Conditions might not be as dire as that found in the struggling office market, but the economic downturn does finally appear to be taking its toll on industrial real estate, with mid-year 2002 numbers from Spaulding & Slye Colliers indicating a significant erosion of that sector in recent months.
Net absorption at mid-year was in the red by an alarming 415,495 square feet, increasing the overall industrial vacancy rate to 10.7 percent and the availability rate to 16.7 percent. That compares to an 8.1 percent vacancy mark and 14.2 percent availability in the 56.2 million-square-foot market at year-end 2001.
Only one of the seven submarkets covered in the Spaulding & Slye survey had positive absorption for the second quarter, with the Route 495/North area up 78,056 square feet. The hardest-hit region was the North market, which had negative absorption of 166,191 square feet. Another six-digit loss occurred in the South submarket, where the largest concentration of industrial space is located. That 20.5 million-square-foot market suffered negative absorption of 169,834, the overview said.
The disappointing figures appeared to catch some observers off guard, with many brokers reporting brisk activity of late. Robert Nahigian, president of Auburndale Realty Corp., said he has seen interest in industrial space from both the leasing and investment perspectives.
“There is good industrial demand out there,” Nahigian insisted last week. “I think it is pretty healthy right now.”
That is particularly true when compared to the office market. By Spaulding & Slye’s estimates, for example, there is just over 6 million square feet of vacant industrial supply in Greater Boston, whereas the office market has 14.9 million square feet vacant. The chasm is even greater when sublease space is thrown into the equation, with 29.7 million square feet of office space available vs. 9.3 million square feet of available industrial product.
The dichotomy between the two sectors can be attributed to increased development of office space in recent years at the same time that many industrial buildings have been demolished to make way for other uses. Meanwhile, most new industrial or distribution facilities have come in the form of build-to-suit projects, with little speculative activity that would provide additional leasing opportunities.
Along those lines, there was one new speculative industrial project kicked off in the first half of 2002, as the Maggiore Cos. began work on the Grove Street Business Center in Franklin. The 23-acre site will ultimately yield three buildings with 222,000 square feet of space, most of which will be targeted at small- and mid-sized light manufacturers, service sales companies and distribution operations.
Performing Well
Beyond that undertaking, however, most of the construction news in the industrial market has again come from build-to-suit projects. The largest unveiled in the first half is a 750,000-square-foot distribution center being built in Taunton on behalf of Jordan’s Furniture. Condyne Development LLC of Avon is constructing the building on behalf of Jordan’s, and also began work on a 181,000-square-foot distribution facility for New England Pottery, also in Taunton.
Klemmer Assoc. principal Greg Klemmer is among those who maintain the industrial market is performing well in the difficult economy. In his mid-year report to the National Association of Industrial and Office Properties, Klemmer noted that rental rates for industrial space are only off slightly, from an average per-square-foot high of $7 triple net to $6.80 at present. Office rents, by comparison, are down as much as 25 percent to 30 percent since their peak in mid-2000.
“The industrial market is not at all like the office market,” Nahigian concurred. “We’re not hurting anywhere near as bad as they are.”
According to Klemmer, most observers had anticipated a larger drop-off in industrial rents as the recession entered its second year, but strong consumer spending has enabled retail distributors to thrive and manufacturers are busy replacing inventory after slowing their production numbers last year. Beyond the build-to-suit projects, other significant leases in the first six months included a 230,000-square-foot least by Home Depot and a 221,000-square-foot lease by Reebok, both in Norwood, as well as a 175,000-square-foot lease by Mykrolis for its high-tech manufacturing operation in Billerica.
Partly due to the struggles of the office market, sales of industrial buildings have also been encouraging in 2002. As with other asset classes, the biggest challenge has been identifying investment opportunities for such properties, especially considering the erosion of the industrial supply in recent years. Nahigian said he has been surprised by the amount of interest he has seen for a 32,000-square-foot industrial building Auburndale Realty is marketing in Walpole, with seven showings in one six-day period.
Other buildings that have already changed hands include 33 Industrial Ave. in Wilmington, acquired by a biotechnology company for $1.45 million. In Ayer, Principal Life Insurance Co. has just closed on 3 Nemco Way, a 113,000-square-foot warehouse facility purchased by Equity Industrial Partners. In Canton, Liberty Properties purchased 25 John Road, buying the 250,000-square-foot manufacturing building for $14 million. It is located in the Canton Commerce Center.