Research

PHILADELPHIA
2Q15 INDUSTRIAL MARKET

Speculative construction rises

on heels of rent growth
Overall vacancy grew within the greater Philadelphia Industrial market
during the second quarter of 2015, as 1.2 million square feet of
construction was completed, outpacing 1.0 million square feet of
demand. Warehouse space comprised the majority of occupancy growth
during the past three months, while flex space enjoyed modest demand
growth and manufacturing space suffered slight losses. This distribution
of tenancy growth has generally defined industrial demand within the
greater Philadelphia market since the last recession ended in mid-2009.

Construction Pipeline Remains Robust

A closer look at demand shows retail and wholesale trade driving growth
during the first half of the year. Companies such as Destination Maternity,
Burlington Coat Factory and Five Below expanded into larger facilities, all
of which were new built-to-suits. Built-to-suit activity has comprised the
bulk of new supply added to the market in the past six years. Most
recently, Liberty Property Trust announced it will break ground on a
145,000-square-foot research facility in the Navy Yard for WuXi AppTec.
This will be the third facility the company will occupy on the campus,
where it currently occupies 120,000 square feet.
In spite of consistent built-to-suit construction activity, pricing, particularly
for warehouse space, has grown to support speculative construction.
Warehouse/distribution asking rents had shrunk to a low of $3.64/SF by
the start of 2011, but have since grown to $4.19/SF, just $0.06 lower than
its pre-recession high posted in early 2007. As a result, speculative
developments grew to comprise 40.0% of current construction activity,
compared with just 1.0% at the end of 2013. Of the speculative buildings
delivered during the past three years, more than 65% of the space
remains available on the market. Almost all of that space exists in the
recently delivered 750,000-square-foot distribution building at Berk Park
78. This building is the third addition to the park and the first on a
speculative basis. Both PetSmart and Dollar General had new facilities
constructed on the campus in 2014.

Current Conditions
Construction pipeline boasting more and more
speculative projects.
Shrinking warehouse supply resulting from strong
demand pushes rents higher.
Investors continue to place bets on Philadelphia region as
a whole, pushing industrial sales volume higher, year-todate.

Market Analysis
Asking Rent and Vacancy
$6.00

14%

$5.50

12%

$5.00

10%

$4.50

8%

$4.00

6%

$3.50

4%
Av erage Asking Rent (Price/SF)

Vacancy (%)

Net Absorption
Square Feet, Millions
6000000
4000000
2000000
0
-2000000
-4000000

Market Summary
While developers are moving to add modern distribution space to the
market, some supply is being renovated for adaptive reuses. Most
recently, Alliance Partners HSP, the owner of Destination Maternitys
former headquarter and distribution facility at 5th and Spring Garden
streets, announced it will convert the building into creative office space.
The company will market the space to technology, advertising and media
companies. A trend of adaptive reuse of obsolete supply is reshaping all
manners of real estate assets in the region. Although most of these

Current
Quarter
Total Inventory
Vacancy Rate

495MSF
9.1%

Quarterly Net Absorption

1MSF

Average Asking Rent

$4.89

Prior
Quarter

Year Ago 12 Month

Period Forecast

494MSF

488MSF

9.0%

9.4%

3.7MSF -398,355

$4.70

$4.74

Under Construction

3.8MSF

4MSF

3.9MSF

Deliveries

1.2MSF

3.7MSF

1.1MSF

Research
PHILADELPHIA
2Q15 INDUSTRIAL MARKET

changes have impacted office and retail space, some have helped to recycle some of the areas older industrial facilities as well.

Pharmaceutical Industry in Flux

As retail and wholesale trade growth shapes the construction pipeline, the trend toward consolidation within the generic drug market may reshape the
existing supply landscape. Since 2009, this market sector has experienced significant consolidation in order to mitigate losses resulting from market
saturation. Deals struck in recent months, such as Lannett Co.s acquisition of Silarx Pharmaceuticals Inc., Endo Pharmaceuticals' purchase of Par
Pharmaceuticals and Endo Pharmaceuticals attempt to take over Mylan N.V. may impact industrial supply in the short term. Because most of the
acquisitions have been made by regionally headquartered companies owned by firms located outside the region, one may expect little downside or even
an upside in pharmaceutical demand. However, following Shires relocation to Lexington, Massachusetts, it is still unclear how these consolidations and
mergers will truly impact local real estate fundamentals.

Sales Activity Shows Signs of Growth

From an investor standpoint, interest in stabilized warehouse and flex product within the greater Philadelphia region remains strong. Following the Great
Recession, sales activity stalled from 2009 through 2011. By 2012, annual sales volume reached the $600 million mark, according to Real Capital
Analytics Inc., and remained at or above that level in the ensuing years. More than $423 million in sales closed in the first half of 2015 alone, indicating
velocity in the market will outpace previous years totals. Cap rates are compressing near the 7.0% mark, while buildings are trading at an average priceper-square-foot measure of around $70.00/SF. Investors have recently begun moving more money into a variety of Philadelphia assets. While
multihousing and office assets boast higher volumes of trades, well-tenanted, stabilized industrial product has received its fair share of attention.
Interest in stabilized warehouse and flex product within the greater Philadelphia region remains strong

Forecast
Expect vacancy to hover near the low 9.0% mark, as developers gain confidence in this market expansion and add speculative product to the market.
Given that developers remain somewhat risk-averse following the downturn in the last cycle, the pace of supply additions will most likely be tempered
enough to forgo any significant oversupply issues in the near term. As a result, expect pricing to gain footing, albeit at a modest pace, while overall
concessions start to wane. As sale prices rise, more would-be owner-users will be priced out of acquisition options, pushing more activity toward leasing
and adding more support for rent growth.

Lease/User Transactions

Tenant

Building
Square Feet
201
Elizabeth St
225,000

Submarket

Type

Bai Brands

Burlington County

New/Relocation

Bunzl Philadelphia

10814 Northeast Ave

185,000

Philadelphia County

Renewal

Universal Pasteurization
and Cold Storage

8
Lee Blvd
169,744

Chester County

New/Relocation

Hedwin Corp.

220 Lake Dr
158,659

New Castle County

New/Relocation

Matrix North America Construction

189
Main St
60,652

Montgomery County

New/Relocation

Building
100 Crossing Dr

Submarket
Square Feet
Bucks
County
281,600

$19,550,000

$69.42

420 Drew Ct

Montgomery
County
147,986

$11,900,000

$80.41

650 Cathill Rd

Bucks County
213,419

$8,822,520

$41.34

2145 Center Square Rd

Gloucester
County
197,894

$8,500,000

$42.95

1145 Easton Rd

Montgomery
County
92,250

$8,500,000

$92.14

Select Sales Transactions

Sale Price

Price/SF

Research
PHILADELPHIA
2Q15 INDUSTRIAL MARKET

www.ngkf.com

Submarket Statistics
Total
Inventory
(SF)

Under
Construction
(SF)

Total
Vacancy
Rate

Qtr
Absorption
(SF)

YTD
Absorption
(SF)

WH/Dist
Asking Rent
(Price/SF)

R&D/Flex
Total
Asking Rent Asking Rent
(Price/SF)
(Price/SF)

Berks County

21,944,184

9.4 %

72,138

55,738

$4.48

$3.85

$3.99

Bucks County

56,676,052

6.6 %

715,897

646,121

$4.28

$9.05

$5.15

Chester County

37,308,491

78,458

5.2 %

225,610

413,585

$6.50

$9.08

$7.51

Delaware County

29,601,628

427,452

8.6 %

-139,688

-237,341

$4.47

$6.60

$5.39

Lancaster County

56,479,335

2.1 %

181,774

2,675,886

$4.56

$5.47

$4.48

Montgomery County

73,179,653

315,897

9.9 %

672,062

556,834

$6.08

$8.72

$6.30

Philadelphia County

93,853,242

11.5 %

198,114

-128,950

$3.98

$9.03

$4.24

369,042,585

821,807

8.0 %

1,925,907

3,981,873

$4.46

$7.81

$5.11

Burlington County

39,931,097

2,630,793

11.6 %

-298,751

959,624

$3.85

$5.83

$4.36

Camden County

32,392,007

6.9 %

36,226

-39,827

$2.73

$5.72

$3.83

Gloucester County

25,286,314

382,200

11.3 %

-205,711

-1,295

$3.70

$5.05

$4.36

Southern NJ Total

97,609,418

3,012,993

10.0 %

-468,236

918,502

$3.52

$5.70

$4.20

New Castle County

28,544,511

20.1 %

-423,846

-260,867

$4.10

$6.08

$4.64

Delaware Total

28,544,511

20.1 %

-423,846

-260,867

$4.10

$6.08

$4.64

495,196,514

3,834,800

9.1 %

1,033,825

4,639,508

$4.19

$7.29

$4.89

Southeastern PA Total

Market Total

Submarket Statistics by Subtype

Total
Inventory
(SF)
Warehouse/Distribution

Under
Construction
(SF)

Total
Vacancy
Rate

Qtr
Absorption
(SF)

YTD
Absorption
(SF)

Total
Asking Rent
(Price/SF)

146,098,585

3,576,342

10.4%

962,590

4,875,091

$4.19

83,485,442

78,458

9.7%

263,329

85,404

$7.29

General Industrial

265,612,487

180,000

8.2%

-192,094

-320,987

$4.46

Total

495,196,514

3,834,800

9.1%

1,033,825

4,639,508

$4.89

R&D/Flex

Research
PHILADELPHIA
2Q15 INDUSTRIAL MARKET

Economic Conditions

Employment By Industry
Philadelphia MSA, Annual Av erage 2014

The region continued to enjoy employment gains through the second

quarter of 2015. In May, the construction sector posted the largest yearover-year job growth, which is unsurprising given the number of
development projects announced during the first half of 2015. More
industrial-occupying specific sectors, such as manufacturing, trade and
transportation, posted mixed results. The trade and transportation sector
continued to grow, accounting for consistent warehouse demand, while
manufacturing employment eroded, resulting in continued demand
retraction for manufacturing space.

Education/Health
4%

4%2%

Trade/Transportation/Utilitie
s

22%

7%

Business & Prof essional

7%

Gov ernment
Financial Activ ities

7%

Leisure/Hospitality

19%

Manuf acturing

12%

Looking forward, two key economic indicators point toward sustained

demand for industrial space. The first is the 0.9% increase in consumer
spending in May. This is the largest gain since August 2009 and points
toward warehouse and distribution demand. The second indicator is the
increase in manufacturing activity reported by the Philadelphia Federal
Reserve. Having only shown signs of recovery starting in mid-2013,
steadily growing manufacturing activity should translate into demand
stabilization for manufacturing space in the near term.

Other Serv ices

16%

Construction
Inf ormation

Source: U.S Bureau of Labor Statistics

Unemployment Rate

Payroll Employment

Seasonally Adjusted

Total Nonf arm, Not Seasonally Adjusted, 12-Month % Change

12.5%

3%

10.0%

2%

7.5%

1%

5.0%

0%

2.5%

-1%

0.0%

-2%
United States

United States

Philadelphia, MSA

Philadelphia MSA

Source: U.S. Bureau of Labor Statistics, U.S. Dept. of Labor,

Philadelphia Federal Reserv e Bank

Source: U.S. Bureau of Labor Statistics

Manufacturing Business Outlook Survey

Employment Growth by Industry

Current and Future General Activ ity Indexes*

Philadelphia MSA, May 2015 12-Month % Change

80

Total Nonf arm

Construction
Manuf acturing
Trade/Transportation/Utilities
Inf ormation
Financial Activ ities
Business & Prof essional
Education/Health
Leisure/Hospitality
Other Serv ices
Gov ernment

60
40
20
(20)
Current Activ ity

Six-Month Forecast

-4.5%

-1.5%

Source: U.S. Bureau of Labor Statistics

Source: Philadelphia Federal Reserv e Bank

* Percentage of respondents indicating an increase minus percentage indicating a decrease

1.5%

4.5%

7.5%

10.5%

Research

Philadelphia
1735 Market St, Suite 4000
Philadelphia, PA 19103
215.561.8300

Newmark Grubb Knight Frank United States Office Locations

Wayne
880 E Swedesford Rd
Wayne, PA 19087
610.265.0600
Marlton
40 Lake Center
401 Route 73 N, Suite 120
Marlton, NJ 08053
856.334.2100
Wilmington
I.M. Pei Building
1105 N Market St, Suite 1610
Wilmington, DE 19801
302.655.0600

Joe Gibson
Research Manager
610.879.4506
jgibson@ngkf.com

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has
been revised. With this expansion and refinement in our data, there may be adjustments in historical
statistics including availability, asking rents, absorption and effective rents.
Newmark Grubb Knight Frank Research Reports are also available at www.ngkf.com/research
All information contained in this publication is derived from sources that are deemed to be reliable. However,
Newmark Grubb Knight Frank (NGKF) has not verified any such information, and the same constitutes the
statements and representations only of the source thereof, and not of NGKF. Any recipient of this publication should
independently verify such information and all other information that may be material to any decision that recipient may
make in response to this publication, and should consult with professionals of the recipients choice with regard to all
aspects of that decision, including its legal, financial, and tax aspects and implications.
Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish,
transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it
contains.