Building for the Future

The demand for manufacturing and industrial space is alive and well in Philadelphia.

The City of Philadelphia has a rich and storied legacy in the industrial and manufacturing sector. It is located between two rivers and, back in the 1950s, its ports were bustling with activity, driving urban textile manufacturing to a post-war peak of 359,000 jobs (nearly half the total private-sector employment). Over the last few decades, labor-intensive manufacturing jobs have shifted out of the region – and out of the country. While the face of manufacturing may have changed dramatically, it is important to realize it is still an important driver of our local economy.

Manufacturing is but a subset of the broader industrial real estate market. Companies that occupy industrial buildings come from a wide variety of sectors including wholesale trade, retail, construction, repair/maintenance, utilities, waste management and transportation, and warehousing – which includes port activity. The Port of Philadelphia handles about 80 percent of the raw cocoa, fruit, and produce that enters the U.S. each year. In 2015 more than 180,000 Hyundai-Kia autos were imported (on pace to exceed that in 2016).

By preserving inventory and building new, the City will be well positioned to secure a foothold when opportunity knocks.

Food and beverage manufacturing and distribution companies are thriving, and account for a total of 6.49% of employment, according to a recent Select Greater Philadelphia article. Philly icons like Dietz and Watson and Tasty Baking Company are as relevant to today’s consumer as they were 50 years ago. The rebirth of craft beer has increased demand for brewery and distillery facilities. Textile manufacturing is returning as well, from creative start-ups to makers of high performance team apparel — like Boathouse Sports — a Philadelphia bred sports apparel company that manufactured the uniforms for the 2016 U.S. Olympic Rowing team.

Philadelphia is home to industry giants like AgustaWestland, manufacturing helicopters, and Cardone, manufacturing automotive parts. The Philadelphia Navy Yard still manufactures ships at its Akers shipyard, but high tech manufacturing is also beginning to take hold there, spurring research and companies committed to sustainability. The Navy Yard employs more than 11,000 people in over 145 companies on approximately 1,200 acres of land. Northeast Building Products, one of the nation’s largest manufacturers of windows and doors, is headquartered in Philadelphia. With its investment in high tech equipment, it recently won the industry’s highest honor – the Crystal Achievement Award — for most innovative plant. It was also selected as the “Greenest Manufacturer in the U.S.” by Door and Window Manufacturer Magazine.

John Strotbeck, owner of Boathouse Sports, at their Northeast Philadelphia plant.
John Strotbeck, owner of Boathouse Sports, at their Northeast Philadelphia plant.

Some residential developers contend that manufacturing in the city is dead, as is the demand for industrial space. Obviously this is a myth. Industrial and manufacturing companies are growing and staying. Many have less than 100 employees, but it’s these small companies that form the bedrock of the entrepreneurial spirit in Philadelphia. Case in point, one of the country’s most successful manufacturers of custom retail store fixtures, KRG, is based in Northeast Philadelphia. They were a small start-up 32 years ago with a handful of employees in a 1,500 SF shop. Today they occupy over 230,000 square feet and employ a staff of over 120 people. They epitomize the growth of successful Philadelphia manufacturing companies.

The demand for new residential and retail construction has eaten a significant amount of aging industrial inventory in Philadelphia in the last ten years. Only three percent of the new industrial construction in the region in the last decade has been in Philadelphia. Just over 2.8 million square feet has been built in Philadelphia, but over 16.7 million square feet has been demolished or redeveloped for another purpose.

The growth in Philadelphia’s desirability and urban population will further drive demand for industrial space. The spike in residential construction will result in an increase in demand for building materials, furnishings and fixtures. The influx of new residents, many of whom do not own cars, and the general shift to online shopping, will increase the demand for home delivery. Amazon has a “last mile” delivery warehouse in Philadelphia and began AmazonFresh grocery service in 2014.

The increase in commercial and institutional space is another demand driver. Retail stores need products restocked. Restaurants need food, beverage, paper and linen supplies. Hotels need commercial laundries, uniform deliveries and food distribution. Hospitals need medical supplies, food, and waste services. The companies providing these services need industrial space.

While the residential boom is well documented here, at some point the pendulum will swing and the demand currently fueling speculative construction will wane. What Philadelphia needs is more speculative industrial real estate construction in order to accommodate growth. The problem we face is lack of inventory. There’s not enough quality space with high ceilings and adequate truck parking. The average age for industrial buildings in Philadelphia is 56 years, compared to the Lehigh Valley where it’s 21 years. This impacts the city’s ability to attract large industrial employers.

Industrial and manufacturing is an important sector that feeds our economy’s diversity. And a diverse economy protects the market from the inevitable downturns. Unlike Detroit with its auto industry and Pittsburgh with its steel industry, Philadelphia enjoys multiple economic drivers that keep extreme economic swings at bay.

As the cultural fabric continues to shift in favor of locally-grown, locally-manufactured goods, the need for suitable space and talented people will increase. By preserving inventory and building new, the city will be well-positioned to secure a foothold when opportunity knocks.

RICHARD GORODESKY is a Senior Vice President of industrial real estate at Colliers International in Philadelphia.