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Lehigh Valley Spec Warehousing Demand is High, But Inventory is Low

By Colin McEvoy on December 9, 2014

J.G. Petrucci Co. started construction this month on a 110,000-square-foot spec warehousing project in Upper Macungie Township. The building is not expected to be completed until March, but they are already in the process of finalizing two leases covering 70,000-square-feet of the space.

Construction of speculative industrial space, in which no tenants are signed prior to the start of development, came to a near standstill across the country in the late 2000s due to the Great Recession, but has been coming back in a big way in recent years, both regionally and nationally. Today, the demand for such space is great, but inventory in the Lehigh Valley remains relatively low, so developers who have embarked on such projects have been very quickly rewarded with tenants.

“The demand is definitely high and I don’t think it’s slowing down,” said Martin Till, Petrucci regional president. “We’re in a very good location for businesses here in the Lehigh Valley from a transportation and logistics standpoint. It’s obviously got to be smart growth and planning, but I don’t see the demand going anywhere.”

According to the Jones Lang LaSalle Construction Outlook, spec development began to rebound in 2012. By the third quarter of 2013, roughly half of the 96.7 million square feet of industrial construction underway in the country was speculative. And while the western United States has historically had the highest ratio of speculative to total construction, the report finds spec development is expected to increase drastically in the northeast based on current tenant requirements.

According to CoStar News, the Lehigh Valley has had one of the highest percentages of new warehouse construction, along with such areas as Chicago, Dallas-Fort Worth, Houston and Atlanta. And according to the Pennsylvania Department of Labor and Industry’s September workforce data, warehousing and transportation in the Lehigh Valley has reached a record 19,700 jobs, up 1,100 over the year and increasing at a higher rate than statewide figures.

“It’s a sure sign of the strength of our local economy, because when developers are willing to build on spec, it means the region is growing rapidly and there’s a lot of confidence in the market,” Don Cunningham, president and CEO of the Lehigh Valley Economic Development Corporation. “In particular, from an economic development perspective, we’re seeing a lot of demand not only for the larger warehouses, but for space in the 20,000 to 100,000 square-foot category, especially with the rise in the e-commerce industry.”

Perhaps the region’s best example of the demand for spec industrial space comes from Liberty Property Trust, which began building an 820,000-square-foot warehouse on former Bethlehem Steel Property with no specific tenant in hand. They quickly landed zulily, an online retailer which made the space their largest distribution center, bringing 1,200 jobs into the Lehigh Valley. zulily representatives said their site location was partly driven by the fact that a building was already under construction, significantly reducing their timeline to getting started.

Liberty Property Trust also built a 1.2 million-square-foot warehouse on Bethlehem’s Lehigh Valley Industrial Park VII without a specific tenant, and went on to lease the entire facility to Walmart for its e-commerce business. Walmart eventually required more space, so the developer is opening a second 1.2 million-square-foot distribution center for them in the nearby Majestic Bethlehem center. Moving forward, Liberty Property Trust is planning a 5.2 million-square-foot industrial park in Lower Macungie Township that will include five buildings ranging between 650,000 and 1.2 million square feet in the next two to four years, none of which have tenants yet.

“Obviously we wouldn’t be doing this is the demand wasn’t there,” said Bob Keil, Liberty Property Trust senior vice president. “We have over 15 million square feet in the Lehigh Valley, so we work not only with new clients but our existing customer base as well. But day in and day out it seems there are more and more new people coming into the market, especially tied to e-commerce.”

But successful spec development is not limited to such large projects. According to Jones Lang LaSalle, 40 of the country’s top 48 markets are building spec warehouses, and most of that construction falls between 100,000 and 500,000 square-feet.

“I think there’s demand for anything from a million square feet down,” Till said. “The advantage with flex space is that our building is 110,000 square feet, but it can be one user or it can be four or five users. It really depends on what makes the most sense.”

There’s are many other examples of successful spec projects in the Lehigh Valley. The Trammel Crow Company this year finished a 677,000-square-foot warehouse on former Bethlehem Steel Corp. land along Route 412. And in 2012, Griffin Land built two warehouses totaling more than 500,000 square feet off Fritch Drive in Lower Nazareth Township.

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