Many ‘unknowns’

While its fundamentals are nowhere near as disturbing as the office sector has been in 2002, industrial real estate is nonetheless showing signs of wear from the prolonged economic slump, with third-quarter figures indicating deteriorating conditions and several commercial real estate observers reporting laggard momentum in most Bay State submarkets.

“The phone is not ringing off the wall,” said Cathy Minnerly, an industrial specialist with Cushman & Wakefield. While there have been a few deals completed of late, and Minnerly said there are several more in the works, she acknowledged it has been a difficult 2002 for industrial properties, with few of the blockbuster deals that had been recorded last year.

“There are a lot of unknowns, and when there are unknowns, people tend to hesitate with their business plans,” said Minnerly, who estimated that industrial activity is off by about two-thirds of what it would normally be this time of year. On the flip side, Minnerly said the companies that are circulating the market are likely going to wind up doing a deal, with most of them good-credit companies seriously in need of finding space vs. tire kickers out looking for a bargain. Cushman & Wakefield is seeing solid traffic for the 160,000 square feet currently available at 275 John Hancock Blvd. in Taunton, she said, with one 60,000-square-foot agreement out for signing and another similar-sized tenant about to ink a letter of intent.

“It’s not that bad,” insisted Minnerly, who just closed an investment transaction with the sale of a 54,000-square-foot building in Taunton to New England Ice Cream for $3.4 million. Rader Properties represented the buyer, while Minnerly acted on behalf of the seller.

Richards Barry Joyce & Partners principal John C. Wilson said he is also not especially worried by the hesitancy among industrial users to expand their operations. “It continues to be one of the brightest spots in the state today,” said Wilson, noting that industrial rents have remained essentially unmoved even as vacancies have increased. The lack of land for new construction in Eastern Massachusetts ensures that inventory will not be overbuilt, said Wilson. “The industrial market has always been slow and steady,” he said, with few of the dramatic pricing swings seen in the office arena. “Rents didn’t double in one year for industrial space,” he noted.

Insignia/ESG principal Steve Clancy delivered a similar outlook. Demand is definitely off its normal pace, he acknowledged, but the supply side has been kept well in check. In the market south of Boston, where the bulk of industrial and distribution inventory is located, there are only about five current options above 100,000 square feet, said Clancy. The largest hole is likely to come from the disposition of the Ames Department Store warehouse in Mansfield, a 450,000-square-foot facility that the crumbling company itself is selling as part of bankruptcy liquidation proceedings.

“It’s good, clear space,” said Minnerly, who predicted the centrally located property could fetch as much as $30 per square foot even vacant. The property will be more attractive to developers and investors vs. a straight user, Minnerly predicted.

‘Realistic Market’

Still, Ames will have to dispose of the hulking property in the teeth of a chilling economic wind sweeping over the region, with some fearful that a bad holiday shopping season could particularly impact the Bay State’s industrial users, many of whom are consumer-related retailers. According to third-quarter figures from Spaulding & Slye Colliers, the 56 million-square-foot market had negative net absorption of 269,000 square feet during the summer months, ballooning the year’s negative absorption to 725,000 square feet.

Interestingly, the problems seem to be concentrated in certain areas, with Spaulding & Slye indicating that the South market alone has negative absorption of 485,000 square feet for the year, yet the nearby Interstate 495 South submarket is up by 238,000 square feet to date. I-495 North is the only other submarket with positive absorption for the year, registering in the black by 67,000 square feet despite a minimal negative absorption level of 8,500 square feet for the third quarter.

As a result of the recent troubles, the industrial market vacancy rate rose from 10.7 percent at midyear to 11.4 percent at present, while the availability rate increased from 16.7 percent to 17.2 percent, according to the Spaulding & Slye report.

Richards Barry Joyce & Partners indicated that the vacancy rate actually decreased slightly in the third quarter, from 10.6 percent at mid-year to 10.1 percent, but did show a rise in availability, from 13.9 percent to 14.8 percent.

One bothersome aspect of the industrial market is that it could result in the second straight fourth quarter in which activity has been slow, with Minnerly noting that the final three months are usually among the busiest. Regardless, she stressed that conditions could be even worse, anticipating that it will wind up being a “decent year” overall.

“There are still deals being done,” she said. “It’s just a more realistic market.”

Industrial Market in Balance But Sluggish in Third Quarter

by Banker & Tradesman time to read: 3 min