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Like many metro areas across the U.S., Boston’s 494 million-square-foot industrial market slowed as we approached elections and the end of 2012. Despite mixed signals, the situation isn’t entirely dour, and there are signs of optimism in terms of demand and activity, evidenced by a slight decrease in vacancy and 475,000 square feet of net absorption in the first half of 2012, according to CoStar Group. At a more macro level, the Boston area’s thriving technology sector has led to job growth and declining unemployment, which ultimately increases consumer demand and benefits the industrial property market.
The Boston industrial market has been flat for more than three years now, but that’s created opportunities for end users to lease higher-quality properties than they previously inhabited while reducing occupancy costs, which is the prevalent trend both in Boston and nationwide. Tenants seek to improve efficiency by consolidating warehouse and distribution into more modern properties with higher clear-height ceilings and other features. While users demand more efficient and flexible industrial space, they also demand more flexible — and generally shorter — lease terms. If tenants can achieve both operational efficiency and lower costs through outsourcing to third-party logistics providers (3PLs), even better.
End users face a few hurdles, though. Industrial inventory in the Greater Boston area tends to be mature, and there’s a lack of relatively new properties. Given the state of the economy, no spec development is under construction or even imminent, and there’s minimal build-to-suit construction as well. This further complicates efforts to improve efficiency and lower costs, but tenants are finding ways to surmount these obstacles.
A few recent transactions point to these trends. XL Logistics, a 3PL, leased 80,000 square feet in Avon, Massachusetts, and 180,000 square feet in Taunton, Massachusetts, in its efforts to better serve clients. ’47 Brands consolidated its distribution into 300,000 square feet in Brockton, Massachusetts, and Plantation Products made a similar move into 278,000 square feet in West Bridgewater, Massachusetts. End-user GRM Information Management Services consolidated as well, acquiring a 260,000-square-foot distribution center in Stoughton, Massachusetts, for $41 per square foot.
While activity has improved, the actual progression and flow can resemble the ice-clogged Charles River in January. Current economic conditions breed uncertainty and unease. Potential tenants’ senior executives and boards examine and vet each transaction to make sure it makes economic sense. While prudent, this lengthens the process and time it takes to reach the closing table.
Industrial investment sales have their own share of complications, too. Overall, industrial values have stabilized but not necessarily increased. Demand for institutional-quality assets is strong, and local owners/investors are examining the market to ascertain whether it’s time to divest. For potential buyers, complexity arises when portfolios hit the market with a varied mix of asset quality. Here, too, buyers and sellers are in a holding pattern, probably through the end of the year.
Like consumers, our industrial end users and investors operate in a state of caution, and tenants certainly don’t want to carry excessive inventory. Improved demand and an improved investment climate hinges on the election, not to mention a few factors we can’t control, such as the Euro crisis. Cassidy Turley Chief Economist Kevin Thorpe released a U.S. macroeconomic forecast over the summer titled, “2013 Can’t Come Soon Enough,” and we can’t help but agree.
— Sean Teague, Senior Managing Director, Principal, Cassidy Turley FHO