Land-Strapped Industrial Developers Tearing Down Offices For Distribution Centers
Industrial developers are responding to Greater Boston’s supply crunch with a wrecking ball.
Developers, including some of the industry's biggest players, have started buying underperforming, underutilized office and flex buildings to demolish them to make way for new warehouses. The demolitions aren’t cost-prohibitive, experts said, as rising rents make the undertaking worth it for developers in the land-starved market.
“You’ve got this vacant office building that’s not really doing anything because there’s no tenants, the city’s not making tax revenue on it,” Oxford Properties Vice President of Investments Ankit Bhatt said. “Why not tear this thing down and build industrial, and solve the logistics problem, but also solve the jobs problem as well?”
One of the first developers to deliver an office demolition and warehouse ground-up project is Northbridge Properties, which tore down two office buildings in Littleton, according to Littleton records, and built an Amazon logistics facility, which opened last month, an Amazon spokesperson confirmed.
The e-commerce giant, which competes for just about every developable industrial site, moved quickly after the town’s Select Board signed off on an agreement for the project in January. Just last year, the two-story office buildings on Taylor Street in Littleton were getting little use other than by area police departments for training exercises, according to a project filing. Both were demolished to make way for Amazon’s 144K SF distribution center and expanded parking lot to accommodate 450 van parking spaces.
Northridge bought the buildings for a combined $6.4M from entities tied to Bulfinch Cos. and DXC Technology Services. Bulfinch had submitted an application in 2018 to demolish the offices for a warehouse before selling the property. The combined 52-acre site sits near Interstate 495 and is secluded from residential areas, Northbridge said in a presentation.
While Amazon's project is among the first, at least three other demolition projects are in the planning stages across the region.
The Greater Boston industrial market has just 2.5% vacancy among its more than 266M SF of inventory and 35M SF of active tenant requirements in the market, according to CBRE. Rents have increased 14.8% in the past 12 months in Greater Boston, and most leasing is occurring at new construction or recent renovations.
Barriers to entry on any type of development in Massachusetts are higher than most areas of the country, and getting projects entitled through local municipalities is difficult in Greater Boston, CBRE Senior Vice President Rachel Marks told Bisnow.
Industrial developers hoping to build on a greenfield site have to look beyond Interstate 495 and even into Southern New Hampshire and Rhode Island, she said. Almost all new projects closer in need to happen on improved land.
The Davis Cos. is mulling an office teardown in Chelmsford at 199 and 201 Riverneck Road to build a 200K SF flex/distribution development, according to Colliers. The developer purchased the two-building portfolio in April from Brady Sullivan Properties for $15M. The site includes 95K SF and 90K SF buildings, the former corporate headquarters campus for tech firm Mercury Systems, which relocated to Andover in 2017.
When Chelmsford’s fire chief emailed the news of Davis' purchase in April to city staff, Chelmsford Director of Community Development Evan Belansky responded, “wow!!”. The Davis Cos. hasn’t yet submitted formal plans to Chelmsford for the site and declined to comment, and Belansky didn’t return requests for comment.
Pugh Management plans to demolish three hotel buildings, an abandoned restaurant, a trailer office for a car dealership and a storage yard at 735 Newburyport Turnpike in Melrose, approximately 9 miles north of Boston. In their place, it plans to build a 94K SF distribution building and parking lot, according to its application to the Melrose Planning Board, which approved the project in June.
Calare Properties is tearing down a 120K SF, three-story office building at 50 Nagog Park in Acton and building a 119K SF warehouse. The developer bought the property from software company Seachange International for $600K in 2019, and it didn’t find a market for the office space, Calare CEO Bill Manley told Bisnow in April.
“Suburban offices have really taken a hit, and quite frankly suburban retail has taken a huge hit,” Manley said. “You’d take down a retail center to put an industrial center. In the past, industrial was torn down for them.”
Suburban office vacancies rose from 16.4% in Q2 2020 to 18.8% in Q2 2021, according to Colliers, showing that even the residential spread to the suburbs hasn’t improved the standing of Class-B and C office properties. A similar story is playing out in the mall space, as the oversupply of those properties in the suburbs has also led to — guess who — Amazon undertaking the first conversion of a mall to an e-commerce distribution center in Worcester.
Tearing down low-rise commercial buildings is far less expensive than taking a wrecking ball to a high-rise, Bhatt said.
Industrial developers are executing similar demolition-and-ground-up warehouse projects in Chicago, New Jersey and Southern California’s Inland Empire. Oxford is actively acquiring vacant offices across the U.S. to tear them down for logistics warehouses, Bhatt said, and he anticipates the practice will expand in the nation’s largest metros. Demand for industrial properties in the Bay State isn’t expected to subside, and the market pales in comparison to the size of the nation’s leading industrial markets.
“We’re constantly looking at big-box retail that we can tear down and build logistics because the location’s perfect to fulfill deliveries in a very short time span,” Bhatt said. “Your neighborhoods are right there.”