7 Essential Takeaways from Boston's Industrial Market Report

Demand Slowdown and Vacancy Increase

Demand for industrial space has slowed in recent quarters, increasing Boston’s vacancy rate to 4.9%, according to CoStar’s most recent report. Despite this, the market remains tight with limited available space, and vacancy rates are still higher than last year’s historic low.

New Supply and Vacancy Projections

New supply will significantly expand availability this year. Developers anticipate delivering a record-setting 7.2 million SF of new space by year-end. Amazon’s 3.8 million SF Osgood Landing is a significant addition. The vacancy could approach 6% by year-end.

Leasing Activity Decline

Leasing activity is normalizing in the Boston industrial market. After a flurry of activity in 2020 and 2021, it’s returning to pre-pandemic averages. Around 2 million SF of space was leased in the first quarter, down almost 30% from the average quarterly pace from 2020-2022.

Development and Land Availability

Developers concentrate on peripheral submarkets for new projects. Limited land availability in closer-in areas drives this trend. Additionally, unfriendly city governments contribute to this development pattern. Large industrial facilities often need to be more welcome in many municipalities.

Logistics and Flex Space Distribution

Logistics space remains the primary driver of activity. However, it constitutes less than half of Boston’s inventory, compared to 70% nationally. Flex space represents nearly 30% of the total space, reflecting the life sciences sector. The Lexington/Arlington Submarket saw a significant flex property lease by AstraZeneca.

Advanced Manufacturing and Life Sciences

Manufacturing, especially advanced sectors like clean tech, biotech, and robotics, is critical—life sciences and the knowledge-based economy drive activity, particularly in suburban submarkets near Kendall Square. The area’s robust growth supports high leasing activity in these sectors.

Rents Increase but Decelerate

Rents in Boston rose 6.6% over the past 12 months, a moderate deceleration from recent record highs. The national average rent growth was 8.1%. The biggest boxes experienced the most significant gains.

Logistics Properties Lead Rent Gains

Logistics properties metro-wide now average $13.70/SF. Rents increased 8.8% from last year. Specialized properties like cold storage and light manufacturing grew by 5.2%. These now start around $13.50/SF.

Expected Slowdown in Rent Growth

Experts anticipate growth to slow further in the coming quarters, and companies have paused inventory builds, reducing demand. The possibility of a recession impacts tenants’ expansion plans, leading to a modest level of space give-backs.

Impact on Landlords and Property Owners

The rise in availability will limit rent increases. Despite the slowdown, submarkets within Route 128 continue solid gains. Peripheral submarkets like Route 24 and Route 3 South are also performing well. Nearly all submarkets saw rent growth above 6%.

Leasing Activity Normalizing

Leasing activity is normalizing in the Boston industrial market. After a flurry in 2020 and 2021, it’s returning to pre-pandemic averages. Around 2 million SF of space was leased in the first quarter, down almost 30% from the 2020-2022 average.

Key Submarkets and Major Deals

Submarkets along Route 128 South, Route 128 North, and Route 495 South dominated leasing activity. In March, Acushnet signed a sublease for 555,695 SF in Lakeville. This was the top deal, with space previously occupied by Talbots’ distribution center.

Investment Trends and Financing Conditions

Industrial investment trends show declining transaction activity since Q2 2022. Confirmed transaction counts dropped. The median cap rate increased to 8.85%, the highest since 2016. Lenders are willing to finance but prefer established sponsors with long-term holds.

Record-Breaking New Supply

Boston is on pace for record-breaking new supply this year. Developers have delivered 5.3 million SF so far, but Boston’s development activity is still slower than many other markets.

Modest Inventory Expansion

Over the past five years, Boston added 10.5 million SF of space, representing a 3% inventory expansion. Nationally, inventory grew by 11%, and in some markets, even higher. Indianapolis, for example, saw a 17% expansion since 2018.

Demolition Limiting Supply

Demolition has limited Boston’s industrial supply. More than 20 million SF of space has been removed in the past decade. This contrasts with the national trend of significant inventory growth. Demolition helps maintain a tighter market.

Logistics Space Driving Development

Demand for logistics space drives development in Boston. Warehouse and distribution facilities have large footprints. Limited land in closer-in submarkets restricts development, so developers are focusing on peripheral submarkets.

Peripheral Submarkets Gaining Attention

Lawrence/Andover has become a development hotspot. Amazon’s 3.8 million SF Osgood Landing is a key factor. Traditional hotspots like the I-95 Corridor South remain active. Developers have added almost 3 million SF in the past five years.

Significant New Projects

A major new project is a 662,500-SF spec warehouse in Plainville, developed by CRG. It is in the I-95 Corridor South Submarket. The property was delivered in January and remained available in June. Another notable project is a 219,000-SF facility in Bridgewater.

Consistent Development Patterns

ARCO developed the 219,000-SF facility on a spec basis. Located at 900 Bedford St. in Bridgewater, it was delivered in May. This follows recent development patterns in the Route 3 South Submarket, where peripheral areas continue to see significant growth.

Connecting the Market Dynamics

Rents in Boston increased 6.6% over the past year. Logistics properties experienced the most significant gains. Experts anticipate rent growth to slow due to economic factors. Development focuses on peripheral areas as closer-in land is limited. This creates a tight market with consistent demand for logistics and flex space.

Declining Investment Activity

Investment in Boston’s industrial market has slowed. Debt costs are climbing, and banks are tightening. Volume dropped. Confirmed transactions totaled $350 million, the third-lowest in three years.

Rising Cap Rates

Average cap rates have been over 7% for two quarters. The median confirmed cap rate exceeded 8% for the first time since 2016. One example is the sale of a warehouse in Newfields, New Hampshire. It sold for $5.95 million at an 8.84% cap rate.

Higher Trade Activity in Industrial Assets

Industrial assets trade more frequently than office, retail, and multifamily properties. The market benefits from a lack of supply-demand imbalance. Firms leverage Boston’s industrial market for sale-leasebacks to access capital.

Significant Sale-Leaseback Transaction

Lincoln Property Company acquired an 815,324-SF warehouse at 64 Leona Drive in Middleboro. The property sold for $105 million and was leased back to Handil Holdings LLC. Handil owns Christmas Tree Shops and has rebranded them as CTS.

Large Trade in Food Processing Facility

Invesco Advisers acquired a 135,000-SF food processing facility in Haverhill for $43 million. Developers built the property in the Lawrence/Andover Submarket for Monogram Foods. This trade highlights the ongoing interest in specialized industrial assets.

Connecting Market Trends

Boston’s industrial market shows varied dynamics. Investment activity is declining, but trade in industrial assets remains high. Rising cap rates reflect market caution. Firms continue to use sale-leasebacks for capital, maintaining market fluidity.

Closing Thoughts

Boston’s industrial market shows unique trends amid economic shifts. Investment activity is changing, but demand remains strong. For your investment needs, contact Lumicre. Our expertise can guide your strategic decisions.