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Worcester Telegram & Gazette
Rents are Climbing, While Available Space is Relatively Non-existent. And, Super-sized Retailer Amazon is One of the Reasons for This Market Condition, According to Some Experts.
WORCESTER — Jim Umphrey has worked in the Worcester real estate market for 35 years, and he can’t believe what has happened over the past 18 months.
“I’ve never seen anything like this,” Umphrey said of the red-hot industrial market.
A principal at Kelleher & Sadowsky, a commercial real estate broker in Worcester, Umphrey said rents for industrial properties skyrocketed over the past year-and-a-half, a stretch that includes the coronavirus pandemic.
At the same time, vacancy rates plummeted because of increased demand, leaving companies, developers and brokers scrambling for a limited supply of space.
It’s a situation Umphrey said he’s never seen happen so quickly. It’s an assessment backed by several real estate experts.
“It certainly is the case,” said Nolan Ryan, vice president at NAI Glickman Kovago & Jacobs, a Worcester real estate broker.
“The (industrial) market is definitely going through a growth phase,” said Steve Goodman, founder and principal at GFI Partners in Boston, a real estate developer that does business in Worcester County.
What is Driving the Phenomenon?
E-commerce is a big reason.
Companies, especially Amazon, crave warehouse and distribution space.
“E-commerce is the biggest trend,” Ryan said. “Amazon is moving into Worcester County.”
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Amazon is expected to open a 120,000-square-foot warehouse and distribution center in fall 2022 at the site of the former Greendale Mall in Worcester.
Next summer, the Seattle-based behemoth is also expected to move into refurbished warehouse space at 135 Intervale Road in Fitchburg, a 350,000-square-foot facility that is owned by Goodman’s company.
The e-commerce trend started long before the pandemic, but the pandemic exacerbated it, Ryan said, as online purchasing shot up during the shutdowns caused by COVID-19. As result, Amazon and others need space to store their products for delivery.
As Goodman sees it, retailers need space to get their products located closer to their customers so they can be delivered quickly by truck. This replaces the traditional model of customers shopping in stores.
“Retailers are looking at industrial properties as a growth strategy,” Goodman said.
Other Businesses on the Prowl
Amazon isn’t alone in demanding more industrial space. Other business are on the prowl for more square footage for storage, manufacturing and distribution.
Goodman’s firm bought the former A. Schulman manufacturing plant at 53 Millbrook St., gutted and renovated it, and leased the entire floor plan – roughly 100,000 square feet – to Polar Beverages.
“Worcester is wonderfully situated to be a warehouse environment,” said Chris Crowley, executive vice president at Polar Beverages. He lauded the city’s access to highways that allow products to be shipped out quickly and efficiently.
But when it comes to finding manufacturing space, Crowley said that can be “so hard.”
He explained that many potential industrial locations in Worcester are “brownfield” sites that come with contamination left behind by earlier manufacturers. Cleanup costs can be prohibitive.
It’s also more expense to manufacture in Massachusetts, compared to some other parts of the country. Crowley cited higher costs of doing business in the Bay State, including hefty water, electricity and gas rates.
Polar has a 400,000-square-foot-plant in Georgia that Crowley said was much easier to get done in terms of bureaucratic red tape. The land the plant is located on is flat, and it made logistical and build-out work a breeze, compared to what needs to be accomplished to get a hilly site in Worcester ready for production.
And Worcester’s doesn’t have many options in terms of expansive sites that provide the necessary space to set up a large manufacturing plant.
“There is finite space out there. It’s all chopped up,” Crowley said.
Even with those challenges, businesses continue to demand industrial space in the Worcester area. Ryan said he secured 60,000 square feet of space in Sutton for Un1f1ed² Global Packaging Group. The company designs, tests and manufactures packaging.
Columbia Tech is another example. It provides product development, manufacturing, global fulfillment and aftermarket services to a variety of industries. Umphrey’s firm worked with the company to land what he called a “lot of space” in Westboro.
Disruptions in the Supply Chain
It’s still the case in many industries during the lingering pandemic, and it contributed to the overheated industrial market, Ryan said.
Ryan explained that businesses want to avoid supply-chain disruptions going forward, and he’s heard of companies stocking up on supplies and securing warehouse space to make sure they aren’t caught off guard again.
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The cannabis industry is another factor.
Cannabis businesses are proliferating, and they’re scooping up buildings, Ryan said. This takes away available inventory for companies that need more room to store and distribute their products.
“They’re eating into what would have been available inventory,” Ryan said.
In Worcester alone, there are 10 retail marijuana establishments open for business, according to the Worcester Regional Chamber of Commerce.
Skyrocketing Rents — Familiar Story of Supply and Demand
It’s simple economics.
More demand for industrial space, coupled with limited availability, drives up the cost of rents.
Before the pandemic, Ryan said the “base rent” for industrial space — what a business pays before the owner passes expenses on to a tenant like property taxes, insurance, and maintenance — was generally $6 to $6.50 per square foot.
Today, it’s jumped between $7 and $8.50 per square foot, according to Ryan. That can be a significant expense for companies needing large amounts of industrial space.
As for solving the space shortage, Ryan said a long-term strategy is to build more industrial properties. A more immediate plan could be repurposing existing buildings.
Both options can be costly.
For starters, land is more expensive, as increased market demand drives up prices. There is also the costs of raw materials needed to build, which have become more expensive during the pandemic. And there are local regulations, like permitting, that add to overall development costs.
Ultimately, Worcester — even with the soaring cost of rents and limited supply — is in a good position to be a destination for companies looking for industrial space, according to Goodman.
“Worcester is a good point to launch from in New England,” he said.
By Henry Schwan