Last Mile: eCommerce's Impact on Boston's Industrial Market

The eCommerce economy has had a profound impact on the industrial real estate market, with each month adding even more pressure to record low availability nationwide. In particular, eCommerce key-player Amazon has had an outsized influence on warehouse availability in Greater Boston. Amazon’s “Last-Mile Distribution” strategy employs a network of giant distribution centers where packages shipped at the local level rely on Amazon’s fleet of drivers and contractors to deliver packages right to the customer’s door, and the company has been both building out facilities as well as leasing available warehouses both inside Boston as well as nearby outskirts. As people nationwide remain home-bound as a result of the global pandemic, the industrial market continues to crowd for a dwindling supply of space.

In the first quarter of 2021, industrial vacancies dropped to 3.8%, and the surge of demand for large distribution warehouses has put pressure on the industrial market. Industrial vacancies, seemingly immune to rising costs, have continued to plummet as a result of the disruption eCommerce has had on the industry, where tenants are competing in an ever-increasingly crowded field for dwindling supply. CBRE released the results of first-quarter rents across the industrial market in Greater Boston where asking rents have eclipsed $10.27 per square foot. “The lack of quality supply, coupled with insatiable demand for industrial space, continues to put pressure on asking rents,” said CBRE. “This growth caps one of the best years in history for the market, which saw a total of 3,996,297 sq. ft. of positive absorption in 2020.”

The COVID-19 pandemic has exacerbated conditions, where consumers have been forced to stay home for more than a year. “In the first 9 months of 2020, which forced many to remain at home due to the pandemic, e-commerce sales increased 34 percent,” said the Metropolitan Area Planning Council. “Warehouse rents in the Boston-area market have increased 42 percent over the last two years to an average of just over $12.00 per square foot.”

The resulting increase in online shopping and local deliveries has accelerated eCommerce’s growth and hold on the warehouse market. “The warehouse/distribution subtype remains the most fundamentally sound, as the only subtype to see any real inventory growth,” said Elizabeth Berthelette, Director of Research at Newmark Knight Frank. “Major retailers continue to flock to the Greater Boston market, likely to contend with Amazon’s dominant distribution network. All signs point to a strong 2021 overall.”

In addition to buying up available warehouse space, Amazon has been building out. The company is currently constructing a 145,000 SF facility in Plymouth, a 320,000 SF warehouse in Milford and a 354,572 SF warehouse approved in Randolph, with proposed build-outs for 5.1M SF in North Andover, 232,500 SF in Dedham, and 826,000 SF in Revere. Proposed hot spots also include Widett Circle in Boston with 805,000 SF of space after a failed bid for a Dorchester Avenue location.

Constraint of space has driven growth out to the I-495 Beltway, and pressures on supply have been acute in Metro West. In the first quarter of 2021, asking rents have reached $9.58 per square foot while asking rents along 495’s northern reaches have pushed up to $11 per square foot. According to Hunneman’s Real Insights report, “stress on inventory levels has caused a lot of pressure on the 495 Belt, where most of the industrial space is shifting to a robust construction pipeline.” 

At ULI Boston/New England’s digital panel discussion “Trends in Multifamily Development”, Michael Boujoulian, Managing Director of Alliance Residential, discussed the reuse of shopping mall retail space as distribution centers as space becomes increasingly limited. “We have these huge Macy’s and Sear’s, and some are going to become distribution centers for how the new economy works, and competing with Amazon and Walmart distribution hubs,” said Boujoulian. “Some of these spaces already have tall, clear heights and great regional access.” Conversions of lesser-performing malls has been gaining momentum in Greater Boston, with the Greendale Mall in Worcester transforming 430,000 SF of former retail space into a 121,000 SF warehouse, and the conversion of an 86,564 SF retail strip in Randolph into an Amazon Fulfillment Center.

As cities and states begin to reopen after a long pandemic-induced hibernation, the industrial warehouse market will continue to experience shifts. The promise of a vaccinated public and hypercharged economy as a result of a year’s worth of pent-up energy is looking increasingly likely, and there appears to be no relief to rising rents and inventory scarcity in sight. As eCommerce giants continue to bring new products to market, developers are playing a long game of catchup with warehouse inventory and an even stronger economy in the near future will likely cement in demand for years to come. 

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