Buildings along Rte. 2 off I-495 have generally been ignored by investors in the past. After tracking some data, there seem to be a number of indicators that could predict an increase in price and sales volume in this market.
Buildings in this market that present attractive criteria for investors (appropriate load ratios, high ceiling heights and proximity to the highway) could see their value increase steadily while demand remains high. Recent sale values seem to set new precedents with, it seems, little regard for historic sale values.
As investor appetite continues to be sustained at high levels, interest is shifting west away from I-495.
The following graphs are generated by data from Rte. 2 corridor off I-495.*data excludes Devens
We can see from this graph that market rents have been accelerating rapidly over the past five years. Rates average +/- $8.25 and are expected to continue to rise. There has been a stronger increase in rent increases in the last two years alone. This is partly due to typical inflation/expected rent growth, but mostly due to increasing e-commerce sales and extremely low vacancy rates. Businesses along I-495 have begun to lower the price of their buildings and are moving west.
Vacancy rates have continued to decline and have remained fairly consistent at levels below 4% for the past two years, which is very low. The data predicts that this will continue in the future. It is theorized that for every billion dollars in online sales, there is a need for 1.2 million square feet of warehouse space. We can see this in effect over the past decade as e-commerce has exploded. This has also been coined the “Amazon effect”.
Under construction / Proposed
Historically, the development of institutional grade distribution products has not been sought along Rte. 2, except for Devens, and a few other buildings along Rte. 2. It has changed. The lack of available product and workable land inside I-495 has diminished, prompting investors and developers to get creative.
Demand is so high that office buildings have been demolished to accommodate a high-bay warehouse. (50 Nagog Park, Acton)
The chart above shows that over the past decade there have been almost no new developments in the market. However, that changed in 2021 and 2022. Currently, there are 1.2 million square feet of warehouse under construction or proposed along Rte. 2. The majority being in Lancaster and Westminster.
Average market selling price per s/f
Market selling price by s/f Distribution
We can see that the current average price per s/f is +/- $87. The average price per s/f before COVID-19 was +/- $65.
Although there has been a dramatic increase in the overall average price per s/f, the majority of properties are still selling in the $60-80 range. Specific comps show us that the median number is around $70.
For small industrial buildings under 15,000 s/f – prices per s/f increase even more – two buildings under 10,000 s/f that sold for over $115 per s/f in 2022.
I expect the median price per square foot to go from $70 to $80 and $90. Some buildings with more than 16 feet of clear height, a high loading dock ratio, and open, unobstructed space will see prices jump up to $100.
The reason this can be expected is due, in part, to the macroeconomic elements at play, including inflation and liquidity. BisNow National wrote an article in late 2021 explaining that private equity had a total of $288 billion in cash ready to invest in CRE (https://tinyurl.com/mr3dbxdn).
This “military chest” of capital impacted the Greater Boston market. Private equity firms are buying up the institutional grade assets that exist primarily along Rte.128, I-93, Rte. 3, I-90 and I-495 – each sale setting a new price record.
The average rent along I-495 and Rte. 3 is +/- $12.00 and has an average selling price of $155 per s/f, with 52% of buildings being sold between $120 and $180 per s/f.
The average rent along Rte. 128 and I-93 are at +/- $14.00 and the average price is just under $200 per s/f, with 54% of buildings selling between $150 and $210 per s/f.
As noted above, the average rent along Rte. 2 is +/- $8.25 and the average price is $87 per s/f with 55% of sales trading between $60 and $100 per s/f.
Just using average rents and average sale price per s/f I-495 and Rte. 3 has an average cap rate of 7.74% (multiple of 12.92 X)
Rte.128 and I-93 have an average cap rate of 7% (multiple of 13.93X) Rte. 2 has an average capitalization rate of 9.48% (multiple of 10.55)
I believe this data shows that from a level of 10,000 feet, this market is undervalued. We’ve already started to see local Massachusetts-based investors recognize the value opportunity and start buying buildings in towns along Rte. 2 which have historically been overlooked such as Ayer, Lancaster, Lunenburg, Leominster and Westminster.
Institutions and private equity have just started deploying capital in this market. For example, a portfolio of two industrial buildings in Jytek Park, Leominster, has just been sold to an institutional company for $14.65 million or $125 per s/f. 25 Tucker Dr., Leominster, a 544,000 sq m warehouse was also the subject of a recent transaction for $113 per sq m to a local buyer deploying institutional money. Another transaction of note is the 400,000 s/f Aubuchon Hardware warehouse building in Westminster which traded for $64 per s/f at the end of 2021.
These early indicators of local buyer groups will signal larger pools of capital entering the market, which will increase sales volume and sales value.
Certain macroeconomic factors such as the rise in interest rates are certainly worth watching. If leases are structured to increase precisely in step with market rental rates/inflation, current values should not be affected, however, we may see a slowdown in overall price percentage growth of sale.
If you own a building along Rte. 2 or surrounding markets and you plan to sell your building in the next few years, it will be important to start planning now to ensure maximum market value.
Nate Nickerson is President and Chief Broker of Fieldstone Commercial Properties, Inc., Medford, Mass.