Yesterday Bisnow hosted the Philadelphia Industrial Logistics Update and the discussions were extremely telling. The panel on key considerations for maximizing returns sparked some major thought bubbles across the room. Value creation in the sector was at the forefront of the conversation, and the evolution of the industrial space in our area offered no shortage of opinions – even before the coffee was served.
The Greater Philadelphia and New Jersey market has emerged as a prominent destination for industrial real estate investments, fueled by its strategic location, robust infrastructure, and a thriving business ecosystem. The industrial real estate sector has experienced a significant surge in recent years, attracting both domestic and international investors seeking lucrative opportunities. In this blog post, we will explore the drivers of growth in PA/NJ’s industrial real estate market and highlight why it is an attractive investment destination, including some of the panel’s points.
Specialty manufacturers turning to onshoring (outsourcing business processes from inside the country) are shaping much of the industrial space leasing demand in PA/NJ.
What are the main drivers of growth in the pursuit of Industrial?
E-commerce use is still pursued at a strong pace, but not as intensely as seen during COVID. Many real estate investors aren’t thrilled with office space and have been turning to industrial, as the supply factor is favorable at this back end of a bull market. Over time, the pressure has mounted, and although transactions are down 40% from the last couple of years, this is not indicative of a slowdown – all of commercial real estate demand has cooled based on interest rates.
Panelists shared that they believe the next 12 months signal moderation in demand and a return to 2019 levels. It all depends on the economy and how far the Fed is pushed. Industrial tenant interest can shift overnight; however the Fed increasing rates and markets reacting takes a bit more time. Right now, investors are “pencils down”.
Philly Vs Everyone Else
The Greater Philadelphia/New Jersey area offers predominantly older buildings, while nationally new construction has been more prevalent. In our area, there is 38% industrial rent growth— a top contender in the US. There is pricing pressure coming from NYC and this is key. In other markets, there is a fair share of issues – for instance, Southern California has been experiencing notable rent fatigues and port issues.
Communities’ Reactions
It wouldn’t be an industrial panel without alluding to residents’ disproval of the use in their neighborhood. This sentiment is intensifying project by project. Communities want job growth and quick shipping; however offer opposition to noise, truck traffic, and pollution. Residential communities are raising money and hiring lawyers to fight back. Even when properties are properly zoned, groups are trying to re-zone preventatively in a “not in my backyard” mentality.
Rise of AI Affecting the Sector
As industries evolve, there is an increasing demand for modern industrial facilities that can accommodate advanced technologies and cater to evolving business needs. There are three areas in which artificial intelligence can be integrated into industrial facilities:
- Operations: Efficiency tools providing rent modeling and financial insight
- Underwriting: Sale and lease comps/using data to show something new
- Insights: Using patterns and sequences to reveal things you haven’t thought of yet
It comes down to value creation in this environment – not entirely being a financial wiz and compressing gains over time. By understanding the drivers of growth in our local industrial real estate sector, investors can make informed decisions and capitalize on the potential of this thriving market. Ultimately, the excitement of the sector boils down to the investor – so while the go/no go decision lingers, let these pointers offer some fuel to the decision. Thanks to Bisnow for a great session in a venue that epitomizes the health of industrial in our area.