Boston’s Record-Low Industrial Vacancy Pushing Developers To Build On Spec, In New Submarkets
Vacancy in the Boston-area industrial real estate market hit an all-time low at the end of 2021, and that dynamic is changing the development strategy for many players.
Boston-area industrial developers are increasingly breaking ground on warehouse projects without any signed leases, raising rents on tenants and expanding to new submarkets farther from the city, executives said last week at Bisnow's Boston Industrial Forecast event.
The strategy of building industrial properties on spec is one that wasn't common in the Boston area until the last few years, Arco National Construction Regional Manager Jason Grant said. He said his general contracting firm is working on more than 3M SF of spec industrial development between Massachusetts and Connecticut.
"Boston has turned into more of a spec warehouse market than it used to be," Grant said. "We're seeing a lot more things go on spec because you don't have the time and ability to wait, and tenants need it now. ... It’s crazy how we’ve seen that turn."
Tenants that need to move in now would have a hard time finding existing space. The Greater Boston industrial market fell to a record low of 1.5% at the end of the year, according to CBRE's Q4 report. The vacancy rate is down from 3.8% at the end of 2020 and around 5.3% at the end of 2019.
With the importance of speed to market for tenants today, developers need to focus on efficiently delivering a project that has docks, HVAC systems, lighting and other services ready for operation, Link Logistics Real Estate Vice President of Development Daniel Connaughton said.
"It's no longer just about leasing the box anymore; you need to deliver a facility that allows the user to ramp up and get to max productivity as quick as possible," Connaughton said. "However we can get the customer up and running as quick as possible is key."
Link Logistics, a Blackstone subsidiary, has 460M SF of existing industrial assets and around 40M SF of industrial construction underway across the country, most of which is being built on spec, Connaughton said.
"Hopefully, the fundamentals continue and we can lease all that, because otherwise, we've all got problems sitting here in this room," Connaughton said.
The demand for industrial properties showed no signs of slowing down last year. Nearly 1.6M SF of industrial real estate was absorbed in the Boston area in the last three months of 2021, according to CBRE, bringing the full-year total to a record 7.5M SF.
Equity Industrial Partners principal Hunter Emerson, whose firm owns 25M SF of industrial real estate, said he thinks the robust demand for industrial will continue. He said the acceleration of e-commerce deliveries has made industrial a much more attractive real estate sector than it was half a dozen years ago.
"Six years ago, we were the ass of the asset classes," Emerson said. "The big players didn't want to be in this market.
"At the end of the day, there's 13 million people that live in New England that are consumers. In the last three to five years, e-commerce has disrupted the whole supply chain industry. We’re no longer that last-mile user that goes and picks up our groceries. We go on the internet and we order it. Covid accelerated that process probably by 10 years because we were all sitting at home and ordering products, and that has to go to a warehouse."
This skyrocketing demand has pushed up rents and shifted the market heavily in landlords' favor.
According to CBRE's report, asking rents rose an unprecedented 21.8% from the end of 2020 to the end of 2021, finishing the year at $12.55 per SF.
Cabot Properties Managing Director of Investments Michael McCarthy, whose firm owns and manages about 80M SF of industrial properties, said the tight vacancy and strong demand in the market gives landlords more leverage in negotiations.
"They don't have a ton of optionality," McCarthy said of warehouse tenants. "It's a unique point in time. You can be a price-maker, a market-maker as a landlord more so than ever in history. They're either going to shut their business down or they're just going to have to move forward and deal with it. It's just firmly a fundamental dynamic of the market."
GLP Capital Partners Managing Director Oscar Wong, whose firm has a 40M SF industrial portfolio, said he agreed with McCarthy's sentiment that it is a landlord's market. He added that this dynamic has been exacerbated by large institutional investors acquiring massive portfolios of warehouses.
"It is unfortunate to be a customer, a tenant right now. There’s just not a lot of relief," Wong said. "Nationally, what’s interesting is as the asset class has institutionalized through very significant portfolio transactions and aggregation of a lot of industrial around major markets, I think there’s been a concentration of ownership that is really changing the mentality in terms of how industrial assets are managed and specifically how rents are grown."
Another shift occurring because of the market's low vacancy is an expansion of the geographic area where tenants are willing to do deals, and as a result, where developers are building new projects.
Colliers Senior Vice President P.J. Foster, an industrial broker who represents landlords and tenants, said in the past tenants would call and ask brokers to run a site search in a specific city or town, such as Taunton.
"That's not the phone call anymore," she said. "It's, 'We need space somewhere in Massachusetts or northern Connecticut or southern New Hampshire or Rhode Island.' It’s just expanded from one submarket to a region."
Emerson said that in large industrial markets like Los Angeles, Chicago and Pennsylvania, brokers will drive two or three hours to show a property, but the Boston market by comparison has historically been "insular and provincial." He said that is starting to change.
He gave the example of Novo Building Products, a Michigan-based company that came to the Boston market looking for a site to build a distribution center before ultimately signing a deal in the Granite State.
"They came to this market and looked at a building in Braintree. We ended up doing a lease for 200K SF in Amherst, New Hampshire," Emerson said. "Five years ago, I didn't even know how to get to Amherst, New Hampshire."
Grant said he has also seen his firm's portfolio shift west within Massachusetts, including projects in Charlton, Sturbridge and Lunenburg, and it has gone south to Rhode Island and Connecticut. Charlton, for example, is being targeted by Amazon as a site for the first multistory distribution center in New England. The company was welcomed by local residents, a stark contrast to some of Boston's closer-in suburbs.
"It's continuing to move west, south and north," Grant said.
Connaughton said Link Logistics will likely look to do deals in New Hampshire, Connecticut and Rhode Island in the coming years.
"We haven't pulled the trigger on anything outside of Mass., with regards to New England, but it does seem like it's expanding," he said. "It's only a matter of time."
CMC Design-Build President Mark Moore, who specializes in cold storage industrial space, said the market's geographic expansion has occurred in part because the booming life sciences sector has scooped up much of the available land within the Route 128 belt, and it is a sector that largely pays higher rents.
“There’s a ton of competition from companies that have the ability to pay more for these types of assets just because they have higher margins,” he said. “Our clients are typically low-margin in comparison to a life science company. That’s a big issue they face.”