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In the case of industrial real estate space in Greater Boston, executives continue to be awed by the sector’s transformation. But for retail real estate, analysts wonder when the carnage will end, as e-commerce firms continue to bite into the sales of large, brick-and-mortar retailers.
Call it a tale of two industries – one that’s largely booming at the expense of the other.
In the case of industrial real estate space in Greater Boston, executives continue to be awed by the sector’s transformation. Once limping along with aging warehouses and factories sitting vacant across the region, the market has entered a vibrant and fast-growing phase, with e-commerce firms and light manufacturers demanding ever more space.
But for retail real estate, analysts wonder when the carnage will end, as e-commerce firms continue to bite into the sales of large, brick-and-mortar retailers, forcing many of the latter to close or downsize stores and prompting large retail property owners to scramble for new types of tenants or entirely new redevelopment concepts.
“It’s all about logistics and distribution,” Ovar Osvold, a vice president at Colliers International, said of “the Amazon effect,” where e-retailers demand ever more warehouses for logistics and distribution purposes, and the corresponding slump in the brick-and-mortar retail market. “The fact is Millennials are moving away from big-box stores. As a Millennial, I can say I haven’t been in a big-box store in three years.”
And looking ahead to 2020, most commercial real estate officials see more of the same.
Industrial Growth Marches Beyond I-495
For CBRE Vice President Rachel Marks, one of the more telling moments of the past year was Medline Industries’ official commitment for 800,000 square feet of new warehouse space at a new business park being developed by Campanelli in Uxbridge.
“There used to be a time when [Interstate] 495 was considered the outer limits of where you would go or build,” she said. “That’s no longer the case. They’re now building outside 495 in Uxbridge, on the Rhode Island border. That really tells the story of how tight the market has become.”
And not just in Uxbridge. Millions of square feet of new warehouse/light industrial construction – some estimate it at more than 5 million square feet – are now underway or in the advanced planning stages in Greater Boston.
Condyne Capital Partners LLC recently broke ground on a speculative/build-to-suit business park in Norton, called BlueStar Business Park, that could ultimately include 11 buildings for potential warehouse, flex and some retail spaces. One of the first tenants to sign up: Wayfair, the Boston-based furniture e-tailer.
According to a recent third quarter report by Colliers International, the vacancy rate for the region’s overall 158.6 million square feet of industrial space is running at about 10 percent, below the vacancy rates for office space in many Greater Boston suburban submarkets. The average price per square foot for industrial space is now hovering around $10 per square foot, up from $6 a square foot since 2016.
Light Industrial Stages Revival
It’s not just warehouses and online retail tenants driving the industrial real estate market.
The light manufacturing sector – with its increasing use of sophisticated robotics and computer-assisted equipment – is also making a small comeback in Massachusetts, further boosting the demand and prices for industrial spaces and spurring new construction or major renovations.
Bill Manley, chief executive at Calare Properties, notes that Callaway Golf Co. recently finished a $40 million renovation of a Chicopee factory that’s been owned by Calare since 2011, in order to double its workforce at the site.
Meanwhile, Manley’s company recently purchased a 124,000-square-foot office building at 40 Nagog Park in Acton – and plans to knock it down and build a new ground-up facility for potential lab, light industrial or warehouse tenants.
Condyne Capital Partners LLC recently broke ground on a speculative/build-to-suit business park in Norton, called BlueStar Business Park, that could ultimately include 11 buildings for potential warehouse, flex and some retail spaces.
“Right now, industrial space is a better play than offices,” said Manley of the commercial market in general in the suburbs. “There’s plenty of room to run.”
Looking ahead to 2020, CBRE’s Marks said she sees more of the same for the industrial sector in general. “We’re very bullish on 2020 – and beyond,” she said. “The market fundamentals have just shifted so much.”
More Shrinkage for Retail Sector
A recent Worcester sale says it all: The long-suffering Greendale Mall was bought by a developer who envisions rebooting it as a “mixed-use destination.”
In Hanover, PREP Property Group this month obtained final local approval to redevelop the 48-year-old Hanover Mall as an outdoor lifestyle center including a Market Basket, a 10-screen cinema and 300 apartments.
From Woburn to western Massachusetts, other shopping centers and giant indoor malls have met similar fates in recent years, as brick-and-mortar retailers continue to take it on the chin from online e-retailers.
Robert Sheehan, vice president of research at Burlington-based Keypoint Partners, said the national retail sector in general could end 2019 with the largest number of store closures in its history – and the Boston area wasn’t spared this past year.
Among some of the store closures in eastern Massachusetts alone, for the 12 months ending in June: Sears (down 539,000 square feet), Rite Aid (down 350,000 square feet) and Fallas discount stores (down 174,000 square feet), according to Keypoint data.
A $225 million redevelopment of the 48-year-old Hanover Mall approved this month will replace the 48-year-old enclosed mall with a lifestyle center anchored by a Market Basket, a 10-screen cinema complex and 300 apartments. Image courtesy of PREP Property Group.
As bad as it looks for brick-and-mortar retail, Sheehan and others warn: Reports of the death of retail real estate in general have been greatly exaggerated. It’s just looks that way in some places, particularly at shopping centers and malls in less–populated and less–affluent areas of eastern Massachusetts and New England.
Sheehan said Greater Boston’s total 196.6 million square feet of retail inventory has remained remarkably stable in recent years, while the overall vacancy rate has only inched up, to just under 10 percent this past year.
Real Carnage, But Not in All Classes
What’s going on, say Sheehan and others, is that retail property owners are finding new types of tenants to fill vacant space, such as fitness clubs, medical clinics, entertainment venues and restaurants.
Landlords are definitely scrambling for those new tenants and lease prices have taken hits, yet many empty stores are eventually filling up, if slowly, with non-traditional tenants.
In addition, Ben Starr, a partner, broker and adviser at Atlantic Retail, noted that new retail spaces are opening, usually on ground-floor levels, in mixed-use urban projects, such as in the Seaport District in Boston, Kendall Square in Cambridge and Assembly Square in Somerville.
“They’re getting rent prices they’ve never seen before,” Starr said of landlords leasing to retail shops, restaurants and other tenants in trendy neighborhoods within trendy new developments.
Meanwhile, many suburban mixed-used projects are now sprinkling small-building retailers among new residential and office facilities, further offsetting the loss of overall retail space at shopping malls and outdoor centers.
The bottom line: There’s real carnage going on today and there’s plenty of uncertainty within retail real estate. But it’s not happening within all classes of retail.
“There is indeed a revolution going on within retail,” said Starr. “But not all of the change is bad.”
As for the 2020 outlook, Sheehan and Starr said to look for the same: An uneven performance within the overall retail sector, with big-box retailers continuing to struggle while smaller retailers, depending on their locations, filling the voids.
