The goal line was in sight for stability in Greater Boston’s industrial market, but that downfield march was sacked in the third quarter as tenants vacated more space than they filled for the first time since the start of 2010, according to a report from Grubb & Ellis.
The 354,000 square feet of recorded negative net absorption in industrial space represents a loss of more than one third of the occupancy gains experienced in the first two quarters of the year.
The vacancy rate increased accordingly, rising 20 basis points in the second quarter to 13.7 percent – the first increase since early 2010, according to Grubb. Negotiation momentum shifted further in tenants’ favor as average asking rates, already standing at comparatively low levels, fell across all product types.
Average asking rental rates for industrial product saw the most significant drop, falling two percent to $7.04 per square foot from $7.24 in the third quarter last year – the lowest level since 2007. Grubb said it expects lease rates to remain low as landlords attempt to entice tenants.
Several substantial corporate consolidations and relocations in the north and south suburban submarkets induced the market retraction. The most substantial tenant move-out happened in West Bridgewater, where Boston Apparel group vacated 618,000 square feet of warehouse space at 35 United Dr. after laying off 300 employees. In Beverly, Johnny Appleseed’s moved operations to Pennsylvania, leaving 180,000 square feet at 39 Tozer Rd.
Although industrial leasing fundamentals in the overall market weakened during the quarter, certain segments showed signs of strength. One particular bright spot was the west submarket, where tenants absorbed 241,000 square feet – the only submarket to post positive absorption. Quiet Logistics, which uses robots to fulfill orders for Internet retailers, took 200,000 square feet of distribution space at 66 Saratoga Blvd. in the Devens Industrial Park. The move, motivated by the ability to expand its footprint at the park, brought 300 jobs to the area.
The R&D/Flex market posted its fifth consecutive quarter of positive net absorption as tenants filled 94,000 net square feet. In particular, venture capital-backed nanotechnology firm QD Vision relocated and expanded from 25,000 square feet in Watertown into 60,000 square feet at 29 Hartwell Ave. in Lexington.
Just as the industrial leasing market saw its fair share of set-backs, so did the industrial investment sales market. Buyers stuck to the sidelines as sale transaction velocity retreated from levels seen earlier in the year. The $56.7 million in closed third quarter transactions stands 16.9 percent lower than the second quarter total of $68.2 million and 36 percent less than the first quarter level of $88.6 million.
Four of the five third quarter acquisitions contained a warehouse/distribution component, suppressing prices as well-capitalized investors such as STAG Industrial REIT and Atlantic Management drove the market. Atlantic Management purchased the former HP campus in Marlborough for $8.7 million. The 109-acre, 750,000-square-foot campus traded hands for $11.60 per square foot and represents Boston’s largest industrial sale of the year in terms of square footage, and the smallest sale of the year in terms of price per square foot.
The underwhelming third quarter industrial market news comes as the total number of jobs in the state economy was off by 2,800 during August, the Grubb report says. The decline slows a recovery in which Massachusetts employers have added 48,000 jobs since August 2010. Furthermore, the Associated Industries of Massachusetts Business Confidence Index fell in August into negative territory on its 100-point scale for the first time since September 2010 as employers grew fearful of possible effects resulting from global and domestic economic recessions.
While these indicators signal a potential commercial real estate slowdown in coming quarters, the current market holds a number of strategic opportunities for buyers and tenants seeking to take advantage of cyclically repressed pricing, Grubb’s report claims.
