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The Shrinking Greater Boston Industrial Base

29 Jan
The Greater Boston market for industrial space is super tight. Overall vacancy rate is just 7.6% at end of the 4th quarter (Source: CoStar Group). I don’t see this changing very much even with an economic downturn. Sure, in such weakened economic environments demand falls off, but I do not foresee an appreciable increase on the supply side in such circumstance.

The main reason is that land in Greater Boston is just too expensive to support industrial uses. Industrial properties have been re-purposed for other higher and better uses such as multi-family, office, retail or bio-tech lab space development.  Since 2013 Suffolk County, essentially Boston, shed 1 million square feet of industrial space (Source: CoStar) or 5% of the total industrial base (Source: Boston Globe, John Chesto 10/15/18 article).

Two examples of this are (aka “The Linx”) and the former Boston Globe printing facility at 135 William T. Morrissey Blvd in Dorchester. In the case of the Linx, this former Verizon garage building was converted into a multi-tenant bio-tech lab building by Boylston Properties. After a very successful and rapid lease-up campaign, this 185,000 sf property was subsequently sold for $154m last year, sending shock waves through the commercial real estate industry. The Boston Globe property has been master planned for a makeover into commercial, lab, and office space by the Nordblom Company.

Another cause for tightening supply of industrial space is the paradigm shift of the retail industry to e-commerce vs. bricks and mortar stores. E-commerce companies increasingly require distribution facilities in very close proximity to heavily populated metro areas to facilitate instant delivery of products to the consumer, and they are willing to pay higher prices for it.

As e-commerce is still in its early stages, demand from this sector for so-called last mile warehouses will not fall off. We are even witnessing a return to multi-story warehouses in highly populated cities to accommodate e-commerce and their need for quick turn from transaction to the consumer. For example, Bridge Development Partners and DH Property Holdings have joined forces to acquire an 18-acre site in Brooklyn, where they plan to a build a four-story, 1.3M SF distribution center, the largest multistory warehouse in the United States (Source 1/11/19 Bisnow). While this will be a state of the art distribution facility with 38 ft. and 28 ft. clearance and truck access to all 4 levels, multi-story warehouse space was unheard of until just recently. Expect this type of investment in existing multi-story warehouses to occur in Boston as well.

As a result of the surge in e-commerce demand and re-purposing of industrial properties, prices have skyrocketed for industrial space close to metro areas and this has spread to the Route 128 area as well. A 40,000 sf industrial building in Braintree is reportedly under agreement to be purchased for $120 psf. This type of pricing is approaching cost for new construction which has historically been the path of last resort for users of industrial space.

Traditional wholesalers and manufacturers that are located in inner city areas are being forced to relocate further away and beyond the Route 128 area to Route 495. Experienced developers such as the Campanelli Companies and National Development have been ahead of this trend and have been buying empty buildings and even building ground up on spec, i.e., without having tenants in hand. However, tenants with requirements for new space will benefit from the new construction as developers recognize the need for high clear heights, ESFR sprinkler systems, wide bay spacing, energy efficient LED lighting and large truck apron to accommodate automation and high tech material handling equipment that tenants require.

As a professional, full service commercial real estate firm, we specialize in industrial property leasing and sales. See our Transactions page to see some of the work we have done. Please contact me to review your specific real estate requirements and assist with navigating this complicated industrial property landscape to find the ideal solution in order for your business to succeed.

Warren Brown, Boston Commercial Properties, Inc.

2019 Forecast: Dark Clouds Forming

09 Jan

original photo by fiona graeme cook, boston commercial properties, dark clouds1/8/19

The risks to the downside for the commercial real estate market are currently outweighing the upside as negative indicators have increased. The first obvious concern is the return of high volatility with selling pressure in the equity markets. For 2018, the Dow was at -5.97%, S&P -6.24% and NASDAQ -4.38%. The S&P closed the year near bear market territory from recent highs. Now stock market sell offs are not necessarily an indicator of future economic slowdown, but the shock may lead to one in the near future as other economic factors mount. Current volatility may be similar to that of 2016, and we are just not used to the current roller coaster ride as the market in 2017 was so benign. We may be experiencing asset repricing as markets may have gotten ahead of accurate valuations. If assets do reprice to depressed levels, the impact on the psychology of investors will weigh on the overall economy.

Further, as Neil Irwin mentioned in his Boston Globe column on 12/25/18: “The sense of doom & gloom and pessimism has gotten ahead of the facts on the ground….[the economy may be] returning to old new normal of moderate economic growth that was completely normal from 2010 to 2017. ” However, there seems to be a “crisis in confidence.” On that latter note, there is a palpable sense of declining confidence in the political realm. Investment bank RBC Capital markets surveyed big investors in December about what kept them up at night,and Trump topped the list. Interest rates and trade war ranked second & third (Reference: 1/2/19 Boston Globe). Indeed, the irrational tweeting by the President along with misguided statements made by Treasury Secretary Mnuchin rocked equity markets at year end and left investors with a sense of a vacuum of leadership in the Executive branch which is not a good thing for financial markets. Equity markets do not like uncertainty and the uncertain political climate along with economic conditions will continue to weigh investors minds.

Other concerns include an inverted yield curve which has frequently in the past preceded recessions, future rate hikes by the Federal Reserve, Fed unwinding of its bond purchase program which tightens money supply, corporate earnings (e.g. Apple), slowing Chinese economy, trade war concerns, continuing U.S. government shutdown, weak ISM Manufacturing Index report, slowing service sector, unstable Brexit process, slowing European economies and record high corporate debt as companies feasted on historically low interest rates to finance expansion. Corporations may now look to correct their balance sheets, seek to trim expenses and cut back on hiring. On the trade war front, mark your calendar for March 1st which is the deadline for the U.S. and China to resolve trade differences.

In spite of concern of political leadership and the aforementioned indicators, other economic fundamentals appear to be very strong. Mainly employment is very a strong – a major factor of the economy. The December unemployment report indicated 312,000 jobs created which is a very strong number and far exceeded expectations but wages increased a strong 3.2%. While inflation is still under control, with rising wages, expect the Federal reserve to continue tightening short term interest rates which will have a negative effect on the mood on Wall Street and create a drag on the economy.

Let’s take a look at the current state of the residential market which is a main driver of the domestic economy. Locally, the Warren Group just reported pretty strong conditions. November showed both sale prices and sales volume at all time highs for the month of November. The median sale price for a single family home in Massachusetts is $385,000. But sale price increases are rising at a slower rate than earlier in 2018. With continued low levels of inventory, prices are reaching a point where many buyers cannot afford to buy. The condo market is experiencing increase in supply. In Boston, luxury home sales actually fell 4.7% in Q3 to an average of sale price of $3.6m (Source: The Warren Group). Anecdotally, my colleagues in the residential real estate industry report that homes are sitting on the market longer with fewer offers received.

In New York City, a correction has been underway for a while as in some cases, sellers have taken a haircut of 30%. The median price for a Manhattan apartment fell below $1m. This is the first time below this level since 2015 (Source: The Warren Group).

The residential market will likely begin to feel softer as more homes are put on the market. This will lessen the rise in sale prices and stabilize the market. The reality is the residential real estate market has been extremely tight for an extended period of time, is not sustainable and is cyclical. Expect supply to increase and softening in the residential real estate market with gradual decrease in median sale prices. As the residential market softens, expect the economy to slow given the huge impact the residential market has on the overall U.S. economy.

As with the economy and residential real estate market, the commercial real estate sector is cyclical, an eventual downturn is inevitable and expect commercial real estate to begin to soften this year. As interest rates rise, capitalization rates will rise thus lowering overall valuations. As companies seek to clean up their balance sheets, expect belt tightening, restraint on expansions and reduction of head counts. This will curtail demand for new space overall. Vacancy rates will begin to rise and the recent trend of lease rate increases will flatten out. The greater Boston economy has proven to be resilient with diverse industries including defense, biotech, enterprise, cyber security, fintech, education and healthcare. This resiliency will soften the blow of any downturn locally but weakening conditions will develop nevertheless.

Contact me to further discuss any questions and to review your specific space requirements to find the best solution to your needs and to provide a steady hand during turbulent times.

Warren Brown, President, Boston Commercial Properties, Inc.

Will WeWork Conquer The Real Estate Market?

28 Feb

Actually, WeWork wants to do more than just conquer the real estate market. The ambitious plans for this rapidly growing company includes expanding into residential real estate, high end fitness, and even education. A recent NY Times article describes the enthusiastic goals of  WeWork’s founder. One has to wonder if  WeWork will become the Amazon of the real estate market and change the paradigm of how companies of all sizes use space. This company is a real global landlord to contend with – 2017 revenues were $900m and it will continue to grow in 2018 as they plan on expanding from over 200 locations to 400.

By capturing the imagination of entrepreneurial as well as Fortune 500 companies, and fulfilling the desires of how millennials view the work environment, WeWork appears to have revolutionized how we work. Rather than occupying staid, plain, vanilla office buildings, at WeWork, employers now have the option to lease flexible, fun and creative work environments with chic decor, with many amenities, where their employees enjoy working, never have to leave the office, and are inspired as a result.

The WeWork concept includes flexible lease terms, comfortable, and creative spaces where the theme of the decor and amenities may change depending upon the location. WeWork offers facilities in hip downtown locations around the world including 303 locations in 62 cities. Amenities include free flowing beer, piped in music, fitness facilities, social networking venues and more. An elementary school and wave pool for inland surfing are other concepts currently being developed.

But will WeWork succeed in becoming a game-changer in how we lease space? While WeWork definitely serves a niche – and a growing one at that – there will always be a place for more traditional space alternatives. As an example, for now it appears that WeWork does not aspire to penetrate suburban areas. Leave other experienced real estate developers that are increasingly adding their own amenities to office parks for that. There will also continue to be a role for traditional landlords in downtown markets. For example, law firms, insurance companies and financial service companies that occupy large blocks of space for a lengthy period of time will need their own corporate identity, perhaps their own office tower, and with their own unique corporate image. As companies see the expanding trend of younger talent seeking employment in urban environments, this fast growing company is quickly becoming an 800 pound gorilla to contend with in downtown markets.

Not to be outdone, many upstart co-work facilities have also been expanding in downtown areas. Knotel in New York, the Cambridge Innovation Center, WorkBar and others in Boston are seeking to disrupt how we use space. Given this trend, we should be cognizant of the possibility of over saturation of the co-work concept.

Is the co-work concept right for your business? Contact me to further discuss this and to review your specific space requirements to find the best solution to your commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.