access to capital again." "Will there be communities that are willing to take into account, perhaps, plans or applications from developers for structures that are 300,000, 500,000, or one million square feet in size? "Lewis, Gibson, and Ranalli all forecast that the warehouse boom would likely continue for some time to come due to ongoing demand, but that the Valley will eventually run out of room. The numerous warehouses in the Lehigh Valley will remain in place, and warehouse construction will not come to an end, even when we cross this tipping point.
"You know when they are going to stop constructing office buildings in Philadelphia? They have, in fact, according to Gibson, with new construction occurring "every once in a while," usually as a result of renovation work. In a similar vein, the warehouse market in the Lehigh Valley can stagnate. Ranalli remarked, "Maybe they are erecting new class-A buildings and knocking down old ones that are not useful anymore." "You have to get inventive because a lot of the low-hanging fruit has been picked up."
There are other areas with land, manpower, and access to the highway system that have been ideal for building warehouses outside the Lehigh Valley. If the demand from companies in need of storage is not reduced, new construction will not stop until the Valley runs out of room. Rather, as it has already done, the tsunami of warehouses will keep moving geographically. Large-scale industrial activity has gradually moved outside of the Valley proper.
Lewis stated, "You can see it if you go either west on [Interstate] 78, or north on [Interstate] 81, where more developments are moving into Berks County and Schuylkill County, sort of further away from the nearby Lehigh Valley." Or even farther up Route 33, in the direction of Wind Gap. The companies' desire to be in our region, he said, "is evidently not changing, given our type of convenient proximity to the Northeast markets that they like to reach."
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