After a sustained period of record-breaking growth, the Boston industrial real estate market showed signs of slowdown in Q4 2022. Rents decreased slightly from record high levels in Q3 2022, and vacancies showed a sharp jump. However, demand for construction remains strong, with several major retailers looking for space.
Boston’s economic fundamentals are also in good shape, with below average unemployment rates (2.76%) and a growing labor pool. The next few months will determine how the Boston industrial real estate market will deal with any recession pressures.
General Area Overview & Demographics
As the largest city in Massachusetts, Boston has a population of 693,062 as of 2023.
The median age is 32, and the median household income is $76,298. Boston is the anchor of the greater Boston metropolitan area, which has a population of approximately 4.3 million. The city also has one of the highest costs of living in the country.
Boston is in a climate transitional zone and has warm summers and cold, stormy winters. Due to its location in the North Atlantic, Boston receives substantial amounts of snow and rain during the fall and winter.
Boston is one of the 30 most economically powerful cities in the world, with a gross GDP of over $360 billion. Its diverse economy is known for financial services, venture capital, tech, and medical research. Boston is also a major educational center and receives a higher amount of NSA funding than any other city in the US.
Summary of Boston Industrial Real Estate Performance in Q4 2022
The Boston industrial real estate market slowed slightly in Q4 2022, with 363,205 square feet of negative absorption. Although high-bay properties posted 420,000 square feet of positive absorption, this activity was offset by 856,000 negative square feet of absorption for manufacturing and warehouse buildings.
Vacancy rates also showed the highest increase in five years, growing 1.3% from 4.9% in Q3 2022 to 6.2% in Q4 2022. The jump in vacancy rates is the result of quarterly deliveries outpacing demand. Despite the large vacancy jump, occupancy rates are still higher than pre-pandemic levels.
What Are Industrial Rents Like In Boston?
After historical growth rates during 2022, average industrial asking rates fell slightly to $14.51 per square foot in Q4 2022 from $14.68 in Q3 2022.
Average NNN asking rates were the highest for flex space at $18.38 per square foot while asking rates for warehouse space and manufacturing space were $13.49 and $12.18 per square foot, respectively.
Submarkets with the highest asking rates were Route 128 Northwest, Route 128 Mass pike, and Cambridge at $24.88, $21.32, and $18.423 per square foot, respectively.
Rental rates seem to have peaked last quarter and will stabilize as the market continues to cool off. Despite the slight drop, average NNN rents are substantially higher than in 2021, and Boston still remains one of the most expensive cities to lease commercial real estate.
Purchase & Leasing Activity
Investment activity in the Boston industrial real estate market slowed slightly due to rising interest rates and inflationary pressures.
However, strong tenant demand has created solid leasing activity, with an average lease size between 50,000 and 200,000 square feet.
Many big-box retailers are looking for leases greater than 500,000 square feet, such as Target, Home Depot, and Kohl’s.
Notable Industrial Real Estate Deals in Boston in Q4 2022
Some of the more notable lease and sale transactions that occurred in Q4 2022 include:
- The Seyon Group’s $54,450,000 purchase at 580 Fort Pond Road;
- Oliver Street Capital’s $42,000,000 purchase at 2000 Shuman Avenue;
- Ram Management’s $14,500,000 purchase at 96 High Street;
- Ferguson’s 260,000 square foot lease at 300 Charles F. Colton Street;
- WORLDPAC’s 142,000 square foot least at 385 Myles Standish Blvd.; and,
- DCNE’s 70,000 square foot least at 54 Bodwell Street.
The majority of these notable lease and sales transactions were in the North and South submarkets.
New Industrial Real Estate Development in Boston in Q4 2022
Boston added almost one million square feet of new product this quarter, bringing YTD delivery totals to 1.7 million.
Virtually all of these deliveries were in suburban markets, reflecting how limited urban space is pushing development outwards from the city. Notable deliveries this quarter include Seyon Group’s 451,000 square foot property in Uxbridge and Amazon’s 121,000 square foot last-mile facility in Worcester.
Construction is also highly active, with 10.4 million square feet under construction. Nearly half of this planned construction is in the North submarket, with an additional 2.6 million in the West submarket.
The high amount of construction will likely create a mismatch between supply and demand.
Market Forecast for Boston’s Industrial Real Estate Market in 2023
Boston’s market seems to have cooled off for the time being as demand stabilizes and gets used to the influx of new construction.
Growing signs of recession have caused many larger companies to downsize over the back half of 2022, but demand in Boston has remained strong, and leasing velocity is still high.
Like many other cities, high interest rates and growing construction costs have led to construction delays, specifically with larger tenants such as Amazon.
However, industrial space has historically been one of the most resilient asset classes in Boston, so experts believe the market will recover quickly from instability.
As we enter 2023, we will likely see a more pronounced split between newer Class A accomodations with higher rents and low-rent Class B properties.
Takeaways for Industrial Real Estate Investors
Despite the quarterly slow down, the Boston industrial real estate market still has strong fundamentals and demand from large tenants has returned.
Landlords can best capitalize on the influx of retail and e-commerce tenants by acquiring new Class A construction. Specifically, projects in the suburbs seem to be in high demand due to fewer space constraints.
As always, stay vigilant, do your research, and happy investing.