When we last looked at industrial buildings in the fall of 1990, they were holding up well in the face of a real estate decline that had seen prices for offices, condominiums, and development land hammered down by as much as half. The relative strength of industrial buildings at the time was attributable to a high rate of owner occupancy and low levels of leverage. Two years have passed. A lot can happen in two years and, in fact, has. A second look is in order.
To say that since 1990 the typical industrial building has lost half its value would be a gross over simplification. It would also, for the most part, be correct. The ordinary 1970s one story, 20,000 square foot building on a 50,000 square foot site in Peabody, Bedford, or Randolph that fetched $65 per foot in 1987 now brings $30. Not all buildings, however, fit this simple picture. Buildings and locations differ, and their decline in value has not been uniform.
The decline in value for industrial buildings dates generally from the second half of 1990. Some locations felt the decline somewhat earlier, and some have yet to feel its full effect. When it hit a particular market, the decline was sudden rather than gradual. A community that had experienced steady sales typically saw a slow down in activity, then a halt and, after a year of no sales, resumption of activity at half the former level of value, with continued more minor erosion since the major decline.
The markets hit earliest were those that suffered the highest levels of vacancy. Route 495 North near Lowell, which registered a vacancy rate of 46% in mid 1989, experienced a decline in two stages, one in mid 1988, the other in late 1989, as seen in activity at one industrial condominium, where prices fell from $85 to $60 per foot and then from $60 to $35. The decline came later and was less severe in the less overbuilt Danvers/Peabody market. The South market, like 495 North, was characterized by high vacancy, but, because prices there were never as inflated, they had a shorter fall, as in Avon, where prevailing prices at $50 per foot slumped to $30 by late 1991. The desirable Newton/Needham/Watertown market, not as hard hit by vacancy and, by urban standards, well served with highways, maintained a level of value that today remains higher than the pre decline levels of value for nearby towns. As noted in our original article, the industrial market is made by owner occupants rather than investors, with prices tied less closely to rents than is the case for multi tenant retail, office, or apartment properties.
Real estate is characterized by poor response to fluctuations in demand. In times of high demand, suppliers may require years to bring sufficient product to the market, with the result that prices run up. When demand evaporates, the supply of buildings (unlike that of Hershey bars, oil, or TVs) has no way to shrink, and the resulting high vacancy pushes markets toward collapse. Apart from the recycling of some old buildings for new uses, we have no mechanism for the removal of antiquated product from the market. If buildings were people and the dead ones were littering the streets, we would call it an outrage and see to it that they received a proper burial. Instead, we allow them to continue a hollow existence, perpetually glutting the market at a low level of rent and value. In this respect, the price problems for industrial buildings may grow more before they grow less. With continued decline in manufacturing and, in warehousing, better inventory control, it may be that still more industrial space is likely to join that in under use.
Eric T. Reenstierna, MAI
24 Thorndike Street
Cambridge, MA 02141
Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.
24 Thorndike Street
Cambridge, Massachusetts 02141