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Boston Area Industrial Market Report for Q2 2019

Overview

Boston's industrial market remains strong in the second half of 2019. Net absorption in 19Q2 pushed past 1.5 million SF, sending vacancies below the U.S. average for the first time in decades. While Boston may not be a national distribution hub, a strong local economy has led to surging levels of demand for last-mile logistics space. The need is particularly acute given Boston's high-income levels, strong income growth, and high concentration of millennial residents. Amazon, for example, has grown its industrial presence in Boston to more than 1.7 million SF just in the past several years. The firm is confirmed to be negotiating for a 3-million- SF build-to-suit in Andover, which would be one of the largest industrial buildings in the northeast. Other retailers and third-party logistics firms have also expanded their footprints in an effort to compete. The metro’s rapidly growing life science industry provides another crucial source of demand. Biotech firms that do their design work in Cambridge also need high-end space to manufacture and distribute their drugs or devices, in places ranging from Andover to Norton. Finally, legalized cannabis is a wild card for industrial demand. While a slow roll out of recreational cannabis has limited the impact to date, hundreds of firms are waiting for licenses, potentially tightening the market further.

Supply has also played a role in current market conditions but not in a way one might expect. Boston has net lost supply this cycle, as more than 20 million SF of industrial space has been demolished or converted since 2010. Multifamily and office development has pushed into areas that were once industrial hubs, explaining the widespread loss of industrial inventory. Only 1,500,000 SF is underway, meaning these limited to negative supply conditions should continue for the near term. This severe supply and demand imbalance have caused rent growth to keep climbing upward and may have yet to peak. Investors have taken notice, and 19Q2 smashed quarterly deal volume records. Cap rates continue to compress but still offer investors better returns than either the U.S. overall or Boston’s three other property types.

Information provided by CoStar.com

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