The Great Divide: Exploring the Dichotomy between the Industrial and Office Markets in Greater Boston
By Bradley Sampson
We’ve all read the headlines about suburban office markets struggling post-pandemic across the U.S. While interest rates have cooled slightly in the last two quarters, the Fed’s attempts to battle inflation continue to add to a challenging environment. Landlords already struggling with persistent vacancies now face a new challenge in attracting tenants with a new dynamic. Smaller footprints and shorter lease terms paired with rising construction costs are currently the driving force behind rents, destabilizing projected returns and income on office assets. Repositioning vacancies into lab-ready space has forced movement in the market for tenants. Still, due to uncertainty, many are opting to absorb sublease space rather than opting for a traditional long-term lease. For office tenants, this could not be a better time to have to look for new space in the market to achieve favorable terms. The suburban office market has been overbuilt for the last two decades and, at this point, has led to complete repositioning, whether through adaptive reuse into life science space or scraped completely to make way for industrial or multi-family redevelopment.
For investors and tenants alike, industrial property has become the most sought-after asset class in Greater Boston. If you’re a landlord, a vacancy has been quick to fill at record rents – across all submarkets. Industrial demand has increased since 2015, when the 40B redevelopment began pushing tenants to relocate further from dense areas in and around Boston Proper. Despite 40B reaching its quota in most communities, the demand has not slowed due to regional continued economic growth paired with national trends such as deglobalization, onshoring, and e-commerce. Greater Boston has been traditionally undersupplied in the industrial asset category and only now has seen a robust development pipeline in the suburbs to satisfy demand. For tenants looking for various sizes of industrial space presently, their options will be of the Class A variety for the most part and demand higher rents with fewer concessions. Almost all new construction consists of buildings that don’t divide into spaces below 50,000 SF. For users that would benefit from expanding into more space or consolidating multiple locations, the “ideal” space for them doesn’t exist today. For example, in the I-495 North / Route 2 West Submarket, vacancy rates sit under 3%, about the same as a year ago, while rents have leveled off at an average price of $14/NNN. In the general Greater Boston Market, the latter half of 2022 saw a slight uptick in industrial availability, coming almost exclusively from high bay construction being delivered. While the rate of rent growth has slowed, rents in the entire Boston Market were up about 7% from Q4 2021. Vacancies and rents in big box/high bay industrial are not consistent with industrial and flex spaces under 50,000 SF.
In summary, the industrial and office real estate markets have taken divergent paths in recent times. The industrial real estate market remains in high demand, particularly for spaces under 50,000 SF. Meanwhile, the office real estate market struggles with declining property values and rents, making it difficult for landlords to finance purchases