Tag Archives: Inc.

March 2017: Greater Boston Industrial Market Has Resilience

07 Mar

The current state of the Greater Boston industrial real estate market is strong. In my 30 plus years of experience, I have never seen such low vacancy rates and resilience in this market sector. Consider the following: Current vacancy rates in this sector is approximately 6.1% and we have witnessed 18 consecutive quarters of positive absorption. This is unprecedented and truly remarkable. Given such tight market conditions, lease rates and market values have naturally risen.

While this pace of absorption and near full vacancy is bound to eventually swing back, I predict that there will not be a dramatic jump to ultra high vacancy rates. A major contributing factor to reduced supply has been the removal of large swaths of industrial space as these properties have been re-purposed to higher and better uses. Consider that approximately 2,000,000 square feet of industrial space was scrapped to make way for a new life-style center at University Station in Westwood. Once a vibrant, high-demand industrial park is now a mixed used residential, office and retail development including anchors such as Wegman’s, Target, TJ Maxx, LifeTime Fitness, Bridges by Epoch, several restaurants plus a Marriott Courtyard hotel is now under construction.  North of Boston, the once staid Northwest Industrial Park in Burlington has been transformed to “3rd Avenue Burlington” which includes popular restaurants, residences, and recreation including Kings Bowling.

In the wake of the removal of industrial space, little new construction has followed. Even with such compressed vacancy rates there are just a handful of spec construction projects. Examples include: 151 Charles F Colton Road in Taunton (200,000 sf), 600 West St in Mansfield (91,000 sf) and Kevin Lucy’s 140,000 sf project in Peabody which is rumored to be committed.

New construction has the added benefit of adding modern, high bay space that is more suitable for current manufacturing and distribution requirements. Ceiling heights in these new buildings tend to be 30 ft. clear allowing for higher storage capacity and use of technically superior material handling equipment, heavy floor loads and ESFR sprinkler systems. Drivers for industrial demand will continue with the advances in the biotech industry, e-commerce and the growing population will always have a need for such essentials as food, pet supplies, tires, etc. Indeed we have seen new build to suit projects such as Martignetti’s new headquarters distribution center and Sullivan Tire’s new facility in Taunton.

While I realize that record low vacancy and absorption rates are not sustainable forever the demand drivers, the lack of new supply plus limited land sites to support new construction will continue to dampen a dramatic increase in vacancy rates. The likely scenario in a down market and inevitable economic downturn will be that Class B industrial product will first see vacancy rates rise. Real estate is a commodity and will behave as such subject to supply and demand. Absorption will slow and vacant properties will linger on the market. In such scenario vacancy rates will likely rise to low double digits and values will decrease as much as 20%.  While such market disruption is not desirable this is not a cataclysmic outcome.

Please contact me review and find the best solution to your specific commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.

What’s in store for the Commercial Real Estate Market in 2017?

05 Jan

 

Equity markets typically disdain uncertainty yet, as of this writing, the S&P is up about 6% since the US election even with the anticipated uncertainty that a President Trump administration brings. The S&P increased over 13% in 2016 (including dividends). One thing that does appear to be certain is rising interest rates. US Treasuries are up 50 basis points in December alone. “Investors are hurrying to dump government bonds in the US, Asia and Europe pushing prices down, according to the Wall Street Journal.”*  Logically, such dramatic rise in interest rates would typically pull in the reins on the real estate sector. The residential market however remains brisk as we witnessed the month of November experience the highest level of sales in 18 years. This can be explained by pent up demand caused by diminished supply and the millennials finally entering the market.

However, experts say the boom that commercial real estate has enjoyed over the last few years was driven by investors desiring better returns than what they could find in bonds, but now that dynamic could be shifting as safe government bonds start to offer yields more in line with real estate returns, and without all the risk. A dramatic pull back in equity markets, such as the historic fall at the start of 2016, could alter this scenario. Indeed, as mentioned here previously, the stock market may be due for a correction. Investors have been betting that the Trump administration and Republican controlled Congress will boost infrastructure spending, cut taxes and relax regulations that negatively affect businesses. Countering this statement, the Fed is expected to raise the Federal Funds Rate, the rate at which banks and other depository institutions lend money to each other, an additional 3 times in 2017 to 1.25%. Still this remains below historic levels. As lending rates rise and, in turn, increase in Treasuries, demand for investment property shall wane. My observation is that investors have in fact have become more cautious recently. In addition to concerns of rising rates, there is increased skepticism of the level of property valuations. Investors will continue to scour the market for deals and have a preference for well located commercial real estate with sound fundamentals. A steady flow of 1031 exchange investors will continue to permeate the market in 2017 and specific asset classes such as industrial real estate shall remain strong. Investors should continue to keep a close eye on the direction of interest rates.

Buyers of commercial properties by end users will be less skittish than investors. In my August 17th blog post, I referenced several economic indicators that were positive. This remains the case today. Indeed most economic forecasters see faster growth ahead: unemployment is low, albeit with stubbornly high numbers of workers remaining on the sidelines, GDP is up, consumer confidence (at a 13-year high in December) and spending is rising. The 2016 holiday sales increased 4.9% over last year – the largest increase in a decade. I have continued to see a correlation between the direction of the economy and commercial real estate fundamentals. So with a stronger economy, we will continue to see increasing demand by end users searching for properties to purchase. Similar to the residential market, there is generally limited inventory of properties for end users. This dynamic will continue through 2017. If you are an end user seeking to acquire property to accommodate your facility requirements, pounce on opportunities that are a good fit. Interest rates, while having increased about 50 basis points, remain at historically low levels enabling a compelling reason to own versus leasing space.

Please contact me to sort out and find the best solution to your specific commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.

*Source: 11/23/16 Bisnow