NY-NJ port importers flock to Lehigh Valley

NY-NJ port importers flock to Lehigh Valley

The Lehigh Valley is being likened to an East Coast Inland Empire.

US shippers are increasingly setting up warehouses and distribution centers (DCs) in the Lehigh Valley, from which they are a 60- to 80-mile dray from the Port of New York and New Jersey, enjoy average rental rates that are roughly $2 per sq ft cheaper than in central and northern New Jersey, and have a better selection of modern facilities.

Amazon, FedEx, Wal-Mart, and NFI have set up operations in recent years, grabbing some of the 10 million sq ft of industrial space that has been constructed around the former Pennsylvania manufacturing hub.That is a 9.5 percent space expansion to 115 million sq ft in a region crisscrossed by interstate highways 78 and 81. Another 5 million sq ft of industrial space is under construction, with 10 million sq ft more of space proposed, according to the Lehigh Valley Economic Development Corporation.  

“The Lehigh Valley is an important destination, and origin, for cargo that moves through the Port of New York and New Jersey,” said Beth Rooney, assistant director of the authority's port division. “Now, the development of these warehouses and DCs, with the potential for this new rail terminal changes the timing, the cost, the efficiency, [and] the environmental footprint [of using the port], for the better.”

The development surge in Lehigh Valley is part of a nationwide shift in which shippers are looking at secondary markets because warehouse vacancies have become sparse in the largest markets, and prices have risen. Indianapolis, for example, is getting overflow business from Chicago, and Reno, Nevada, is getting business from Northern California. Likewise, San Antonio is getting secondary market business in Texas, and Phoenix is helping serve Southern California.

Prime logistics space in Lehigh Valley, a drive of about 60 to 80 miles down Route 78 from the port and slightly more from New York City, rents for about $5.50 to $5.75 a sq ft. That is less than the $7.55 per average sq ft rate in Central Jersey, which is about 35 miles from the port and 45 miles from New York City, CBRE said. Prime space in the Meadowlands, which is about 10 miles from both the port and the city, goes for $8 to $9 per sq ft, the real estate company said.

Lehigh Valley, which some liken to a small, East Coast version of the Inland Empire that serves the ports of Los Angeles and Long Beach, has seen its vacancy rate fall to 4.1 percent, according an outlook report released by JLL, the real estate firm. The rate was about 6.5 percent at the start of 2016, according to the economic development corporation. In comparison, the vacancy rate in Central Jersey is 3.2 percent and in Northern New Jersey, 4.4 percent, JLL said. Just as important as the available warehouse volume is the quality, CBRE said, with Lehigh Valley offering a newer inventory of larger, taller warehouses that is more able to meet demand, as well as a more plentiful labor supply.

In a sign of Lehigh Valley’s importance, Port Authority of New York and New Jersey staff last week took a tour of five sites in the valley to view the developing warehouse and DC hub and assess the possibility of tying it to the port with a rail link, Rooney said.

Norfolk Southern Railway already has an active line from the area into the port — where four terminals have near or on-dock rail and while such infrastructure is under construction near the port’s fifth terminal — but a terminal needs to be developed in Lehigh Valley, and the link needs sufficient business to make it viable, Rooney said.

Yet for all this increase in supply, in a sign of strong demand, rents have risen rather than dropped. This week, CBRE said Lehigh Valley was the second-fastest growing market in the world in the first quarter of 2017, with a 10 percent increase in rents. First-placed Seattle saw rents grow by 17 percent in the first quarter.

“The I 78-81 corridor in Pennsylvania is extremely hot,” said Ian Anderson, CBRE director of research and analysis in the Greater Philadelphia Region, who expects the demand for space in the area to continue. ”And Lehigh Valley is ground zero for what’s happening along this corridor.”

Aside from Lehigh Valley, the US locations at the top of CBRE’s list of the fastest-rising rents worldwide are primary markets, often with space limitations. Along with Seattle, the list includes Oakland, at fourth place, with an increase of 9.4 percent, and Los Angeles/Orange County, at sixth place, with a 9.2 percent increase in rents.

The factors driving rents in Lehigh Valley include the growth in demand for logistics space at the Port of New York and New Jersey, and the surging population of the New York metropolitan area. That has pushed up demand for consumer and other goods that come in through the port, said CBRE executives. At the other end of New Jersey, growth in the Philadelphia market has added to the effect.  

“The second part, which has amplified this whole trend, is the switch and the pivot in the retail revolution,” said Anderson, referring to the rise of e-commerce. “Retailers [are] keeping more of their stock in warehouses and getting it to customers, as opposed to maintaining that stock in stores,” he said, adding that e-commerce warehouse occupants use about three times as much space as regular warehouse users.

That has put pressure on the North Jersey market, the closest to the port, around exit 8A on the New Jersey Turnpike, where about 70 million sq ft of industrial warehouse, distribution, and manufacturing space has sprung up in recent decades. But there is little available land left in that area, and area communities are reluctant to approve any more warehouse projects, said Bill Wolfe, CBRE executive vice president of industrial and logistics.

The rise of Lehigh Valley also has caught the attention of officials at the Port of Philadelphia, who cite their port’s proximity to the valley — about 60 miles — as part of their argument that the port has significant cost and transportation advantages over other East Coast competitors, especially New York-New Jersey.

Don Cunningham, president and CEO of the Lehigh Valley Economic Development Corporation, said there is now about 115 million sq ft of space in the area, including a considerable amount of food and beverage manufacturing, along with DCs and e-commerce fulfillment centers.

Stitch Fix, an online personal shopping service, and e-commerce vendors Zulily, Amazon, and Wal-Mart have all opened fulfillment or DCs in the area. And Pennsylvania Governor Tom Wolf announced a year ago that FedEx would open an 800,000-sq-ft DC on 253 acres of land in the Lehigh Valley that would be the “largest warehouse and logistics hub” of the company’s 34 such facilities nationwide. It is expected to open next year.   

“Lots of manufacturers and distributors are getting goods from the port by truck,” Cunningham said. About 90 percent of the products that come in and out of the area go by truck and about 10 percent go by rail — on an NS line that runs into an intermodal terminal that goes into the former Bethlehem Steel facility, once the heart of the area’s heavy industry, he said.

Rooney said a rail link to the Port of New York and New Jersey is important, to improve the flow of cargo to the area and also to help the authority meet its goal of reducing truck traffic and resulting pollution. Once a terminal in Lehigh Valley is developed, the cargo would be sent there by rail from the port, removed from the train, and drayed to the DCs, where it would be broken down further and sent onto customers, she said. But even without a rail link, the area is growing and will be important to the port in the future, she said.

“The rail allows that transportation in bulk,” she said. “But those warehouses and DCs are still going to be there.”

Pat Sabatino, manager of the terminal on the Bethlehem Steel site, Lehigh Valley Rail Management, said there has been talk of linking the facility to the Port of New York and New Jersey via the NS line.

The terminal, with a seven-mile short line and 88 miles of rail track, also connects to a line operated by Canadian Pacific Railway. Sabatino said the terminal handles boxcar and container business, with raw materials coming into the manufacturers in the valley and finished products going out, and consumer goods coming into the warehouses and DCs.

The terminal does not do much international business at present, but Sabatino said he believes there would be sufficient business to make a link with the Port of New York and New Jersey feasible, in part because the warehouse sector in the area is seeing so much growth, he said.

“The northeast is a consumer’s market,” he said. “There’s more stuff coming in than there is going out. And that’s why the warehouses are in the Lehigh Valley. Because it’s a good central point to get into New Jersey, into New York, up into New England, down to Baltimore. It’s kind of like the center of the star.”

Contact Hugh R. Morley at Hugh.Morley@ihsmarkit.com and follow him on Twitter: @HughRMorley_JOC.