As Industrial Market Reaches ‘Plateau,’ Boston's Small Footprint Is A Big Benefit

The industrial real estate market is beginning to cool down around the country after e-commerce demand made it red-hot during the pandemic, but experts say the Boston area has an advantage that could benefit industrial owners.

The difficult permitting process and frequent community opposition to industrial projects around Boston, while frustrating for developers, have constrained new supply and helped owners keep vacancy low and maintain rent growth, experts said at Bisnow’s Innovating & Developing Boston’s Industrial Market event at the Boston Park Plaza Hotel.

AEW Capital Management Head of Industrial Asset Management David McGeehan said that the Boston market, like others nationwide, is seeing demand slightly moderate and vacancy tick up. But Boston-area rent growth is still at a 10-year high of $14.51 per SF, according to Colliers.

“For the last 18 months, everyone was driving 100 mph on the highway. Now we’re driving 65 mph,” McGeehan said at the event. “It’s not a bad thing.”

At the end of 2022, Boston’s industrial market had more than 14M SF in the construction pipeline, according to Colliers’ Q4 Industrial report. However, industrial vacancy has seen the largest increase in recent years, up from 5.6% at the end of 2021 to 6.2% as of Dec. 31. 

Although vacancy is up, the rate is below a 10-year average for the state. Chris Mora, vice president of development at The Davis Cos., said he thinks Boston's market is still in a strong position. 

Rent growth in the market has cooled, but rents are still high compared to $12.77 per SF in 2021, according to Colliers. Mallory Gonzalez, vice president at Berkeley Partners, said she has recently begun to see stabilization in rent growth for some properties.

“We have already felt a little bit of a slowdown in these rates quarter-to-quarter,” Gonzalez said. “I think that plateau is already here. I think we would be naive to think that we could continue 10% to 15% to 20% rent growth indefinitely."

A cooldown in the market may help the most attractive Class-A assets stand out. During the pandemic, lower-class properties saw the same demand boom, as low vacancy had tenants scrambling to find space. 

"The better operators with the better portfolios in the better locations are going to separate from the rest of the pack now," said Matthew McCarthy, senior vice president of Northeast investments for Blackstone-owned Link Logistics. "That was hard to do when all the ships were rising with the tide in the last five to seven years."

Experts said the Boston-area industrial market is better-positioned than other areas to maintain a low vacancy rate because developers are constrained on what new supply they can add and where. Developers have faced strong pushback from certain communities in the state, making it increasingly hard for them to permit and construct new industrial projects.

In 2021, GLP Capital Partners bought its first suburban Boston industrial portfolio from Marcus Partners for $173M. The portfolio consists of four warehouses and distribution buildings totaling over 1M SF. However, the process of introducing new development hasn't been easy.

When asked what makes the Boston industrial market attractive for investment, GLP Managing Director Oscar Wong's first response was the area's constraints on new supply.

“The neighborhoods you live in can be very anti-warehouse development,” Wong said. “There are a lot of supply barriers, which kind of creates a very healthy environment for rental rate growth."

As interest rates have risen and construction financing has become harder to secure, McCarthy said it is more difficult for developers to begin projects. 

“With this capital markets environment, it probably means that some construction starts will start to dwindle, which will be inflationary from a rent standpoint with existing products,” McCarthy said.

Marcus Partners has had its own share of issues with the communities where it does business. The firm has developed three industrial properties in Franklin, Haverhill and Taunton, which all were long, drawn-out processes for the developer due to the towns' pushback.

“We sit in front of these planning boards and these towns which makes it really difficult and it takes a lot of time,” said Ryan McDonough, co-chief of investment at Marcus Partners. “When you actually get something permitted, you get real value.”

Davis Cos.' Mora said he has seen these challenges in getting projects permitted around Boston. 

“It is difficult to permit industrial in and around the Boston area," he said. "You have to be willing to work with the community. You have to have ample communication with the community to put forth a package of mitigation that hopefully addresses most if not all of their concerns.” 

In other parts of the state, like Fort Devens, pushback from communities has caused caps on how much of its 4,400 acres can be developed. The fort, which is in the middle of Ayer, Harvard and Shirley’s jurisdictions, had its development cap increased in November to 20M SF of developable land.

The fort has seen activity from industrial builders, mainly in the biomanufacturing space. King Street Properties built a 750K SF manufacturing campus in light of industrial tenant demand acceleration, Banker & Tradesman reported. The five-building campus had already begun construction on three of the buildings, which were expected to be completed in Q4 of 2022.

Despite progress in submarkets like Devens, McGeehan said that isn't necessarily where tenants want to be. Most tenants prefer to be closer to Boston, right off of major highways like I-93 and I-95, but that doesn’t seem to be where much of the supply is going. 

“You can deliver supply further out west or to southern New Hampshire, and there are easier municipalities to deal with and people are more accepting of industrial uses, but I don't know how they will necessarily line up with demand,” McGeehan said.

There isn't a lot of space left near the city, causing other issues for developers to keep in mind when scouting out potential sites. 

“It’s hard to develop when there is not a lot of land sites to be acquired," said Katie Speede, chief of operations at Camber Development. "There’s a natural limit on the amount of supply that can be brought to the market.”