When we peel back the veneer and see how industrial buildings tick, we find that the same factors that made them more or less valuable in 1996 still apply today. Pick a building up, move it five miles down the highway, and you may find that it has gone up or down in value by 20%.
Double a building’s size, and you find that its value per s/f drops by 15%.
Cut its proportion of office space in half, and you reduce its value by a factor. Double a suburban building’s available land area, and you increase the value per s/f of building by 15%.
Those same factors applied in 1996 as they do today. So that has not changed. But many other factors have.
Values have changed. The building in Avon that was worth $22 per s/f in 1996 is likely worth $76 per s/f today.
Tenants have changed. In 1996, industrial buildings were occupied for the most part by – guess what – industrial tenants. Occupants were people who made things and people who stored things. Those tenants today are fewer. And what has taken their place is a new wave:
• Schools and day care centers;
• Churches, temples, and mosques;
• Outpatient clinics; and
• Trampoline parks, gymnasiums, and recreational tenants.
This wave is attracted to industrial buildings for various reasons:
• Relatively low cost;
• Large, open indoor spaces; and
• On-site parking.
The new wave of tenants gives 1960s-era industrial buildings new life. The common narrative about industrial buildings is that they have fallen into disuse as manufacturing has moved elsewhere. But the fact that one class of tenants has declined does not necessarily mean that their buildings are dead. The fresh wave may not be the tenants that these buildings were designed for. However, the new tenants do fill them up.
A study of 117 randomly selected sales of industrial buildings in 2017-2018 by Eric Reenstierna Associates LLC, including spaces from 1,000 s/f industrial condominiums to 600,000 s/f warehouses across Eastern and Central Mass., reveals these patterns:
• $73.61 – the average price per s/f for industrial buildings (total of selling prices divided by total of building areas);
• A low level of value from Leominster west through Worcester County;
• Higher (but still low) values in Southeastern Massachusetts off the Rte. 24 corridor;
• Higher values along Rte. 495 from Hudson south to Foxboro;
• Peak values inside Rte. 128, at Malden and Waltham; and
• Sharp reduction in the inventory of industrial space in Cambridge, Somerville, South Boston, Jamaica Plain, and the north side of Dorchester as land is redeveloped for multifamily use.
Schools and trampoline parks are good tenants for industrial buildings up to a certain size. But what about the trend for this sector’s largest buildings?
Large warehouses have seen perhaps the greatest resurgence of all. Internet shopping is the gray cloud looming over the retail sector. But it has been the pot of gold for warehouses. Capitalization rates in the warehouse sector, as reported by PriceWaterhouseCoopers, have declined steeply since 2013. Declining capitalization rates correspond to price growth. Where capitalization rates for warehouses in 2013 were 12% higher than those for apartments, today they are 7% lower. In 2018, they are the lowest of any sector. Apartments once were by far the most desirable investment vehicle. As measured by capitalization rates, not any more. That big warehouse that sits beside the highway on a shipping route for online goods is at the top of the 2018 heap, investment-wise. These big warehouses break the rule that says that increasing building size means a lower price per s/f.
The rule holds, mostly. Big warehouses are the exception. The Amazon/Fedex economy likes its industrial buildings very big.
Eric Reenstierna, MAI, is principal and commercial real estate appraiser at Eric Reenstierna Associates LLC, Cambridge, Mass.