Industrials: 2018

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. Those factors, which we explored in "Industrials: the Baseline Method," published in The Appraisal Journal (and reproduced with a link from this Web site's home page), were location, building quality, building size, and land:building ratio. 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 square foot 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 square foot of building by 15%.

All those factors plus a map that gave the baseline price per square foot for a 20,000-square-foot, average-quality industrial building all across Greater Boston were part of the Baseline Model. The model allowed users to get a reading on the value of any industrial building online, with only a few inputs from the user.

Some very good ideas die on the vine. That was a very good idea. The trouble in gaining broad acceptance for it was that no one knew how to incorporate an analysis through the Baseline Method into the standard methods of analysis that dominate appraisal. If the regulators who make the rules for how appraisals are made make no room for innovation, innovation will die on the vine. When that happens, we find that decades pass without any significant changes in commercial appraisers' work product. Take a look at a commercial real estate appraisal from 1970 and one from today, and you'll find that not much has changed: four comparable sales in a Sales Approach. An Income Approach with the same line items from a half century ago.

In five decades, what is on TV has changed, with an explosion of program choices and better drama than we have seen since Shakespeare. Telephones have changed. Fifty years ago, who knew what an app was? Cars are about to go driverless. What has changed about commercial real estate appraisal other than greater efficiency through word processors and the Internet? Where have we made room for the advances that could come through mass number crunching of big data? Where is our something new?

Which is not to say that change will never come. It is here, for any of us who want to look at comparable sales on a large scale and absorb what the numbers teach.

In 1996, we subjected data from more than 400 comparable sales of Greater Boston industrial buildings to multiple regression analysis. We were able to quantify the effects of the four factors discussed above on value.

When we apply these same factors in 2018, we find that, as before, they account for most of the differences in industrial properties' values.

The factors still work, but some things have changed.

Values have changed. The building in Avon that was worth $22 per foot in 1996 is likely worth $76 per foot 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
  • trampoline parks, gymnasiums, and recreational tenants


This wave is attracted to industrial buildings for various reasons:

  • durability
  • relatively low cost
  • large, open indoor spaces
  • 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-square-foot industrial condominiums to 600,000-square-foot warehouses across Eastern and Central Massachusetts, reveals these patterns:

  • $73.61 - the average price per square foot 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 Route 24 corridor
  • higher values along Route 495 from Hudson south to Foxboro
  • peak values inside Route 128, at Malden and Waltham
  • 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 multi-family 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 square foot. The rule holds, mostly. Big warehouses are the exception. The Amazon/Fedex economy likes its industrial buildings very big.