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Industrial Buildings
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
The Reenstierna Associates Report is published as a service to the clients
of Eric Reenstierna Associates and other real estate professionals. The
views expressed are those of the articles' authors and do not necessarily
reflect those of other members of the organization. Copyright 1993. All
rights reserved.
Eric Reenstierna Associates
24 Thorndike Street
Cambridge, Massachusetts 02141
(617) 577-0096
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