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Industrial Users Inking Lease Extensions, Sale-Leasebacks Amid Amazon-Fueled Market Crunch

The staggering low vacancy and rising rents in Greater Boston’s industrial market are forcing tenants to cling tightly to their existing spaces and rental rates.

An Amazon worker at a distribution facility

The 30M SF of tenant demand is nearly triple the amount of vacancy in the market, while rents in some submarkets have doubled in the past five years, according to industrial brokers and developers speaking on Bisnow’s Transforming Boston Industrial digital summit this week. The dynamics have forced a wave of short-term extensions and sale-leasebacks in a market not expected to cool in the next 24-36 months, panelists said.

“A lot of the time, we’ve seen these companies that traditionally didn’t pay the highest rent are coming to the plate,” CBRE Vice President Doug Rodenstein said. “It’s either we close down this location or we pay the rent. There’s not many other opportunities out there.”

The 9M SF available in the region’s industrial market amounts to a 3.4% vacancy rate, and that number is expected to be closer to 1.5% toward the end of the year, Rodenstein said. With e-commerce, bulk distribution, manufacturing and biomanufacturing users competing for space, experts said they don’t expect rent growth to slow down soon. Complicating the landscape is a muted construction pipeline of 1.2M SF, according to CBRE, a fraction of tenants' needs. 

The competition has created significant upward pressure on rents, which reached $10.27 per SF triple net in Q1 2021, according to CBRE. The rate represents a 6.2% increase from year-end 2019.

Much of the rent increase stems from Amazon’s leasing and development prowess; the company was responsible for more than half of industrial activity in Boston last year. The e-commerce giant already touts a 2M SF industrial footprint in the Bay State and has pledged to operate seven new delivery facilities by year’s end, bringing its total warehouse inventory to 25.

Clockwise from top left: CBRE's Doug Rodenstein, EBI Consulting's Elizabeth Krol, Seyon's Bryan Blake, Equity Industrial Partners' Mark Reardon and Jeff Levine, Boston Private's Emily Rush and Camber Development's Katie Speede.

The high rents are amplified by the parking requirements of Amazon and other e-commerce users, which require five to six spots per 1K SF, whereas a traditional warehouse typically needs one-and-a-half spaces per 1K SF, Equity Industrial Partners principal Mark Reardon said. The parking requirements shrink building sizes on already-limited plots.

“Looking at some of the design structures, it’s almost like we’re designing call centers with the parking,” Condyne Capital Partners President Jeff O’Neill said. “Things have greatly changed. It requires more land.”

The deep pockets and large development needs of Amazon have forced other tenants to sign short-term extensions and join up with operating partners to share costs, experts said. Sale-leaseback deals, where businesses sell their properties to investors and lease the space back as tenants for anywhere from three to 10 years, are also on the rise, Rodenstein said.

“When you bought your building three years ago, now your building’s worth double, or [bought] 10 years ago and it’s worth quadruple, this can be a one-time opportunity,” he said. “When you mesh those two together, they can really control their destiny as well." 

Clockwise from top left: VHB's Brittany Gesner, Condyne Capital Partners' Jeff O'Neill, Wayfair's David Willett, The Davis Cos.' Gretchen McGill and Womble Bond Dickinson's Greg Sampson.

A company selling its property often has the ability to set its own rents, a bargaining chip ripe for Greater Boston’s costly market. Sale-leasebacks totaled $4.8B in the industrial sector nationwide, and sale-leaseback prices averaged $116 per SF, compared to $93 per SF for sales since the beginning of 2020, according to a June CommercialEdge report

The nation will require 330M SF of new industrial space by 2025 to keep up with the booming e-commerce sector, according to a recent CBRE report. Panelists cited the data point as reason to believe the demand boom will continue. With continued industrial growth comes concern over Massachusetts’ transportation infrastructure, experts said.

“For the last year, there hasn’t been a tremendous amount of traffic on the roads because of Covid,” Reardon said. “It’s been kind of hidden when you see Amazon trucks on the road. Once you go back to work, I have severe concerns about the traffic.”

An Amazon tractor-trailer in street traffic

A February study by the Massachusetts Metropolitan Area Planning Council reported on the traffic impacts of e-commerce, concerns that have been raised by local communities home to Amazon facilities. The warehouse and distribution centers generate tractor-trailer traffic, delivery vehicle traffic and employee traffic, often around a 24-hour cycle. The report found a lack of data on e-commerce traffic in Massachusetts and said the repurposing of older warehouses and large retail or office buildings into distribution centers has complicated efforts to study the traffic impact.

Municipal zoning typically only focuses on employee car space counts and lacks regulations on fleet parking, a looming hurdle for governing bodies, civil engineer and VHB New England Industrial Team Leader Brittany Gesner said.

Amazon in 2019 rescinded plans for a Braintree facility amid local businesses’ traffic concerns. Tractor-trailer traffic remains on the minds of Charlton residents in Central Massachusetts, where Amazon prepares to head into Planning Board review for a proposed multi-story warehouse along the narrower U.S. Route 20 connecting Interstates 84, 90 and 395.

“When we deal with municipalities, that has to be taken into account,” O’Neill said. “The benefit to the municipality, they’ll get the excise taxes on vehicles parked there. They have to balance between the tax revenue growth and what we’re seeing on traffic.”