Finding Opportunity Amid the COVID-Induced Slowdown

Philip DeSimone – Executive Vice President
September 2020

The COVID-19 health crisis has sent a shock wave throughout the U.S. economy. In the second quarter, U.S. gross domestic product (GDP) declined from the first quarter by 32.9% when measured on an annualized measure. In Massachusetts, the economy shrank at an even more staggering pace, plummeting by an annual rate of nearly 44%, the biggest decline on record according to economists at MassBenchmarks.

Since the virus outbreak, the working world has moved quickly from business-as-usual to office closures, work-from-home, Zoom meetings and online shopping.

This has created unprecedented challenges for the commercial real estate industry. The pandemic directly impacts the demand for space through social distancing, shutdowns, supply chain disruptions, employment loss and a shattering of consumer confidence.

MetroWest Commercial Real Estate
As with the rest of the country, the hardest hit economic sectors in the MetroWest region have been hospitality (hotels, restaurants, entertainment) and retail. People are staying close to home where they feel safe. And they are tightening their purse strings to spend on essentials – primarily food, medicine and home supplies – and getting these delivered more often.

There are, however, some bright lights still shining in MetroWest commercial real estate – most notably the life sciences and industrial/warehouse sectors.

Life Sciences
Pre-pandemic, Massachusetts was already the #1 Life Science cluster in the US.. In response to the coronavirus, Mass Bio lists more than 100 life sciences companies either headquartered or with a presence in Massachusetts working diligently to develop diagnostics, vaccines and therapeutics.

Many of these companies are looking for space beyond Cambridge and the Boston Seaport. Rising demand is being driven by a need for safe, clinical laboratory space and an appetite to scale up and locate its manufacturing nearby. Looking west, these growing companies are viewing a vibrant MetroWest community with nearly 100 biotech, pharmaceutical and medical device firms, including Sanofi Genzyme, Sunovion, GE Healthcare, AbbVie, Astellas, and Replimune and Boston Scientific,. These growing firms are located across 21 MetroWest communities including Framingham (15), Natick (12) and Marlboro (16).

Biomanufacturing operations have grown in importance as concerns over COVID-19 related supply chains linger. With over one million square feet of requirements currently in the market, locations within one hour of Cambridge research facilities are in high demand for production. In August, CRISPR Therapeutic signed a 50,249 square foot lease with King Street Properties’ life sciences hub at 33 New York Avenue in Framingham.

Further down the road, Kelleher & Sadowsky recently announced two important transactions at the 46-acre Reactory biomanufacturing campus being developed by the Worcester Business Development Corporation (WBDC). Shanghai-based contract manufacturing organization WuXi Biolgogics has begun building a $60 million biologics production facility. Webster-based Galaxy Life Science has secured the rights to acquire all remaining land parcels at The Reactory for further development. Later this month, Galaxy will begin construction of a state-of-the-art multi-modal life sciences facility.

Industrial/Warehouse
Not surprisingly, e-commerce is booming with online spending reaching its highest level in the U.S. representing 20.8% of total retail sales in the second quarter (up more than 44% year over year). The continued increase in online spending has fueled unprecedented demand for a variety of different types of fulfillment and distribution centers.

Amazon (e.g. Milford, Taunton, Dedham, Fall River) alone is building out a trillion dollar footprint across the nation consisting of million square foot fulfillment centers, midway sortation centers and last-mile delivery stations. But demand is coming from more than Amazon. Traditional retailers such as Walmart, Best Buy and TJXX are actively building out their distribution ecosystem. Shipping giants FedEx (Boylston) and United Parcel Service (Shrewsbury) are at it, too. I

These brand name tenants with investment grade credit are attracting investors to the MetroWest market. In Milford, Cabot Properties recently purchased 29-acre property with 410,000 square feet of warehouse space housing Amazon and global communications supplier Anixter. In Northborough, TA Realty built a 220,000 square-foot warehouse without a tenant and is now fully leased (Maintenance Supply Headquarters, Metrie). Despite the pandemic, investors appear confident.

Office
People understandably want to work in an environment where they feel safe. In an August survey by the Massachusetts Competitive Partnership (MCP) of 106 Massachusetts companies, 82% of its 127,000 employees are currently working from home. When queried as to how many employees were expected to work on-site post-COVID vaccine, employers only expected 47% to return. That’s staggering!

Factors impacting employer’s return-to-workplace decisions include:

  • Employee sentiment (44%)
  • Waiting for a treatment or vaccine (44%)
  • Waiting for infections rates to reduce (40%)
  • Opening of Schools (38%)
  • Availability of childcare (25%)
  • Safe and available public transportation (23%)
  • Further government guidance (16%)
  • Improved rapid testing results (13%)

Not surprisingly, most companies are asking for rent relief and extending their leases for six months to a year until there is more clarity. One example is a firm that occupied 40K square feet in downtown Boston and then relocated to three different locations (each 10K SF) in Boston, Burlington and Braintree to accommodate its employees safety concerns while in the office and commuting.

This “hub and spoke strategy” could benefit the MetroWest office sector. In the MCP survey, 8% of the companies are considering relocating some portion of its urban office footprint to the suburbs. While not a wholesale migration, the number of urban tenants touring has increased. Some are considering satellite locations like the example above. Others are considering moving back-office operations.

Many architectural/design firms are helping area companies figure out their post-COVID workplace. This will no doubt result in companies allotting more square footage per employee. Will this offset work at home or job reductions? Not likely. Our best estimate is that companies will reduce their office footprints by 25% going forward.

Already large sublease inventories are sure to grow, presenting great value for opportunistic tenants.

Retail
Owners of retail properties are being transformed into new usages. Health care organizations are looking to redirect their services to where the population is rather than a central location like a hospital. In the past year, the Kelleher & Sadowsky team helped relocate Reliant Medical Group to such a retail environment in Westborough, Worcester and Auburn.

Retail stores are typically in good locations with ample parking and visibility. This mixed-use retail-healthcare trend has been happening for some time and will continue.

A new re-purposing trend is taking shape as well: Malls are being claimed by the industrial sector. Besides having lots of space, parking and population access are key ingredients for successful distribution hubs. In Ohio two vacant malls are being re-purposed to become Amazon distribution centers spanning nearly a million square feet! We believe that the bankruptcies of anchor tenants such Sears, JC Penney, Lord & Taylor and others will only hasten this growing trend.

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Philip DeSimone is an Executive Vice President at Kelleher & Sadowsky. He can be reached at [email protected] or 508-635-6795.

2020-09-25T16:45:32+00:00