Neighboring Markets Might Be Siphoning Industrial Demand Away From Lehigh Valley

The Lehigh Valley, Pennsylvania, logistics sector has been successful for so long that it almost feels immune to risk. But things are starting to look interesting one quarter into the year.

CoStar data shows industrial demand within Lehigh Valley cooled off somewhat in 2020. The market’s vacancies climbed by roughly 2% during the turbulent year, and in the past 12 months, more than 1 million square feet of industrial space has been put up for sublease.

Last year saw about 2.4 million square feet of net absorption, the difference between move-ins and move-outs. This isn’t a freakishly low figure, but it is under the market’s historic average and one of its weaker showings since 2010. 

That is somewhat concerning because this curious softening of demand is also occurring at a time when some experts are beginning to caution about the risk of oversaturation. There’s nearly 8 million square feet of speculative space on the way in the Valley, and the major projects that delivered in 2020 remain 50% unoccupied at the end of the first quarter.

In all likelihood, this lull is just a blip, and demand will soon bounce back. But what’s interesting here is Lehigh’s cooldown occurred as the national logistics market was exploding. Lehigh should have done very well last year, and what’s even more intriguing is its neighbors are overperforming notably.

Both Scranton and Reading had banner years in 2020, each seeing over 4 million square feet of net absorption, some of the highest levels ever recorded for either markets. And neither market has slowed since the start of 2021. Multiple 1 million-square-foot deals have been inked in these two markets since January, while Lehigh has seen just a few leases over 200,000 square feet finalize in that same time.

Given the relatively slow pace of last year’s leasing, it looks possible that Lehigh’s vacancies could soften notably this year, but it’s still far too early to say this is a trend. CoStar Advisory Services points out that large-scale projects in the Valley have leased up notably quicker than the national average over the past several years, and Lehigh’s position on the supply chain is just too good to dismiss.

But it might mean that tenants are now more willing to sacrifice the perfect location for cheaper rents and more labor. When it comes to the all-important labor pool, Berks County has Lehigh beat outright. Rents in both markets are considerably cheaper, as well, something Scranton developers have been eager to point out.

For those looking to read the rapidly evolving world of central Pennsylvania logistics, Lehigh Valley is now a market worth monitoring closely.

*Article courtesy of CoStar

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