Despite a torpid beginning, the Greater Boston industrial real estate market enjoyed a solid first half of 2000, according to mid-year figures released last week by Spaulding & Slye Colliers. The overall vacancy rate for industrial buildings dropped 2 percent to 5.5 percent, prompting a slight rise in rental rates.

Most of the leasing activity took place during the last three months, with all but 45,000 square feet of the net absorption of 1.36 million square feet occurring in the second quarter. The recent surge has put the market on pace to surpass a healthy 1999, which saw 2.4 million square feet of net absorption.

“These are unprecedented times,” said Scott R. Hughes, president of Hughes Properties of Framingham. “If you are an owner of industrial [buildings] right now, you are in a good position.”

Increasingly, however, that club is seeing its membership dwindle, with Hughes and other brokers noting that the better-located industrial properties are being scooped up and converted to office space, or even to house telecommunications uses known as switch hotels. Over the past year alone, prime industrial sites in Allston, Watertown and Natick have been taken off the market for conversion to a telecommunications function, while prime land sites that might have been developed as industrial buildings are also being captured for more upscale uses.

“It’s probably decreasing every day right now,” Hughes said of the industrial supply. “It’s a tough situation not only for developers, but also for tenants looking for space.”

The tightest market at present can be found in the Northwest sector, including Billerica and Burlington, with a vacancy of just 0.2 percent. There is a 0.6 percent vacancy in the Route 128/Massachusetts Turnpike market, reflecting the strong concentration on office space, while the third hardest market to find space is in the North. There, communities such as Peabody, Wilmington and Woburn have a vacancy of 2.3 percent, or about 300,000 square feet of supply.

Of the 49.2 million-square-foot industrial market in Greater Boston, the highest vacancies are found in the Interstate 495/North region, with a 14.7 percent vacancy rate reflecting 1.34 million square feet of available supply. The jump in vacancies follows negative absorption for the first half of the year of 269,000 square feet.

Even with that pocket of space available, broker Greg Klemmer of Klemmer Assoc. said there remains a serious need for industrial supply, maintaining that much of what is available is obsolete for today’s modern distribution and manufacturing operations. Because of that, he said, companies are being pushed farther afield than in the past, with the South and Western suburbs faring the best. Cheaper land is driving an explosion of activity in the South market, for example, which at 17.6 million square feet is almost double the size of the next largest submarket.

Flying South
Interstate 495/South has also seen a migration during the past few years, said Klemmer, who cited more palatable land costs in that area, as well as close proximity to both Interstates 95 and 495 and markets in Rhode Island and Connecticut. Taunton’s Myles Standish Industrial Park has been among one of the more successful ventures, Klemmer said. Meanwhile, Lincoln Property Co. is reportedly seeing a stream of tenants at its two industrial buildings under construction in the Franklin Industrial Park.

“They’ve seen a tremendous amount of activity,” Klemmer said of Myles Standish, adding that the Devens Commerce Center in Central Massachusetts has also fared well on the industrial front. Most recently, for example, Equity Industrial reportedly signed WebVan, an online grocery distributor, to occupy several hundred thousand square feet at a Devens building that Equity was selected to construct. In addition, American Semiconductor is said to be planning a significant manufacturing operation at the former army base.

The Worcester area has also benefited from tight industrial supply, Hughes said. Home Depot reportedly has tied up a 45-acre site on the Shrewsbury line to develop a distribution center.

Other significant 2000 investment deals for industrial space included Teradyne’s $4 million acquisition of 1623 Turnpike St. in Stoughton. The company will use the 137,000-square-foot facility for manufacturing. Meanwhile, WRT Management of Boston acquired a three-building industrial portfolio totaling 230,000 square feet. The properties were located in West Boylston, Worcester and Canton. In Westborough, Whitehall Industrial Properties paid $5.4 million for 25 Otis St. The 106,000-square-foot warehouse/distribution building is leased to Host Marriott.

Interestingly, even with the tightened supply of industrial space, rents have risen far slower than that seen in the office market. While some markets such as Waltham are achieving upwards of $9 per square foot, the suburban average is currently $6.67 per square foot, up just 60 cents from the average seen two years ago.

“The $7 rent barrier has been a tough one to crack,” said Hughes, who cited the need by companies to keep production costs down as a main reason there has not been as great an appreciation of industrial rents as one might have thought. Nonetheless, if present conditions continue, Hughes said industrial rents may begin to rise more quickly.

Klemmer agreed, adding that the impact of the telecommunications industry is still being assessed. The industrial sales market does appear to be active, he said, with transactions often occurring in a matter of weeks versus months.

“It has been busy,” Klemmer said. “At the end of the day, we should have a pretty good year.”