Invesco/Conroy Development preleased 208,000 square feet of flex space at 10-20 Dan Road in the Canton Commerce Center to Armstrong Pharmaceuticals and Copley Controls.
Lost behind the constant headlines of the slowly recovering real estate market, particularly the office sector, is news that the area’s industrial market is, at a minimum, healthy and thriving in certain submarkets. Industrial real estate is comprised of warehouse/distribution, manufacturing or high-tech/research and development space.
Nowhere has this healthy industrial market trend been more evident than in the markets south of Boston where industrial vacancies are at relative equilibrium with demand and average asking rents actually on the rise. As recently as April 2002, the industrial vacancy rate south of Boston was 12.6 percent, up just 2.3 percentage points over the past year’s performance. Industrial asking rents during the same period actually rose by almost one dollar per square foot, increasing from $5.57 in 2001 to $6.49 triple net leased today.
The office market, by comparison, saw its vacancy rate rise over the last 12 months to 19.7 percent at the end of first quarter 2002. As one might expect with rising vacancy rates, rents are down about $6 per square foot through first quarter 2002.
Two major facts attributed to the strength in the south industrial market. First, there has been a mere 1.4 percent growth in the industrial inventory over the past 12 months, compared to a 4.4 percent increase in the office market inventory during the same period. In other words, the industrial market has enjoyed a more controlled supply during a time of reduced demand. The second factor is that the demand for industrial space continues to increase in a market with limited supply. By comparison, office users took more space than they needed over the past few years. As a result, the effects of the recession, coupled with the overzealous leasing, have resulted in current office demand becoming negligible.
Flexible Space
The largest single trend affecting demand in the industrial market has been the introduction of so-called “flex space.” Flex is a relatively new term that is essentially a hybrid of older product labels such as research and development, high-tech and manufacturing. Flex buildings are generally designed to feature classic industrial characteristics such as heavy power, abundant floor load capacity, high ceiling clearances and dock high or drive-in doors. Tenants can use space in these buildings for manufacturing, warehouse/distribution, assembly and even office space.
Flex buildings also feature amenities like four parking spaces per 1,000 square feet, elegant landscape design and high-end facades and ribbon windows, features unheard of in traditional industrial complexes. Consequently, today’s flex building can not only service the typical industrial user, but can also be attractive to a Class B office requirement and generally at a price that could be up to $5 per square foot less than traditional Class B office products.
Accordingly, select office users are competing with traditional industrial users for flex buildings and are partly responsible for a significant amount of absorption and occupancy in the industrial market. The competition for space by these office users is also contributing to the rise of industrial rents, creating a misleading perception of where industrial rents may be headed. Two examples of this are the lease of 20,000 square feet by CGU at 25 Forbes Road, a flex building on the Foxborough side of Cabot Business Park, and Tyco Adhesives leased roughly the same amount of space in a flex building at 1400 Providence Highway, Building II, in Norwood. In both cases, the tenants are utilizing the flex space for an office requirement.
Flex products have been especially well received recently in Canton. Here, Invesco/Conroy Development easily preleased 208,000 square feet at 10-20 Dan Road in the Canton Commerce Center to Armstrong Pharmaceuticals and Copley Controls in the $11-$12 NNN range. Further, in the Canton Corporate Center at 780 Dedham St., Vazza Assoc. quickly preleased 50 percent of an 84,000-square-foot building at $16 plus NNN rents (70 percent office – 30 percent warehouse) to tenants such as Square D, Carrier and Hadco.
It appears that flex space is the perfect product for a slow market, appealing to a broad array of prospects. Brokers representing a flex building, having numerous opportunities, can call on warehouse, office, high-tech and manufacturing users to garner interest in the flex product they are marketing, versus old-school industrial space products, such as warehouse or manufacturing space, which may appeal to only one or two potential types of users. Real estate brokerage is a game of statistics and probability. The more tenants a property can appeal to, the better the chance of leasing the space.
For example, a broker marketing 690 Canton St., an office building in Westwood, will find the initial prospects for the building from three, maybe four office buildings within a two-mile radius. However, in the marketing of 780 Dedham St., a flex building a short distance away in Canton, the audience is much larger. The broker can contact the same prospects in those three or four office buildings in Westwood, plus a dozen of industrial users along University Avenue in Westwood/Norwood and in Shawmut Park in Canton. As a result, the chances of landing a prospect on behalf of the landlord are substantially higher.
From the broker’s standpoint, flex space offers a new product that is enjoying strong demand from a variety of user types at a time when other real estate products, especially office space, appear to be weak in demand and long on supply.
