Construction On The Rise: Supply Barely Keeps Up With Demand In The Burgeoning I-81 And I-78 Distribution Corridor

Distribution

Chances are if you’ve heard of them, they have a presence in the I-81/I-78 Distribution Corridor: Walmart, Lowes, Amazon.com, Nestle, PepsiCo, Procter & Gamble – and the list goes on. With access to over 50% of the U.S. population and 60% of Canada’s within a 24-hour truck drive, it’s not surprising that a wide range of companies continue to flock to this area.

But location is not the only factor driving demand in the Corridor. Affordability of land and lower operating costs compared to neighboring New Jersey and I-95 markets, tax incentives offered through the Keystone Opportunity Zone, Keystone Opportunity Expansion Zone, and Local Economic Revitalization Tax Assistance and well-established multi-modal infrastructure attract national retailers, consumer products companies, and 3PL firms alike.

Leasing activity and net absorption in the I-81/I-78 Corridor reached record levels during 2013. Much of the positive absorption was attributable to build-to-suit deliveries for companies including Dollar General, PetSmart and Crayola, among others. Five leases of one million square feet (msf) or greater were executed by Procter & Gamble, Mondelez, Ocean Spray, and Walmart, which signed two 1.2-msf leases. This momentum has carried into 2014, with activity particularly strong in the Central PA and Lehigh Valley submarkets, the latter of which currently has an astoundingly low 3.5% vacancy rate.

The stock of warehouse and distribution space in the I-81/I-78 market has increased over 50% since 2005. While the majority of projects completed since 2009 have been build-to-suit (10.4 msf), speculative construction has held its own with 8.6 msf completed during that same period and another 2.2 msf scheduled for completion this year. Major players in the market such as Liberty Property Trust and Trammell Crow are betting on the future of the Corridor.

PA I81 & I78 Distribution Corridor
Approximately 90% of spec construction is located in the Lehigh Valley submarket. Although only 5% is preleased at the moment, one only needs to look back to 2012 to realize this is likely a short-term phenomenon. At the end of 2012, 90% of newly completed spec projects sat vacant. Today, new warehouse/distribution properties (2012 to the present) built on spec have an average occupancy rate closing in on 75%. In the hot Lehigh Valley submarket, the occupancy rate for new properties is 87%. In addition to the aforementioned Walmart, companies drawn to newer properties included Menlo, Allen Distribution, Kuehne & Nagel, and Caterpillar Logistics.

E-commerce has been a major driver for new construction as older stock do not have the 32 to 40-foot ceiling heights often required for these types of facilities. Faster inventory turnover and increased labor requirements require higher ratios of dock doors and parking spaces square foot, both of which often necessitate new construction.

Can this level of demand be sustained? The answer may lie in the form of a question: where are YOU doing your shopping these days?

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