COVID-19 Impact: Industrial Market

COVID-19 Impact on the Greater Boston Industrial Market

In March 2020 Lincoln Property Company released a “Reason’s to Remain Optimistic” piece, where we discussed some positive attributes about the Boston office and lab markets that should aid it through the COVID-19 outbreak. Following up on that piece, we thought it would be appropriate to specifically address the area’s industrial market and factors that may carry it through this difficult time. It may seem to be hard to even consider “optimism” given prevailing uncertainty that runs through the economy. However, we believe there are attributes of the Boston industrial market that should inspire a degree of confidence. Here are five factors that will benefit Boston going forward and position itself as a relative outperformer.

FIVE FACTORS THAT WILL BENEFIT BOSTON

1. Historically Strong Industrial Fundamentals
Similar to Boston’s office and lab markets, industrial enters this turbulent time with historically strong real estate fundamentals. Warehouse vacancies for the first quarter of 2020 closed at 5.4%, near-record low for the market. This rate, nearly half of its peak rate in 2010, is 200 basis points below the market’s all-time historical average. Strong demand from a variety of sources, ranging from e-commerce, robotics, to biotechnology have spurred these historically low vacancy rates. Developers haven’t been able to keep up with this strong demand. In fact, in many parts of the metro, industrial supply has contracted. Surging multifamily and lab construction have pushed into former industrial areas, and resulted in the demolition or conversions of millions of square feet of space. While construction has recently increased, the buildings that have delivered this cycle have leased well. Of the roughly 8.5 million square feet delivered since 2010, only 5.7% is available. The current market as it stands is strong and may be able to weather a COVID related economic slowdown.

2. More People Shopping Online Will Spur Further E-Commerce Growth
The leading contributor to strong industrial demand across the US has been the shift of retail purchases from brickand- mortar stores to online platforms, a trend that appears likely to continue in the future. More than $158 billion in e-commerce sales occurred across the US in the fourth quarter of 2019 representing roughly 11.4% of total retail sales. Compare these figures to only five years ago when e-commerce sales totaled $79 billion (6.1% of total retail sales). All indications are that 20Q1 e-commerce sales figures should be significantly higher than 19Q4’s lofty total. Current activity on e-commerce sites is at record highs, and companies in the sector have seen corresponding surging valuations. Shortages at grocery and other essential stores, plus concerns over in-person contact at physical stores, have pushed many more customers to shift to online purchasing. Even as the economy opens up, this trend could be a long term one. E-commerce has created many new customers during this crisis and ingrained itself further among its existing users. This could send longer-term e-commerce sales higher and generate further demand for warehouse space.

3. E-Commerce As An Occupier
Boston is well exposed to e-commerce which, given the segment’s expected growth, should bode well for its industrial market. Amazon currently leases more than 3.6 million square feet of logistics-related space in Boston, up from only half a million in 2015. Amazon confirmed in early April that it is hiring an additional 1,800 people in Massachusetts as part of its commitment to hire 100,000 across the country. Perhaps, as a result, Amazon is believed to be looking for millions of more square feet in the market. Wayfair, the Boston-based online furniture company, has a similar model to Amazon and has also witnessed rapid growth. The firm recently leased 110,000 square feet at 237 E Main Street in Norton, their second warehouse in greater Boston. Boston’s exposure to e-commerce extends well beyond Amazon and Wayfair. Dozens of third-party logistics firms that service the industry lease millions of more square feet in the metro area. E-commerce’s continued growth, and its large presence in Boston should provide the industrial space market with stability in the future.

4. Boston Industrial Demand Isn’t As Directly Tied to International Trade
As countries have shut their borders to contain the spread of COVID-19, global trade has declined, though Boston appears to be less exposed to these forces. Recent trade figures for March 2020 show a monthly drop of 6.6% and 2.4% for US exports and imports respectively. This does pose a risk for industrial markets closely tied to the ports that ship and carry international goods. The Port of Los Angeles (the nation’s largest port by volume), for example, reported a 30% year-over-year drop in traffic in March 2020. However, Boston is a last-mile or local distribution market and less directly exposed to these global forces. Below is the total Twenty-Foot Equivalent Units (TEU’s) that arrived in American ports for 2018. The Port of Boston is 23rd on this list, behind ports like Mobile and Wilmington, NC. Given Boston’s relatively isolated position in the northeast of the country, industrial users in Boston exist to service the regional economy. Global trade issues, while relevant, shouldn’t have nearly as direct an impact on Boston industrial as they will have in other markets.

5. Strong Base of Healthcare Related Manufacturing
Boston, with its base of high skilled medical-related manufacturing, is in a unique position to adapt to COVID-19 related manufacturing. Boston is well known for being a hub for the research and development of innovative life science-related goods. But many may not know that it is also a hub for the high skilled manufacturing of many of these same goods. More than 5.6% of Greater Boston’s manufacturing jobs are in medical equipment and supplies manufacturing, more than double the US rate of 2.4%. A similar story emerges for pharmaceutical and medicine manufacturing, which comprise 4.6% of total manufacturing jobs. Many of these manufacturers have already pivoted to COVID-related work. Siemens Healthineers AG, for example, recently announced their intentions to begin the production of antibody tests from their Walpole facility. Beyond the current crisis, Boston could set itself up for further leadership in the field. The country will need to produce huge quantities of Personal Protective Equipment (PPE), diagnostics tests, vaccines, and treatments to fully quell this pandemic. Given current issues with trade, the need to produce these domestically, as opposed to internationally will be particularly acute. The nation’s capital for healthcare research could be a logical place for these operations to occur.