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July 5, 2017 2:30 PM, EDT
The Great Pennsylvania Warehouse Boom
Warehouse fulfillment center John Sommers II for TT

EASTON, Pa. — If there was a real-life version of the video game Pac-Man, it could be playing out here, as retailers and other firms continue to gobble up land and build warehouses at an accelerating rate.

The gold rush can be summed up in one statistic: 83%.

That’s the rise from first-quarter 2016 to first-quarter 2017 of the warehouse square footage leased by the commercial firm CBRE Inc. in the I-78/I-81 corridor from the Lehigh Valley, north to Wilkes-Barre/Scranton, and south on I-81 to the Maryland border, according to a company report last month.

An increase from 39.4 million square feet to 72.2 million square feet from just a year ago.

Other real estate firms are reporting similar gains. “The retail industry is undergoing massive structural change,” said Lauren Gilchrist, head of research for JLL’s Philadelphia office, “and the warehouse and distribution market has responded to meet the demand for storing goods that are shipped directly to consumers.”

Recent JLL deals include a 911,000-square-foot warehouse for Hudson Bay Co., owner of Lord & Taylor stores, in Pottsville, Pa.; a 705,000-square-foot facility for Walmart subsidiary Jet.com in Pedricktown, N.J.; and another site for Jet.com, a 115,555-square-foot warehouse in Bridgeport, N.J.

“Nationally, the numbers are the most compelling that we’ve seen over the last three years since e-commerce began moving the needle,” said Jason Tolliver, head of industrial research for the Americas at Cushman & Wakefield.

About 22% to 25% of all leasing in the United States is tied to e-commerce, according to Cushman & Wakefield. Vacancy rates are the lowest in 30 years while rental rates are rising.

Many retailers such as Walmart are trying to catch up to online juggernaut Amazon, while Best Buy and Bed, Bath & Beyond are looking to add physical stores along the East Coast and need more space.

Some are new to the U.S. market and need more room to house their product, making the I-78/I-81 corridor in Pennsylvania among the hottest warehouse markets in the country, up there with Southern California, Dallas, Atlanta and Chicago in Cushman & Wakefield’s Top 5.

The companies are keeping Bill Wolf on his toes. The veteran broker is giving at least one or two warehouse tours a week since spring. Or he’s out scouting new sites to show off as the inquiries pour in.

“The activity in the last 24 months is the most I’ve seen in my 30 years in the Lehigh Valley and eastern Pennsylvania market,” said Wolf, a CBRE vice president, as he stood near Amazon’s one-year-old, 1.1 million-square-foot fulfillment center, one of seven warehouses built or planned for the Chrin Commerce Centre, near Route 33.

Wolf’s top five warehouse or distribution center deals in the last year involved Kraft Heinz, Continental Tire, supply chain firm NFI, battery maker East Penn Manufacturing and truck maker Isuzu – representing about 3.5 million square feet combined.

“I do not see a slowdown in demand,” he said. “I do see a risk of a slowdown in supply forcing companies to locate in other markets.”

Another trend: The warehouses keep getting bigger.

That 400,000- or 500,000-square-foot warehouse 10 years ago is now bigger than a million square feet to meet e-commerce demand.

The density and demand for space keep FedEx opening new warehouses in the area, including one of the world’s largest. CBRE just handled the sale of a 595,000-square-foot distribution center for rival UPS in Carlisle, Pa.

UPS ranks No. 1 and FedEx No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.

It’s a scene that Tim Conrey, managing director for Century Commerce out of Aston, Pa., likes so much that he and his partners acquired land that can accommodate a 1.6 million-square-foot, e-commerce distribution warehouse in the Lehigh Valley. He said they will sell the land before the structure is built or develop the site into a warehouse.

“Either way, we expect to see a significant return on investment in excess of 30% internal rate of return,” he said.

Conrey is among a large group of speculative developers who are building warehouses with the confidence that they will lease in six months or less after construction.

Warehouse spaces that rented for $4.75 a square foot last year were now at $5.30 a square foot or higher, he said, and land values have gone up as much as 50% in the Lehigh Valley.

“That market is incredibly dynamic right now,” he said. “It’s really where all the capital is flowing.” That includes significant foreign capital, as international investors are seeing the level of construction activity.

Vincent Planque, a senior research analyst at Cushman & Wakefield, said his firm had delivered about “5.64 million square feet of new speculative product” — such as Conrey’s project — so far this year along the I-78/I-81 corridor to these groups along with private equity funds.

“Another 3.42 million square feet is scheduled for delivery by year-end 2017, and 6.25 million square feet is expected to be completed in 2018.”

Here’s what the I-78/I-81 corridor offers: a great roadway system, proximity to Lehigh Valley International Airport, an abundant workforce, low taxes compared with New Jersey, and the ability to reach 70% to 80% of the U.S. population in 24 hours.

The boom is causing labor rates to rise as competition for warehouse workers intensifies, retail experts say.

In April, CBRE broker Joe McDermott closed on a deal for a 1.1 million-square-foot cross-dock warehouse at the Lebanon Valley Distribution Center in Fredericksburg, Pa., to serve all Ace Hardware stores throughout the northeastern U.S.

Items ordered on acehardware.com will be shipped for free to a customer’s nearest store within one or two days for pickup — and they will likely come from this new warehouse.

“We’ve been at this location for 50 years,” said assistant store manager Paul Tiger at the Ace Hardware store at Thornridge Shopping Center in Levittown, as he stood on a ladder and switched sales signs for paint and other supplies on the storefront last week. “Online will bring people to our store that have never been.”

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