Demand for Suburban Warehouse and Distribution Sites Remain High
Supply continues to struggle as demand remains heightened. This has been a common theme among the past several quarters. Construction is elevated at 2.1 million SF, to meet the growing need for space. While some submarkets, such as the Parkway West and West Pittsburgh, saw an increase in vacancy, this can largely be attributed to new construction. These submarkets currently have the most space under construction and it is anticipated that quality vacancies will quickly be absorbed. The demand is compounded by the fact that many tenants are vacating obsolete or outdated facilities in favor of higher-end properties.
The emerging I-576 corridor of the Parkway West is showing no signs of slowing. E-commerce and tech users continue to absorb new class "A" space, following in the footsteps of Amazon’s 1 million SF regional distribution center last year. Owners of antiquated properties are being required to pivot and modernize to attract quality, stable tenants. While proximity to urban areas remains important to attract talent, the priority of bulk acreage and access to major transportation arteries is rising to the forefront. Cumberland Additive is an example as they executed a lease for manufacturing space at the new Neighborhood 91 campus at Pittsburgh International Airport. A major reason for their location choice is to foster and enhance collaboration with Wabtec. Both firms operate in the additive manufacturing business, which has been the target industry for the Neighborhood 91 development.
Firms are relocating to the suburbs from the urban core to facilitate growth. One example is MSI, a distributer of residential construction products. MSI is relocating from the Greater Downtown submarket to 3115 Washington Pike in the Bridgeville neighborhood of the South Pittsburgh submarket. Their new location will be a short distance to I-79 and will also accommodate its expanded footprint of 74,520 SF.
Suburban and rural land sites in outlying counties are being readied as developers are seizing the opportunity to attract tenants. Ground has broken and construction is underway for the 28,000 SF HW70 project in Washington County. This new property just off Interstate 70 in Bentleyville will provide much needed flex/warehouse space to the region. Also in Washington County, Baker’s Waterproofing acquired 2833 W. Chestnut Street. This 95,000 SF warehouse facility will serve as the company’s headquarters. Other notable construction completions include 100,000 SF at 715 Mt. View Drive in Fayette County and 100,000 SF at 1500 Randall Court in Westmoreland County.
At the end of May, the national unemployment rate was 5.5%. This is a decline from 6.0% just two months prior. This is a positive sign since the rate peaked at 14.7% in April, 2020. It should be noted that manufacturing had a strong unemployment rate at 4.8%. For the Pittsburgh region, overall unemployment was at 6.13% at the end of Q2. This is down considerably from April, 2020 when it topped off at 17.0%.
Nationally, transportation costs are elevated causing shippers to rethink their logistics plans. Risk mitigation has become imperative as suppliers reevaluate their real estate portfolio to meet the consumers’ demand for quick delivery. Supply is struggling as competition for premium properties heats up. At the end of Q1, none of the top 25 U.S. Industrial markets had a vacancy rate exceeding 10% and the national average was a healthy 5.2%, down from 5.4% at the close of 2020. Rental rates for warehouse and distribution facilities ended Q1 at $6.15. This is the highest rental rates have ever been for this sector.
Going forward, pent up demand across all sectors and industries should push consumer spending. Reduced regulations due to COVID-19, including mask policies and occupancy restrictions, are expected to increase activity by the buying public. Also, as newly enacted government policies, such as the American Jobs Plan take effect, a downstream stimulation of employment should provide a boost to the economy. Manufacturers and distributors will be required to operate at full capacity, causing vacancy to remain tight. As a result, rental rates will continue to climb.