The departure of Smarterkids.com from 140,000 square feet at 145 Plymouth St. in Mansfield earlier this year is one of the few examples where industrial sublease space has come on the industrial real estate market.

It might be hard to spot amidst the economic storm clouds suddenly lurking over the region, but there is a silver lining for the commercial real estate industry, with a mid-year report on industrial properties indicating that the sector has held up remarkably well thus far in 2001.

“We haven’t seen any slowdown in the industrial market at all,” Insignia/ESG broker James Nicoletti said last week. “There are still very low vacancies and we’re continuing to see a lot of activity.”

Following net absorption of 860,000 square feet and gross absorption of 2.3 million square feet for the first six months of 2001, Insignia places the current availability rate for warehouse and distribution space at 13.5 percent. That level is even lower for modern warehouse properties, said Nicoletti, with a continued “flight to quality” from older facilities. The 13.5 percent includes all space, including outmoded properties and those in secondary locations.

The bulk of the leases signed to date have been among traditional economy firms, but Nicoletti said the industrial market never really became inundated with dot-com concerns anywhere near the degree seen among office properties. Save for the departure of Smarterkids.com from 140,000 square feet at 145 Plymouth St. in Mansfield earlier this year, there has been virtually no subleasing of industrial space, according to Insignia, keeping the market on an even keel for some time.

“The industrial market never really had the peaks and valleys over the past two to three years, especially the peaks,” Nicoletti said. “It has been pretty steady all along.”

Suprisingly, even in the face of deteriorating economic conditions and waning consumer confidence, Greater Boston continues to see a number of sizeable industrial requirements. The Smarterkids space was taken over by the TJX Cos. of Framingham, for example, while Nicoletti and colleague Steve Clancy recently represented McLane, a division of Wal-Mart, in a 96,000-square-foot lease at 111 Constitution Blvd. in Franklin. Crate & Barrel, meanwhile, committed to 52,000 square feet at 42 Industrial Way in Burlington, a 72,000-square-foot warehouse that is now fully leased.

If anything, demand for industrial buildings appears to be on the increase, according to Nicoletti, noting that his firm has a user currently shopping for 600,000 square feet. The client, whom Nicoletti declined to identify, is seeking a land site that would accommodate such a large structure somewhere south of the Massachusetts Turnpike, but Nicoletti said the size of the deal is making it difficult to identify a suitable location. A build-to-suit project is the most likely scenario, he said, given that there is nothing existing that could fit the client’s needs.

But there remains a lack of options for smaller deals as well, Nicoletti said, a situation underscored as he and Clancy try to assist the tenant needing 600,000 square feet to obtain a temporary site of 100,000 square feet. Just three availabilities in the south market fit that requirement, he said, partly because many industrial properties have been razed or converted in recent years for office functions. Land prices closer in to Boston make that area unlikely for such a use, Nicoletti explained.

“It is just very difficult to find out there,” he said. “It can be pretty frustrating.”

Mixed Results
Beyond warehouse and distribution buildings, other industrial product is seeing mixed results to date. The 17 million-square-foot manufacturing market saw net absorption in the red by 147,000 square feet at mid-year, although gross absorption has been in the positive range at 387,000 square feet. That has increased the availability rate slightly from the end of 2000, although it remains relatively in balance at 7.34 percent.

Rental rates in the manufacturing sector vary widely, from a low of $7.81 per square foot in the Interstate 495/South submarket to a high of $17.19 per square foot in the 128 West area. The average rent now stands at $11.32 per square foot, according to Insignia.

As expected, given that it was more exposed to the technology world than other industrial categories, research and development space has taken the biggest hit to date. Insignia estimates negative net absorption of 913,000 square feet over the past six months, increasing the availability rate to 8.9 percent. That trend was attributed largely to sublease space coming back onto the market, with 1.1 million square feet of R&D subleasing opportunities now available, or 34 percent of the total space available.

The average rental rate for R&D supply is $14.93 per square foot, with the I-495 South submarket again lagging behind all others at $9.90 per square foot. Route 128 North was the highest at $18.32 per square foot.

In any event, Nicoletti said he believes the fundamentals will continue to be solid for industrial space throughout the rest of 2001, especially given the unlikely prospect of new, speculative construction in that arena. He even predicted that the R&D market will see improvement, with some firms looking to take advantage of the recent increase of space seen there.

Real Estate Market Showing Signs of Industrial Strength

by Banker & Tradesman time to read: 3 min
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