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Anecdotally, by activity and by the numbers, the suburban Boston industrial market has definitely strengthened. If positive net absorption trends continue through the balance of the year, 2013 could end in territory that we have not seen since before the Great Recession.
The momentum in the market has changed significantly in two years. For example, two years ago our firm was hired to sell a 53,000-square-foot single-story industrial building in Woburn for a third-generation plastics manufacturing company that was growing and wanted to buy a larger facility in the region. The company concurrently asked us to look for a larger building for them to buy. However, before putting an alternative building under contract, they would need to sell their Woburn property. In 2011, we did not have much activity from prospective buyers interested in our client’s property yet there were a number of viable purchase options available to them. Fast forward to the present, and we have multiple, highly qualified companies interested in buying their Woburn building — but now there is nothing to buy that meets our client’s criteria for size, quality and location. As a result, we have been forced to switch our acquisition strategy to buying land and constructing a building.
The Boston industrial market ended the second quarter of this year with a vacancy rate of 9.7 percent and 916,569 square feet of positive net absorption, according to CoStar. It is the fifth consecutive quarter of positive absorption; nearly 6 million square feet of industrial space has been absorbed since the third quarter of 2012. The overall vacancy rate has dropped approximately 200 basis points from its recent high of 11.5 percent in the first half of 2010.
We have reached the inflection point regarding new construction. In fact, at the close of the second quarter, the metro Boston area had 261,117 square feet of new industrial buildings under construction.
Average asking rents reached $6.20 at mid-year, with the flex sector averaging $9.29 per square foot. By comparison, a year ago the average asking rent for modern single-story industrial properties was less than $6 triple net per square foot.
For sales, CoStar tracked 26 transactions in the first quarter with an average price of $52.33 per square foot. In my estimation, Class A product will at this point trade from a range of $60 to $80 per square foot, based on age and condition, location, ceiling height and proximity to amenities.
Significantly, sale prices are beginning to approach replacement costs, a situation we have not seen in this region since 2007.
The hottest submarkets are all inside of Route 128 or along the I-95 corridor, which form a ring within 20 minutes of the city and Logan International Airport. The community along the Route 128/I-95 corridor with the greatest amount of new commercial development is by far Burlington, which is 15 miles northwest of Boston and bordered by Bedford, Billerica, Wilmington, Woburn and Lexington.
At a macro level, the economic engine and biggest driver of demand for commercial real estate in the region — including industrial product — has been and will continue to be higher education. Boston’s colleges include Harvard, MIT, Boston University, Boston College, Tufts University, Wellesley College, Northeastern University, Emerson College, the University of Mass/Boston, Simmons College, Emmanuel College, Suffolk University and Berklee College of Music.
Collectively, Boston’s colleges and universities generate a tremendous volume of demand for services, all of which need varying degrees of manufacturing, production, warehouse storage and distribution outlets to support the region’s service industry. The total inventory of industrial space in the Boston area is a little more than 497 million square feet and it would not be an exaggeration to estimate that 20 percent of this space is connected to fulfilling the service demands associated with higher education.
— David Stubblebine, president, The Stubblebine Company/CORFAC International