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'Land-Starved' Boston Sets New Pricing Highs In Tight Industrial Market

The coronavirus pandemic has given the industrial market such a boost from stockpiling, e-commerce and life sciences demand that the Greater Boston region can’t keep up.

The region’s warehouses recorded a record-setting third quarter with more than 940K SF of positive absorption and historically low availability and vacancy rates, CBRE’s Q3 2020 Industrial Report found.

The inside of an Amazon warehouse

The activity has caused rents to rise 5% to among the nation’s highest at $10.50 per SF, but with only 3M SF of warehouse space delivered in 2020 and 410K SF under construction, Boston is a “land-starved” market, CBRE Vice President Doug Rodenstein said.

Greater Boston landlords must keep major tenants, including market leader Amazon, satisfied with new warehouse requirements lacking in the suburbs’ older inventory, while meeting standards for flexibility for the new bulk distribution players, experts said Tuesday during Bisnow’s Industrial Round-Up webinar.

Black Friday sales topped $9B this year, Adobe Analytics reported, below initial projections — causing analysts to revise optimistic holiday spending estimates. But extended shopping promotions amid the coronavirus pandemic shouldn’t damper expectations for a reduction in spending, a Bloomberg Intelligence analyst told Bisnow.

“I think what you’re going to see going forward is, industrial is the poster child of real estate especially into '21 and '22,” said Lori Cronin, Seyon senior vice president of Southeast operations. “I think the pandemic has catapulted us forward, several years of growth, with e-commerce.”

Retail giant Amazon leads the local market share with 60% to 65%, or 10M SF in Greater Boston, according to Rodenstein, and other omnichannel or third-party logistics groups are reshaping the industry’s wants and needs at a modern warehouse. Amazon is hiring an average of 1,400 new workers a day and touts an army of 500,000 delivery drivers, The New York Times reported, requiring space to park all of its delivery vehicles.

Clockwise from top left: CBRE's Doug Rodenstein, ARCO National Construction's Jason Grant, STAG Industrial's Michael Chase, TA Realty's Lisa Strope and Seyon's Lori Cronin

While industrial spaces used to typically need one loading dock per 10K SF, 25-foot-clear facilities and some trailer storage, new omnichannel groups are bringing larger minimum requirements, Rodenstein said. Parking requirements can be as high as 0.4 spaces per thousand SF for van parking.

“In Massachusetts where we traditionally saw most landlords try to max out their sites as much as they possibly could, we’re seeing it be a little more strategic as to what they’re developing,” Rodenstein said. “It might be a smaller footprint, but with more parking, you’re going to be able to achieve a higher rent and so the numbers end up making sense.”

Warehouse rents across Greater Boston averaged $10.50 per SF triple-net, with urban industrial rents topping $19 in Q3, CBRE reported. With regional availability at 8%, vacancy under 5% and the sublease market at a near-zero rate, deliveries of spec buildings need to be flexible, said Jason Grant, ARCO National Construction principal and regional manager.

ARCO is currently building developer Northbridge Partners’ 289K spec warehouse in Plainville, approximately 38 miles south of Boston, including the industry-desired 36-foot-clear height and 42 dock positions and will house a life sciences user, The Sun Chronicle reported. Among cheaper builds to gain flexibility in flex spaces include putting in more power or the infrastructure to allow it or increasing the capacity of a roof structure to accommodate a potential cold storage user, Grant said.

“Those sorts of things are easy, cheaper things to do upfront when you’re building Class-A spec buildings that can cater and market to more tenants out there,” Grant said.

With the limited space across Boston repositioning of struggling office assets has risen as an alternative to the space crunch with differing success, panelists said. The region’s ultracompetitive lab market will place life sciences tenants seeking to enter Boston in a tenuous position as they await their industry’s own repositioning of sites with less than a dozen readily available spaces to move into, a JLL expert told Bisnow.

Grant said the market touts a lot of older, declining inventory along the 128 corridor that serves last-mile-type delivery stations. While buildings “not as functional” are still leasing out at $7.50 or $7.75 per SF, a safe investment when four years ago such rents were $2 cheaper per SF, Rodenstein said.

“Space is so tight you can lease those buildings up too,” Rodenstein said. “I just think when you're looking at trying to capture the Amazons, or these bigger, better credit users, having all the bells and whistles is really important.”

As the pandemic persists, experts have raised concerns over the industry’s ability to store COVID-19 vaccines at extreme subzero temperatures, Bisnow reported last month. While panelists said they haven’t seen the rush for cold storage yet in their market, they anticipate stockpiling will remain a crucial need after supply chains were caught off-guard with a toilet paper rush earlier this year. Medical supply storage is also anticipated to remain a crucial need.

“We’ve seen a lot of push for almost building redundancy into your inventory,” STAG Industrial Chief Investment Officer Michael Chase said. “Going from just-in-time to just-in-case inventory strategies. That means, obviously, more space ... I think the need to increase inventory to accommodate for potential issues has increased in a big way.”