10B — January 2025 — 2025 Forecast — M id A tlantic Real Estate Journal
www.marej.com
2025 F orecast
By Heather Kreiger, CCIM, Lee & Associates Logistics Real Estate in 2025: Adapting to the Hyper Supply Cycle
T
he logistics real es- tate market has en- tered the hyper supply
tition are reshaping leasing dynamics and influencing development strategies. From Record Growth to Oversupply The post-pandemic surge in logistics demand was unprecedented, driven by rapid e-commerce growth and a shift from “just in time” to “just in case” inven- tory models. This demand pushed vacancies to historic lows and spurred a national construction boom, adding 1.8 billion s/f of warehouse space, including 223 million s/f in the Mid-Atlantic region.
By mid-2023, the market be- gan recalibrating as demand cooled and speculative devel- opments continued deliver- ing. Vacancy rates have since climbed and remain on an upward trajectory due to un- leased speculative inventory. Although construction starts have slowed significantly compared to the peak years of 2021-2022, a substantial pipeline of projects remains in progress. Eastern PA: A Microcosm of Broader Trends Eastern Pennsylvania, a cornerstone of the Mid-At-
lantic logistics market, re- flects these broader trends. Submarkets such as Central PA, Lehigh Valley, Metro Philadelphia, Southern New Jersey, and Delaware offer strategic connectivity to East Coast ports and population centers, making them key hubs for distribution net- works. However, rising vacan- cies are challenging the region as speculative developments continue to deliver. In the next six months, ap- proximately 11 million s/f of speculative space is expected to be delivered in Eastern
PA, much of it unleased. This influx will exert additional upward pressure on vacancy rates through at least the first half of 2025. Shifts in Leasing Dynamics During the warehouse boom, lease rates surged dramati- cally, with some submarkets experiencing rent increases of 100% or more compared to pre-pandemic levels. However, as vacancy rises and competi- tion intensifies, lease rate growth is expected to level off. Tenants now have more options, particularly in lower- cost submarkets, which may become increasingly attrac- tive alternatives. For tenants renewing leases signed at pre-boom rates, sticker shock could lead to reassessments of space needs. E-Commerce and Market Resilience E-commerce remains a critical driver of long-term logistics demand. During the pandemic, its share of total U.S. retail sales jumped from 12% to 16.4% in a single quarter. While this growth has since stabilized, e-com- merce sales are projected to grow at a compounded annual rate of 10.35%, trans- lating into continued demand for logistics space. The Mid- Atlantic region’s strategic location and connectivity position it to benefit from this sustained growth. A Market in Flux As the logistics real estate market adapts to the hyper supply cycle, oversupply will continue to weigh on vacancy rates and lease growth in the near term. Developers have already reduced construction starts significantly, yet in some submarkets, it may take up to three years to fully ab- sorb existing vacancies based on current absorption rates. Despite these challenges, the Mid-Atlantic region re- mains highly desirable due to its strategic location and resilient market fundamen- tals. Tenants may find them - selves in a stronger position, with increased flexibility and negotiating power, while landlords and developers face the challenge of navigat- ing a more competitive and dynamic landscape. Heather Kreiger, CCIM, is the regional research director, principal of Lee & Associates of Eastern and Western PA. MAREJ
phase of its cycle. Follow- ing a post- pandemi c boom fueled by surging e-commerce demand and shifts in inventory
Heather Kreiger
strategies, the market is now contending with the realities of oversupply. In the Mid-At- lantic region, rising vacancy rates and heightened compe-
INDUSTRIAL INTEL Q4 2024 LOGISTICS MARKET SET Lee & Associates of Eastern Pennsylvania LLC lee-associates.com/easternpa
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