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Signs of softening have started to appear in Greater Boston’s industrial and warehouse property market. Vacancy rates grew in the third quarter for the first time in eight quarters, according to a Newmark report. Additional supply is expected to hit the market, but that doesn’t mean it’s time to ring the industrial alarm bell for 2023. 

This is still very much a strong sector, experts say.  

“We’re still expecting there to be positive, healthy growth trends in 2023,” said Elizabeth Berthelette, director of research at Newmark’s Boston office. “We’ll see some upward pressure on vacancies, but we’re confident there’s enough demand to absorb the new supply. It may just be that we’re sort of mismatched in terms of timing.” 

The current 3.3 percent vacancy rate across Greater Boston’s nearly 218 million square-foot industrial real estate inventory remains below pre-pandemic levels and even the 3.8 percent rate seen this time last year. The vacancy rate uptick is expected to continue as more speculative warehouse space – that is, warehouses built without a tenant lined up – hits the market.  

But Berthelette doesn’t see this supply-demand shift throwing the local industrial market into disarray.  

“The demand is there to continue to absorb that in the next 12 to 18 months,” she said before adding a caveat in light of economic uncertainty: “That is predicated on how deep this recession will be – if and when it kicks off – and all of those factors. So, there are some downside risks that we’re still monitoring, but, overall, the market is still pretty healthy.” 

Asking Rents Set New Record 

Rising vacancy rates don’t necessarily mean deals are in store for potential tenants heading into the new year. Average asking rents ended the third quarter at $13.88 per square foot, a historical high.  

The trend is driven by demand for “quality” – often new construction – warehouse and distribution space, according to Newmark’s report. Average rents approaching $16 per square foot for class A warehouse and industrial space is up more than 30 percent from a year ago.  

While demand for e-commerce distribution space in the area may not be as high as it was in the past, local industrial landlords can likely still benefit given the nature of the region’s tenant mix.  

Greystar is making its first inroads into the local logistics market, recently breaking ground on its first Massachusetts industrial development. The 413,000-square-foot distribution center at 798 North Bedford St. in East Bridgewater is scheduled for completion in late 2023. Image courtesy of Greystar

“I think the theme coming out of the COVID-induced supply chain issues is for users to continue to shorten their supply chains moving forward,” said Andrew Iglowski, the managing partner and co-founder of Boston-based industrial investment and development firm The Seyon Group. “While the U.S. consumer will be under further strain in 2023, thus potentially dampening e-commerce demand, there is likely to be increased user demand across other distribution and manufacturing sectors such as robotics, automation, defense, and clean energy tech.”  

Those factors disproportionately benefit land-constrained markets with diverse tenant types such as Boston, Iglowski added. 

Development Pushed to Outer Suburbs  

Industrial development trends heading into the new year generally favor lab and biomanufacturing within Route 128. This is what drives a lot of the recent string of office-to-lab conversions, Berthelette said. Larger space requirements and more warehouse development pushed further beyond the urban core and into markets along Interstate 495 and beyond, including Worcester County.  

As for space requirements heading into the year, there remains robust demand for anything 200,000 square feet or less, said Doug Rodenstein, a vice president on CBRE’s industrial advisory and transaction services team. While larger space needs above 350,000 square feet aren’t as prevalent as recent years, there is now an “influx of users” in the market looking for larger spaces. 

Rodenstein declined to name specific tenants but noted it could put even further pressure on rents, as these larger needs would take bigger warehouses off the market and drive up prices. 

“When you don’t have a big competitive set, that’s when you really have the opportunity to drive rents,” Rodenstein said. “We hope that some of these bigger tenants take down some of these larger chunks of space and you see a little bit more of that in the bigger block space and we can continue to push rents there as well.” 

On the new construction side, rising interest rates are likely to dampen the drive to move ahead on projects that aren’t already underway in the new year. 

But that also means another lesson of supply and demand. Less warehouse and industrial supply flooding the market in the near-term means driving up rents for what product does exist.  

“I think the impact of higher interest rates and elevated construction costs mean that we’ll continue to see strong rent growth for existing facilities despite a moderating pace of absorption on new construction,” Iglowski said. “From an investment perspective, valuations have decreased in the second half of 2022 due to the interest rate environment, but the amount of liquidity in the market coupled with the underlying leasing fundamentals should keep a lid on cap rates in 2023.”