Industrials on Top

Industrials are the clear top performers in the commercial real estate market in the past five years. Average prices per square foot of building have increased by 93% in five years, a rate of increase more than double the rate for the next-highest-performing sector, apartments, at 41%. (See “What the Pandemic Did,” which accompanies this article in this issue of The Reenstierna Associates’ Report.) Industrial buildings that were converted to one-story offices in the 1990s achieve higher value when most of that costly office build-out is gutted out and the building again becomes industrial. The turnaround for a sector that was dead in the water ten years ago is remarkable.

Several factors have worked in industrials’ favor:

• the reduction in the inventory of industrials as they were razed or converted to other uses from 1980 to 2010; reducing the inventory makes the remaining industrials more scarce and, therefore, more valuable.
• the Internet economy, which requires distribution warehouses for online shopping
• immunity from the work-from-home model that took hold during the pandemic in the office sector; the kind of work done in industrial buildings cannot be done from workers’ homes.

The markets experienced a credit crunch in the early 1990s. Investors were unable to acquire empty industrials because lenders did not want to make loans on buildings that were vacant. The situation was an opportunity for owner occupants. People who owned a company could move their company into a building, buy the building, and do it – because the building would be occupied - with a mortgage.

Today, 30 years later, those mortgages are paid off. A different dynamic has come to the market of mid-sized and large, owner-occupied industrial buildings. Investors are attracted to industrials with secure tenants on long-term leases. They offer building owners high prices if the owners will agree to a long term lease at today’s high market rents. Building owners can cash in on a windfall under the favorable conditions of 2023.

At the opposite end of the size spectrum are industrial condominiums that offer small companies a space of 2,000 to 5,000 square feet with drive-in truck doors, heat, and on-site parking. These spaces are well suited to the contractors and others – repair garages, parts distributors, or piano servie companies – whose businesses have done well for the past ten years. These metal buildings are going up at various locations in the Greater Boston suburbs, providing good quality homes for a wide variety of small businesses.