Q3 2022 INDUSTRIAL MARKET OVERVIEW
Vacancies remain near record lows in the Boston industrial market, at 2.9% in the warehouse segment and 5.4% in the flex segment. Leasing volume is decelerating, however, with limited available space on the market that meets the requirements of modern tenants. Developers are responding to space needs, and construction is at its highest level in several decades. Roughly 11 million SF is under construction across Massachusetts, mostly in warehouse and GMP projects, supporting the rapid growth of e-commerce and the life sciences industry. Development is spreading far from Boston, with about 3 million SF under construction in central Massachusetts and the Worcester area. Rent growth has continued at a torrid pace, especially in the flex segment which reached 11% over the first three quarters of 2022. That number matches the cumulative rent growth rate for the flex segment across 2019-21.
While fundamentals are still arguably at their strongest point in recent memory, macroeconomic issues are beginning to challenge the primary demand drivers for the industrial market. E-commerce companies are contending with global supply chain disruptions and inflation-driven pressures on consumer spending. Amazon is scaling back its national logistics footprint by 10-30 million SF, after recording its first quarterly loss since 2015 earlier this year. The e-commerce giant will close at least five Massachusetts warehouses in this downsizing. Biotech has been affected by struggling public markets, with IPO activity slowing significantly and industry stocks underperforming the broader economy in 2022. The rising strength of the U.S. dollar is also sending pricing power to overseas manufacturers.
Despite macroeconomic headwinds, the industrial market is still in a strong position for long-term growth. The Amazon closures will barely make an impact on the overall Boston industrial market, as they represent less than 1% of the total inventory, and Amazon continues to expand to new facilities at a rapid pace. Given how low vacancies are, the additional space on the market may provide necessary relief for tenants seeking to expand. E-commerce should also have plenty of room for continued liftoff, as online sales as a percentage of total retail sales in the U.S. still trails that of many other industrialized nations. E-commerce also may better withstand an economic downturn, as it generally offers cheaper prices than in-person shopping. While biotech public markets have struggled, VC funding remains robust. As this influx of investment boosts the R&D capabilities of many local firms, companies will also require additional biomanufacturing and GMP space. Although dozens of local firms have announced thousands of combined layoffs in 2022, overall scientific R&D jobs increased by about 12% over the last year, which easily outperformed the broader professional and business services sector.