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Rents Shooting Up As Boston Industrial Market Tightens 'Almost To The Point Of A Crisis'

Industrial has been the strongest-performing real estate asset class for years, but construction in Boston hasn't come close to keeping pace with demand, driving prices skyward.

A Cardinal Health distribution facility at 11 Centennial Drive in Peabody.

Asking rents for industrial properties in the Boston region hit $10.27 per SF in the first three months of 2021, according to data CBRE released last week, a 6.2% increase from year-end 2019 and a 34% spike since 2017. But with 16M SF available among the 268M SF of supply and only 1.2M SF under construction, prices are expected to spike even more in the coming months and years.

“We are going to continue to be in this unbelievable supply and demand [dynamic] almost to the point of a crisis,” CBRE Senior Vice President and Boston Industrial Leader Rachel Marks said. “Even if every new development project ends up coming out of the ground, we still don’t have quite enough space.”

Industrial vacancy hit a new low in Q1 2021 at 3.8%, even after construction deliveries reached a four-year high of 2.4M SF in 2020. Nearly 4M SF of industrial space was absorbed in 2020, a 54% increase from the previous year, according to CBRE. More than 1.1M SF of industrial space was absorbed in Q1 alone, while only 160K SF of construction delivered.

The competition for control of the last mile around the inner ring has caused a spike in both asking and taking rents. JLL Senior Director of Capital Markets Kerry Hawkins, who recently arranged a deal for one of the market’s last remaining large development sites, said asking rents still have “running room” with new construction seeking closer to $20 per SF than $10.

37 Upton Drive at Upton Crossing Industrial Park in Wilmington.

“There’s more groups that want to play in that space from an ownership perspective,” Hawkins said of the market. “You’ve got the perfect storm from the capital stack as well as the tenants. We’ve seen rents increasing substantially within the [Interstate] 495 belt.”

Hawkins recently arranged the $44M sale of a suburban warehouse portfolio from PGA Realty Co. to The Davis Cos. The assets include 156K SF of fully leased assets in Wilmington and Methuen north of Boston, and includes a site entitled for up to 235K SF of future development.

Asking rents at certain properties along the Route 128 corridor have topped $20 per SF, previously only seen in the urban core, CBRE Director of Research Suzanne Duca said. Marks agreed rents will rise faster in the next two years in what will be a seller’s market.

“I foresee sunny skies on the landlord side, not on the tenant side, for at least the next 24 to 36 months,” she said. 

Among the 268M SF of supply within the I-495 belt, most of the unoccupied inventory is “functionally obsolete,” according to CBRE’s report. Larger spaces have even less availability, with vacancy rates of 3.3% for facilities between 250K SF and 500K SF and 2.7% for buildings larger than 500K SF. 

“We would have years where we wouldn’t have a 400K SF user,” Calare Properties CEO Bill Manley said. “We get 15-20 a year right now.”

200 Research Drive in Wilmington

Manley’s firm is developing a speculative 119K SF project in Acton miles from I-495. Calare purchased 50 Nagog Park in 2019 for just $600K and tore down a three-story office building on the 11 acres of land for the new construction set to break ground next month.

Advertised as flexible space for either manufacturers, warehouse or cold storage users, the space is among the 100K SF to 250K SF size range in most abundance in the market. Manley said his firm is in discussion with potential manufacturing clients.

“The nice thing about the New England market, you have just a ton of skilled labor here, a highly educated workforce,” Manley said. “You’re seeing the higher-tech manufacturing, the biotech manufacturing, you’re seeing a lot of that come here.”

Biomanufacturing requirements are pouring into Boston’s industrial market, with several significant deals closing in the past five months, but e-commerce remains the market’s top player. Average asking rents for both high-tech and manufacturing industrial assets trend higher than distribution facilities, according to Cushman & Wakefield data.

Amazon looms large over the market, accounting for the majority of industrial activity last year, and it is showing no signs of slowing. The e-tailer counts 12M SF of inventory across 20 facilities statewide and projects 34 operating centers by the end of the year.

Amazon’s deep pockets have driven prices up for all the users in the market, King Street Properties Managing Director Robert Albro said at a Bisnow event earlier this month.

“We’ve looked at land and we’ve looked at existing buildings where there’s competing use, often Amazon is willing to pay more,” Albro said. “There’s a dynamic there.”

Developers will increasingly turn toward razing “functionally obsolete” assets and replacing them with new structures featuring the high ceilings and numerous loading docks today’s tenants require, brokers said. Much like Calare’s Acton project, developer NorthBridge in Littleton also razed a building for an anticipated Amazon warehouse.

Barriers to entry in Massachusetts’ industrial market are among the nation’s highest, Marks said, because its wetlands, topographical challenges, building laws and growing community resistance to e-commerce traffic and pollution make it harder to find and execute on development sites.

With the market reaching a crescendo, investors are getting slimmer returns on rents, Manley said. Construction costs once at $50 per SF have soared as high as $90 a SF and cap rates once sitting around 8% now sit around 5%, he said. 

“The rents have gone up, but the actual return ratios what you’re building to, have actually skinnied quite a bit,” Manley said. “I don’t know how much further they have to go, if any further at all, but it is pretty interesting.”

CORRECTION, APRIL 15, 9:30 A.M. ET: An earlier version of this story incorrectly identified 150K SF of industrial space available when the statistic rather referred to industrial speculative construction underway. The story has been updated with the correct statistic.