One of nine buildings at the Shawmut Industrial Park in Canton involved in a recent sale to Leggat McCall Properties, 110 Shawmut Park is pictured above. Leggat is contemplating the creation of condominiums for both industrial and high-end flex tenants at the park.
Industrial real estate tenants are taking a “rational” approach in 2005, but exuberance is not part of the mix, according to veteran broker William Bailey.
“There’s caution in the market right now,” the Spaulding & Slye Colliers principal observed last week, with many firms expanding only when they win actual contracts or business to support such growth. Although midyear industrial figures released by Spaulding & Slye last week showed encouraging trends, the overall pace of leasing has been “spotty,” said Bailey, estimating that a true recovery remains between a year and 18 months away.
“Deals are being done, but it is still mostly a zero-sum game,” said Bailey, adding, “We’re going to get there, but no one is out doing cartwheels just yet.”
Any trepidation found among tenants is not being reflected by investors and developers, however, as evidenced by numerous industrial building sales and even a few speculative projects coming to the fore. Following last month’s groundbreaking of a 113,000-square-foot industrial building in Franklin by the Maggiore Cos. sans tenant, Condyne LLC is said to be considering a speculative building for a site next to the massive warehouse the firm constructed in 2002 in Taunton for Jordan’s Furniture. While officials at Quincy-based Condyne were unavailable for comment, sources said the building would be in the range of 130,000 square feet. “They are serious about moving ahead,” claimed one source, while another agreed that Condyne is actively pursuing the project.
Totaling 61.3 million square feet, the Greater Boston industrial market posted 768,000 square feet of positive net absorption in the first half of 2005, including 513,000 square feet in the second quarter, Spaulding & Slye reported. Nearly 50 percent of that late burst occurred in the South suburban region, noted Bailey. That 21.7 million-square-foot submarket still has an availability rate of 20.7 percent, while three of the seven submarkets were negative in absorption. “We’re happy to see growth, but when you spread [the absorption figures] across the entire market, it’s really not that much,” said Bailey.
Even so, the industrial market has recorded its share of leases in the opening two quarters of 2005, including a deal just announced at 20 Forbes Road in Northborough that was brokered for the landlord by Bailey and colleagues Kristin O’Shea and Phil DeSimone. A computer testing company, Akibia Inc., took nearly 43,000 square feet in the building, which is owned by the RREEF Funds. Akibia, which will relocate from Marlborough next month, was represented in the deal by Mitch Jacoby of Cresa Partners.
Among the largest leases in the first six months was a 240,000-square-foot renewal by Draka USA at 620 Spring St. in North Dighton. Elsewhere, Victory Plastics took 125,000 square feet at 25 Shelley Road in Haverhill, while Crown Cork & Seal committed to 85,000 square feet at 14 Aegean Drive in Methuen. Lincoln Property Co. negotiated the 15-year Draka USA lease.
Lincoln Research Director Emily Schwartz reported positive absorption of 607,000 square feet for the industrial market in the first half of 2005. Still, Schwartz cited “mixed results” that included more than 450,000 square feet of warehouse space becoming available in the Route 128 North submarket and a drop in the average asking rent from $5.64 per square foot at the end of the first quarter to $5.57 by the midyear point.
Despite those setbacks, Schwartz provided an upbeat assessment, reporting that the industrial market’s availability rate fell to 15.4 percent as of midyear, and the direct vacancy rate slipped slightly to 12.1 percent. The worst performer recorded by Lincoln was the Route 2 West/Interstate 495 submarket, which has a 23.6 percent availability rate and direct vacancy of 19.5 percent.
‘Far Better’ Year
One of the more intriguing trends in 2005 has been the continued interest in buying industrial properties, both from investors and users themselves. Many industrial tenants are considering the option of buying versus leasing, acknowledged Bailey, who is currently assisting two users in pursuing that strategy, including one requiring 125,000 square feet of space. A combination of low interest rates and the presence of decent facilities priced below replacement cost is allowing users to obtain financing, said Bailey. Earlier this year, for example, Stacy’s Pita Chips paid $5.15 million for a 185,000-square-foot building in Randolph, while City Lights Electrical acquired a 65,000-square-foot building in Canton to which the firm is relocating from Boston.
Traditional investors are also busy, not to mention developers with plans to add value to existing buildings. Perhaps the most significant deal to date was the $29 million purchase of nine buildings in Canton’s Shawmut Industrial Park. Leggat McCall Properties plans to take advantage of a new concept locally, the creation of condominiums for both industrial and high-end flex tenants.
Popular in other parts of the country, the industrial condo is quickly inuring itself in the Bay State, with other properties in Bellingham, Marlborough and Stoughton being pursued for such development. Bailey and Schwartz agreed there could be demand, but cautioned that too many adherents could upset the equation if excess supply is constructed. “There are benefits, but a user really needs to understand what they are looking for,” said Bailey, who explained that the idea is too fresh locally to say how much demand does exist.
As for other market reports, Cushman & Wakefield showed a drop in the direct vacancy rate for manufacturing buildings from 11.4 percent at the start of 2005 to 11 percent at midyear, while the availability mark dropped from 13.4 percent to 12.8 percent. Although not as disastrous as 2004, when the manufacturing sector saw negative absorption of 2.89 million square feet, rental rates for manufacturing space have fallen from $5.79 per square foot to start the year to $5.48 per square foot at present.
In the warehouse/distribution market, which Cushman & Wakefield separates from industrial manufacturing buildings, the 95.8 million-square-foot inventory has a direct vacancy rate of 14.9 percent, down from 15.1 percent at yearend 2004, while the availability mark has fallen from 18.3 percent to 17.3 percent. The average rental rate nonetheless dropped during the past six months, from $5.69 per square foot to $5.58 per square foot.
Those difficulties have made for a lukewarm beginning to 2005, but not everyone is downtrodden. Cushman & Wakefield broker J.P. Plunkett said he has been encouraged by the level of demand among small to midsized tenants. “There were no real headline grabbers, but [activity] was nice and steady,” he said. “You’d always like to see more, but there’s no question the first half of this year was far better than last year.”
Plunkett is especially bullish on the South market, which colleague Catherine Minnerly and he have covered for several years. After a slow start, demand for industrial space in that submarket is at about 3 million square feet, said Plunkett, representing some 50 companies that are looking either to lease or acquire properties. “It’s exciting,” said Plunkett. “Some of the [space requirements] may fizzle, but it’s a good [base] to work from.”
Plunkett and Minnerly completed several industrial deals in the first half of the year, including brokering the Shawmut Industrial Park sale to Leggat McCall Properties along with the firm’s Financial Services Group. More recently, the pair represented WRT Management in its $4 million sale of 9-11 Mear Road in Holbrook to J&T Enterprises. Cushman & Wakefield is also exclusive leasing agent for the Boston Business Park in Boston, a 72-acre complex that can accommodate tenants needing upwards of 1 million square feet. “We’re getting some very good traffic there,” said Plunkett.
