By Heather Kreiger, CCIM, Lee & Associates
The logistics real estate market has entered the hyper supply phase of its cycle. Following a post-pandemic boom fueled by surging e-commerce demand and shifts in inventory strategies, the market is now contending with the realities of oversupply. In the Mid-Atlantic region, rising vacancy rates and heightened competition 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” inventory 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 began recalibrating as demand cooled and speculative developments continued delivering. Vacancy rates have since climbed and remain on an upward trajectory due to unleased 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-Atlantic logistics market, reflects 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 networks. However, rising vacancies are challenging the region as speculative developments continue to deliver.
In the next six months, approximately 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 dramatically, with some submarkets experiencing rent increases of 100% or more compared to pre-pandemic levels. However, as vacancy rises and competition intensifies, lease rate growth is expected to level off. Tenants now have more options, particularly in lower-cost submarkets, which may become increasingly attractive 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-commerce sales are projected to grow at a compounded annual rate of 10.35%, translating 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 absorb existing vacancies based on current absorption rates.
Despite these challenges, the Mid-Atlantic region remains highly desirable due to its strategic location and resilient market fundamentals. Tenants may find themselves in a stronger position, with increased flexibility and negotiating power, while landlords and developers face the challenge of navigating a more competitive and dynamic landscape.
Heather Kreiger, CCIM, is the regional research director, principal of Lee & Associates of Eastern and Western PA.