The industrial sector’s vacancy rate may only be 6.3 percent, but that’s close to double what it was one year ago. That’s causing many developers to rethink speculative projects, observers say. iStock illustration

The once red-hot warehouse and distribution center market has noticeably cooled over the past year.

Propelled by e-commerce and other firms in need of space to store and sort items before deliveries to consumers, warehouses and distribution-centers remain a hot subsector of industrial properties strewn across New England, easily outperforming other commercial real estate classes in the region.

According to data from Newmark, the vacancy rate for warehouses and distribution centers in Greater Boston stood at about 6.3 percent as of the fourth quarter of 2023. That’s a relatively low level compared to struggling offices and other CRE categories.

But that 6.3 percent vacancy rate is up from 3.7 percent in the fourth quarter of 2022.

Among the causes of the significant jump: decreased demand for space by large e-retailers, such as Amazon, and a glut of new speculative space that came online last year and that’s expected to impact the warehouse/distribution submarket through much of 2024.

The net result of the changing market conditions has been newly built properties sitting empty, or largely empty, and developers curtailing new construction plans moving forward.

Meanwhile, some major tenants are delaying occupancy of newly built spaces until 2025, including Amazon’s recent decision to postpone occupancy of a new 144,000-square-foot center at the site of the former Showcase Cinema in Revere, according to industry sources.

“We’re definitely seeing a slowdown,” said Liz Berthelette, head of Northeast research and national life-science research at Newmark. “We’re seeing a slowing across the [industrial] board.”

A Notable Slowdown

According to data from commercial brokerage Hunneman, the entire industrial market in Massachusetts – which includes flex, biomanufacturing and traditional manufacturing properties, as well as warehouses and distribution centers – last year saw 10.8 million square feet of newly completed space, 3.7 million square feet in new construction starts, and 6.3 million square feet under construction.

Amazon’s new distribution center at the Osgood Landing property in Andover accounted for about 3.8 million square feet of the newly completed facilities in 2023, according Hunneman.

The combination of surplus space, higher interest rates and other factors have all led to declining investment activity within the industrial market in Massachusetts, said Mark Fallon, director of research at the brokerage.

He noted that, through early September, there was about $2 billion in transactions in the industrial space in 2023, down from $3.5 billion during the same time period in 2022.

Fallon stressed that the industrial real estate sector, particularly the warehouse and distribution-center subsector, remains fundamentally strong.

“It’s still incredibly healthy,” he said. “All signs point to [the sector] steamrolling ahead.”

But, he added, “The velocity of activity has definitely slowed down recently.”

Jeff Meyers, research director at Colliers in Boston, agreed that the industrial sector remains fundamentally sound.

He noted that the industrial-space vacancy rate 10 years ago was 15 percent – and only a year ago was hovering as low as 5 percent. During the same time period, rents have doubled, he added.

“We’ve had a very good 10-year run,” said Myers. “But it certainly has cooled down lately.”

Of particular note is the rise in the regional vacancy rate for class A “high-bay” warehouses and distribution-centers, from 2 percent in 2022 to 12 percent in 2023, according to Colliers data.

Myers attributed most of the upward surge in the vacancy rate to the millions of square feet of newly delivered space in the region. “And a lot of that space is still sitting empty.”

Two Reasons for Optimism

At Calare Properties, its recently built 219,000-square-foot speculative property in Bridgewater, which came online in October, has yet to find a tenant. A year ago, such a space would have been snapped up long before construction was finished.

“We certainly hoped it would have been leased during construction,” said Bill Manley, CEO of Calare, which owns about 40 industrial properties along the East Coast, the majority of them warehouses and distribution centers in New England.

Meanwhile, a recently acquired 46,000-square-foot center in Northborough has yet to find a tenant, six months after Calare refurbished the facility with a new roof, Manley said.

Todd Barclay, vice president at Calare, said a decline in demand by larger tenants is clearly contributing to the rising warehouse/distribution vacancy rate, in addition to the flood of new facilities being delivered.

But he said he’s optimistic the market may regain momentum in 2024 for two reasons.

First, holiday sales for e-retailers far exceeded expectations in 2023, raising hope there’s still plenty of room for growth in the e-commerce sector and thus growth in demand for warehouse and distribution-center space, he said.

Second, demand for space by smaller tenants – such as government agencies, clean energy firms, and life-science companies – seems to be increasing and offsetting some of the drop-off in demand by larger tenants.

Due to current conditions Myers, of Colliers, said he expects new industrial construction to “dramatically tail off” in the second half of 2024.

He added he plans to closely watch how the economy performs in the coming year, especially how consumer spending impacts e-retailers and their corresponding demand for distribution space.

Otherwise, Myers said most signs point to the industrial market remaining strong in 2024 – just not as strong as in years past.

Newmark’s Berthelette said the national economy and the upcoming presidential election are areas of concern for all real estate classes. “There’s a lot of uncertainty out there,” she said.

But the prospects of falling interest and inflation rates this coming year could end up helping the economy and commercial real estate in general, she said.

“We’re cautiously optimistic,” she said. “There’s cause for optimism.”