The greater Boston industrial market recorded a flat quarter with 57,181 square feet of negative absorption, resulting in a 20 basis point increase in vacancy to 14.2%.
The market absorbed 846,944 square feet of space last year, a marked improvement on the 1.5 million-square-foot loss posted in 2004.
Average asking rents for all industrial property subtypes remained firm last year, rising only 17 cents on the year to $7.61, triple net.
There were 15 completed industrial sales valued at more than $5 million each during the fourth quarter, for nearly $247 million in total activity.
Seventy-four investment sales were completed worth $1.2 billion, nearly twice the dollar volume of 2003 and 2004.
Massachusetts’ manufacturing jobs remain unchanged from a year ago, netting a gain of only 2,400 in the state for a total of 312,800.
The majority of manufacturing job growth came from transportation equipment, computer equipment and navigational and control instruments. Since July 2000,the peak in Massachusetts’ manufacturing employment,jobs still are down 23%. The flat manufacturing job market reflects the light absorption position posted in 2005.
Market Assessment
In a surprise turn of events, warehouse and distribution properties posted a negative 260,259-square-foot drop in absorption in the fourth quarter, ending the market’s stellar comeback.
On the other hand, warehouse and distribution space gained a respectable 568,195 square feet of absorption last year.
Due to the tremendous loss of warehouse absorption during 2004,1.6 million square feet,average asking rents remained firm in 2005 at $6.09, triple net, per square foot per year, an increase of 6 cents.
That said, it was the first year of the past four where rental stability could be recognized within the property type.
The research and development/flex submarket posted the quarter’s largest gain with 131,166 square feet of absorption, leading to a total of 294,756 square feet of positive take-up.
While encouraging steps were made during 2005, vacancy still is a worrisome 19.5% with availability even higher at 23.4%.
Nearly one out of every four R & D;/flex buildings still is available, causing some concern regarding the stability of the product. As a result, asking rents fell slightly over the last year by 19 cents to $9.54, triple net.
There clearly is some way to go before landlords who hold this property type can begin to think about increasing rents.
General industrial properties had an improved quarter, posting 71,912 square feet of absorption, and saw an all but flat year with only 16,007 square feet of negative absorption, edging yearly vacancy up 30 basis points to 11.9% by the end of 2005.
In addition, asking rents edged up slightly from $7.14, triple net, to $7.33, during the past 12 months.
With just less than 12% of general industrial vacancy in the marketplace, the upcoming year will see some sustained level of rental increase.
Forecast
It is anticipated that the industrial market will make significant strides toward equilibrium in the upcoming year. In particular, warehouse and distribution rents are expected to rise at a rate greater than inflation.
R & D; and flex properties are expected to continue to stabilize and offer value-based alternatives to similar office products.
As the office market heats up, the constrained supply of space likely will lead some prospective tenants to R & D; and flex properties, thus positively impacting the vacancy concern associated with the product type.
It likely will be another 9 to 12 months before any rental growth is expected in R & D; and flex properties.
General industrial properties, the smallest inventory of available industrial property types, will benefit from this limited supply of product and general dearth of new construction. Rents associated with this property type are anticipated to increase at roughly the rate of inflation in 2006.
The Central Boston industrial submarket will continue to be the most sought after in 2006 due to its close proximity and limited space availability.
The West Boston submarket likely will be the first of the suburban areas to witness rental increases in 2006, followed by South Boston.
The high vacancy in the North Boston submarket will limit the rental growth potential of the market.
However, some pockets are expected to see increases in the upcoming year such as Woburn and Burlington. Overall, the entire industrial market is expected to improve in 2006 with Central Boston warehouse space most likely performing and delivering the best returns.
Opportunities and Challenges
The following are four opportunities and challenges for the industrial market in the coming few months:
R & D; and flex space vacancy remains high, especially in the North Boston submarket. The improved suburban office market and increased competition may assist demand for R & D; and flex space in the coming few quarters, as tenants search for value-driven product in the suburbs. The submarket likely will remain flat during the same time due to availability and location.
Expect R & D; and flex rents in the Central Boston submarket to be among the first of the R & D;/flex properties to experience rental increases in 2006.
Demand for warehouse space in the West Boston submarket will drive rents up in the first half of this year. There is a limited opportunity for well-built, quality warehouse construction in the area. Landlords still are cautioned to find a tenant prior to development, as the market has a way to go before it reaches an expansion phase.
2006 will be a year of further market stability driven by solid growth for category specific industrial product.
