In R.W. Holmes’ Q2 Quarterly Report on the Greater Boston Real Estate market, the firm notes a softening in the industrial market for the first time since 2019. Many tenants believe this indicates that rents will decrease and ample value opportunities will be available in the market. However, this is not true for all spaces throughout all submarkets.
Here is where R.W. Holmes sees opportunities for tenants in today’s market:
Over 10 million square feet of big box (100,000+ SF) new industrial buildings have come to market in Greater Boston in 2023-2024. This major influx of product, much of which remains unleased, has increased the available space in the market. However, the design of these properties typically does not allow for subdivision into spaces smaller than 50,000 SF. Therefore, most of the available space in the current market, which has been sitting for long periods, consists of large suites of industrial space with over 50,000 SF. Depending on the landlord and their cost of construction, these larger suites are where we see landlords offering rent reductions, free rent, and other incentives to compete against the amount of availability in the current market.
Landlords who purchased their industrial property between 2020-2023 bought at the peak of the market with interest rates close to 3%. These owners were able to justify these large sale prices due to their expectations of increased rental rates in the market. Therefore, they are unable to provide major discounts on their rents due to investor expectations on returns, bank restrictions, and their need to recoup value from their recent acquisition.
On the other hand, landlords who purchased their property prior to 2020 most likely acquired their property for under $100/SF and if they are long-term holders, may not have a mortgage on the property. These owners have more flexibility in their rental rates because they have a lower basis on their property. This does not mean that all long-term holders are willing to provide significant discounts, but these are the owners who have more flexibility and fewer restrictions from their bank or investment partners.
A potential trend we are monitoring is the emergence of single-digit rental rates in the Rt 2 market. In Q2 2024, there were two leases in this market that were under $10/SF + NNN. This is the first time we have seen rental rates at pre-pandemic levels in any market in Greater Boston. It is important to note that these leases were in second-generation space, and the spaces had been on the market for over 12 months with local/regional owners. The newer, class A product continues to maintain rates in the mid-teens for this market. However, we will continue to monitor whether rental rates in the Rt 2 market continue to undergo corrections.
Other Greater Boston rental rates have remained consistent in 2024. The 495 West and 128 South markets each average around $14/SF + NNN. Rt 24 averages around $13/SF + NNN. The 128 North/Rt 3 market and the Central 128 market continue to have the highest industrial rates, at approximately $18/SF + NNN and $26/SF + NNN, respectively.
One other area where we have seen industrial tenants find value is acquiring an industrial property for their own use. Despite higher interest rates, owner occupants have been able to find properties to buy where the mortgage is still less than asking rental rates in their area. While buying a property requires more upfront capital, there are programs available that offer 10% down payments or slightly reduced interest rates for owner occupants. Many tenants have had interest in buying rather than leasing to also assist with their long-term real estate budgeting, to prevent major spikes in rent from happening again in the future.
If you are contemplating a change to your real estate, please don’t hesitate to reach out to the R.W. Holmes team. We can assist in identifying value opportunities specific to your unique needs.