Vacancy is falling and rents are rising both in Boston’s 130.5-million-square-foot warehouse/distribution market and its 64.6-million-square-foot Flex/R&D market. While research and development and high-tech manufacturing are an important part of the Boston area’s economic base, Boston is not a distribution center and its warehouse/distribution space is generally oriented toward local needs. This segment of the market, along with manufacturing space, was hit hard by the Great Recession.
Reis reports a second quarter 2012 vacancy rate of 11.9% for warehouse/ distribution space in Boston, same as a quarter earlier and down 30 basis points from one year earlier. The rate has seen little change over the past two years, while the U.S. rate for this property type has fallen more significantly to 12.7%. For Flex/R&D space, Reis reports a vacancy rate of 16.5% in Boston, down 30 basis points for the quarter alone and 50 from a year earlier. The national average for this property type is lower at 14.7%, and is down 80 basis points year-over-year. While Boston’s industrial vacancy rates are high, it is an older market and a significant share of the vacant space may be obsolete.
“Many companies continued to shed space during the quarter,” Cushman & Wakefield reported, leading to a 130 basis-point increase in the vacancy rate despite higher leasing. This source reports a vacancy rate of 18.5% for 186 million square feet of all types of industrial space. Cassidy Turley reports a vacancy rate of 14.3% for industrial space in Boston, unchanged from the prior quarter, but down 80 basis points from a year earlier. Reis predicts the warehouse/distribution vacancy rate will edge down another 20 basis points to 11.7% by the end of 2012, and then edge down 20 to 30 basis points per-year until reaching 10.8% in 2016. For Flex/R&D space, this source predicts the vacancy rate will rise to 16.8% at year-end 2012, before resuming a slow descent toward 15.8% in 2016.
SUPPLY AND DEMAND
Reis reports solidly positive demand for industrial space in Metro Boston in 2012. Following 515,000 square feet of negative net absorption in 2010 and 2011 combined, Boston’s warehouse/ distribution space recorded positive 492,000 square feet in the first half of 2012, including plus 117,000 in the second quarter. Increased demand has been associated with a revival of new supply. While just 129,000 square feet of space was added in 2010 and 2011 combined, more than 900,000 square feet has completed construction in the first half of 2012. This includes 252,000 added in the first quarter and 650,000 in June.
Net absorption for Boston’s Flex/R&D space totaled minus 769,000 square feet in 2010, partially reversed by a reading of plus 429,000 in 2011. The first half of 2012 saw 417,000 square feet of net absorption, including plus 203,000 square feet during the second quarter. No new space has completed recently, but nearly 1.1 million square feet is under construction in three projects. All are in the Central submarket, in Cambridge and the City of Boston, whereas all the recently completed and under construction warehouse/distribution space is in the southern suburbs.
Reis predicts Flex/R&D net absorption will be negative in the second half of 2012, but otherwise predicts solidly if unspectacularly positive demand for both types of space, generally less than 1 million square feet each year. This will be associated with a revival of new supply, particularly starting in 2013, slowing the decrease in vacancy. Net absorption and new supply will go hand in hand in part because so many projects are built-to-suit and single tenant. Three of the six projects under construction carry the name of a tenant. Both speculative development and expansion into existing space, remain limited in metro Boston, and have been since the tech bust after the year 2000.
Boston’s industrial concessions are easing, causing effective rents to rise following steep losses in 2010. For warehouse/ distribution space the average asking rent rose 0.3% in the second quarter to $6.26 psf, with the average effective rent up 0.8% to $5.32 psf. The year-over-year gains are 1.0% and 3.3%, respectively. The U.S. effective average for this type of space is up 0.5% from a year earlier at $4.23 psf. Reis predicts the asking and effective averages will rise 1.8% and 2.9% in 2012, with a strong increase of 4.3% asking and 5.2% effective forecast for 2013.
For Flex/R&D space, Reis reports the average asking rent rose 0.3% in the second quarter to $11.96, with the average effective rent up 0.6% to $10.09 psf. The year-over-year increases were 1.8% and 2.4%, respectively, while in the U.S. as a whole Flex/R&D rents are barely changed from a year earlier, despite small gains in the first half of 2012. Reis predicts a weak second half of 2012 for Flex/R&D rents in Boston, limiting the annual increase for the year to 2.5% asking and 2.0% effective. The effective average, however, is forecast to rise by 4.3% to 4.7% each year from 2013 to 2016.
“Asking rents witnessed a 2.5% decline year-over-year and remained stable during the second quarter at $6.19 psf (NNN), overall,” according to Cushman & Wakefield. “The sharpest declines in asking rents took place in the manufacturing sector which saw a decline of over 6.0% since this time last year.” Cassidy Turley reports an asking rent of $4.19 psf for metro Boston, down 1.2% from a quarter earlier and 1.9% from a year earlier. According to Reis Transaction Analytics, meanwhile, single property industrial investment sales remained in the doldrums in the second quarter, with just nine for $116.2 million at a mean price of $90 psf. The sales total for the first half of 2012 was $156 million; more than $2 billion in industrial property had been sold here in both 2005 and 2006.