The Lehigh Valley was a premiere logistics hub before the coronavirus hit, and it looks remarkably well positioned to maintain that stature through the coming quarters.
The map below the location of distribution space occupied by America’s most troubled retailers – those that either had S&P credit rating of BBB – or lower even before the coronavirus took hold, or were cited as particularly high risk borrowers by other ratings firms leading up to the current crisis.
Many of these firms will outlast the coronavirus, but the fact that they occupy more than 170 million square feet of distribution space throughout the U.S. hints at potential trouble spots for the industrial sector. Companies like Kmart were already downsizing their distribution presence pre-pandemic, and a few firms, including Office Depot, have already announced they planned to shutter some distribution spaces permanently in recent weeks.
But despite its large inventory of more than 100 million square feet of logistics space, the Lehigh Valley has notably fewer of these troubled tenants, which make up 0.7% of the local logistics space. That’s well below other nearby distribution hubs in Harrisburg and Scranton, and also less than half the share found in other major U.S. markets such as Kansas City and the Inland Empire.
Whether it’s simply luck that Lehigh Valley has less exposure to these old line retailers, or a reflection of the market’s particular appeal to the most advanced and dominate logistics chain operators such as Amazon.com, Fedex, and Walmart, is unclear. Either way, the market’s unique location should help it continue to garner tenant interest as the economy begins to recover.
Lehigh’s main advantage over its neighbors is that it lies at the intersection of interstates 78, 80 and 476. These routes not only offer direct access to New York City and Philadelphia, they also allow for optionality. Drivers can use I-78 to access markets to the west, while I-80 and I-476 makes it easy to deliver across the mid-Atlantic and Northeast.
Brian Knowles, a principal at Lee Associates near Philadelphia, said that location trumps rents in this industry.
“Rents obviously mean something,” he said. “But if more than 60% of my cost is in transportation expenses, location is more important.”
Knowles has been leasing warehouses for decades, and has witnessed the evolution of eastern Pennsylvania’s logistics market first hand. Shippers flocked to the region, and developers have added close to 85 million square feet across these markets over the last decade.
Knowles credits Lehigh’s growth to its labor pool as well. The costs of being that close to the Port of New York and New Jersey became prohibitively high for those moving goods within the region. Rents in the Newark submarkets, close to the port, lease for about $12 per square foot these days. But the labor is pricier too, and there’s less of it.
Eastern Pennsylvania, a manufacturing hub hurt by decades of outsourcing and automation, offered a deeper, and cheaper, pool of workers in a better location for moving products across the country.
Knowles is also quick to point out that while the Valley might be Pennsylvania’s strongest positioned market right now, he firmly believes other major Pennsylvania markets will weather the storm well, too East Pennsylvania’s location is as strong as before, its labor pool is still deep, and the virus will likely accelerate the growth of e-commerce.
“When I started, the guy in charge of supply chains and logistics worked in some backroom of the warehouse,” said Knowles. “Now, he’s in the executive suites near the CEO.”
*Article courtesy of CoStar News
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