Hudson-based Calare Properties acquired a vacant 112,000-square-foot industrial-flex property at 15-21 University Road in Canton last month for $5.8 million, responding to demand for distribution space close to population centers.
Demand for industrial space is rising. Capital is looking for promising investments. Will it translate into a breakout year in 2018 for construction of new warehouse and distribution facilities in Greater Boston?
There’s already 600,000 square feet of new construction earmarked for future light manufacturing or warehouse-distribution uses under way in Greater Boston, according to the latest data from Newmark Knight Frank.
The vacancy rate has dropped below 10 percent for all industrial properties in the 71-million-square-foot Greater Boston market, Transwestern Consulting Group reports. Commercial real estate brokers and developers say more space is needed at a time when demand for advanced manufacturing and especially warehouse distribution space is surging.
“There are a lot of people looking at (new construction) and trying to figure this all out,” said J.R. McDonald, an executive managing director at Newmark Knight Frank in Boston. “Demand for space is going to remain strong in 2018, so you would expect more (construction).”
Still, McDonald and other industry experts caution that as strong as the industrial market may appear, there are still huge challenges facing those who would build here.
Eye-Opening Costs Remain A Concern
Chief among those challenges is the high cost of land and cost of construction, which has been rising sharply in recent years.
Austin Smith, senior vice president of Colliers International in Boston, said one industrial client recently took a look at constructing new space for itself in the Boston area, expecting that final bids would come in at around $80 to $100 per square foot. Instead, the eye-opening, all-in bids were in the $150 range.
“They were looking to build new, but building was just not feasible for them,” Smith said. “Rising costs are going to significantly constrict construction in coming years.”
Others are more optimistic, pointing to recent or ongoing new construction across the region, such as Campanelli Companies’ over 400,000-square-foot expansion of its warehouse capacity at the Campanelli Business Park in Bellingham and Alnylam Pharmaceuticals Inc.’s new 200,000-square-foot manufacturing facility in Norton.
Calare Properties Managing Director Charles Nolfi and CEO William Manley are convinced the market is ripe for new construction, though they certainly don’t discount the cost challenges associated with building in eastern Massachusetts.
“There’s unprecedented demand,” said Nolfi, noting the rise of e-commerce firms including Amazon demanding ever more warehouse space for distribution purposes and advancing manufacturing firms looking for space. “Most quality space is already spoken for.”
As a result, Manley said Hudson-based Calare has tentative plans to build new light manufacturing space in the North Shore area and is looking for opportunities to build industrial facilities elsewhere, perhaps on a speculative basis. He declined to provide details or locations.
Calare has experienced firsthand how hot the industrial market is in Greater Boston. In late November, it sold a class A, 119,000-square-foot warehouse and office facility at 301 Page St. in Stoughton for $12 million, after having acquired the property in March 2016 for $8 million. The property is leased to Boston Interiors as an office, retail and distribution facility.
Demand for warehouse space is particularly strong in the Boston area, with vacancy rates hovering in the 5.5 to 6 percent range in urban areas near Boston and a little higher in the Route 128 and I-495 submarkets. Class A warehouse rentals are now fetching around $20 and up per square foot in the immediate Boston area, and around $7 to $8 per square foot in suburban markets, according to various industry reports.
As a result of low vacancy rates and strong rents, there’s been a “significant increase” in capital chasing good deals, primarily from institutional investors.
“The money is pushing for it,” said Frank Petz, head of capital markets for JLL in New England. Still, like others, Petz warned that even institutional investors balk at new construction if costs are too high. “It’s not easy to build in these parts,” he said.
While most attention centers on the high demand for quality warehouse space, Collier International’s Smith said the “sleeper category” within the market is light manufacturing, driven by all types of firms, from food processors like soup-maker Kettle Cuisine in Lynn to pharmaceutical manufacturing. The expansion of so-called advanced manufacturing, or manufacturing processes that rely heavily on computers and robotics, is also fueling more demand for light manufacturing space, Smith said.
“Most people don’t realize that manufacturing in Massachusetts is alive and well,” Smith said. “It’s doing quite well.”
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