Worcester Commercial Real Estate Market in 2017

Worcester Commercial Real Estate Market in 2017

Following recent trends, the 2017 Worcester commercial real estate market looks quite promising. As with other areas in the vicinity of Boston, the focus in Worcester's commercial and industrial sector has been redeveloping and renovating existing structures. Industry experts say Worcester is poised to become an "18-hour" city. This term refers to up-and-coming cities that are viable investment alternatives to the biggest cities in the US: Boston, Chicago, New York, Los Angeles, San Francisco, and Washington, DC. Worcester's proximity to Boston and its comparatively cheaper market rates is drawing attention from investors. In 2016, domestic and global capital began to flow steadily into Worcester's market. That trend is continuing in 2017, and as a result, significant revitalization has already taken place. In the past several years, a few large-scale projects have been completed as part of the Worcester Redevelopment Authority's Downtown Urban Revitalization Plan. Shopping centers are expanding and reformatting their spaces to meet the needs of consumers and retailers. Suburban office parks are improving the quality of their spaces to attract tenants and their workforce. The availability of multi-family housing units is increasing throughout Worcester, as developers are converting historic buildings and other under-utilized buildings into attractive and affordable living space. Grocery stores, particularly small-scale grocers, are eyeing Worcester as a prime location to operate. With the rise of ecommerce and a consumer demand for products, the industrial market in Worcester is also experiencing growth.

Despite these recent rapid changes, industry experts believe that little new ground-up construction will take place in Worcester in the next few years. There is still an abundance of properties that total 100,000 SF or more, which negates the need for new construction. Instead, corporations and businesses are occupying vacant lots, repurposing warehouse space and defunct commercial space, and even creating innovative mixed-used spaces to conduct business out of Worcester.

Throughout suburban Boston, vacancies have increased by 18.6 percent in 2017. Class B vacancies rose slightly in Q2 2017, while Class A vacancies fell to 18.2. Class B properties have seen negative absorption for nearly a year. Across all categories of commercial property in suburban Boston, approximately 2.6M SF was subleased, which is not a remarkable change from last year. Prospective tenants in Worcester, as with other areas around Boston, are looking for build-to-suit opportunities. Office space and laboratory space is in demand in Worcester, as the life science market continues to expand. Life science enterprises are particularly drawn to Worcester because it contains land, and that land is available for a better price than other areas in suburban Boston, particularly Cambridge. Technology companies, pharmaceuticals, and large retailers are increasingly attracted to the area and searching for space to meet their unique needs. This trend is expected to continue, as software as a service (SaaS), 3D printing, manufacturing, and the health and science markets are forecast to drive greater Boston's economy in the future. To date in 2017, the combined supply of Class A and Class B office and laboratory space in Worcester has totaled 2,892 SF. At 12.7 percent, vacancy rates in the office and lab market are lower in Worcester than in any other market in suburban Boston. In Q2 2017, approximately 348,000 direct SF of commercial space was available in Worcester. The availability of space for subleasing was 17,600 SF. This year, Worcester has averaged an absorption rate of 21,635.

In a departure from past trends, tenants are being more selective about the space that they occupy. With the growth of the economy, they can afford higher quality spaces, and price is less of a concern. In the commercial sector, tenants are searching for a mix of amenities, access to transportation centers, and proximity to a talented, educated workforce. Landlords are trying to meet those demands by creating amenity-filled space and conveniences that tenants require. In the Worcester commercial real estate market, demand for commercial space is influencing pricing. In 2016, the asking rental rate per SF for office space was $17.44. That rate is down slightly from 2015. Countywide, office space rental rates averaged $15.54 in 2016, which is 0.6 percent lower than going rates in Worcester. Statewide, office space rental rates in 2016 averaged $16.36. Rental rates are expected to increase for Class A and Class B properties, although Class B properties are losing value as prospective tenants compete for higher quality Class A properties. A growing need among commercial clients is a demand for innovative and flexible use space. Therefore, the industry is seeing an increase in prices for brick-and-beam Class B spaces ($50-$55 per SF gross), which were traditionally less expensive than lower-level spaces in towers. In the Boston vicinity, rental rates have increased by four percent year-over-year. As of 2017, rental prices for Class A high-rise spaces are $65-$85 per SF. Class A mid-rise properties rent for $55-$65 per SF. Class A low-rise spaces rent for $50-$60 per SF, and Class B spaces rent for $45-$55 per SF. In the next several years, competition will be most fierce in places with the greatest potential to access Boston's expanding population. Public transportation is a critical factor in the growth of Worcester's commercial market. The MBTA, one of Boston's most frequented forms of public transportation, carries over 1 million riders daily on its buses alone. The complete MBTA network consists of subways, commuter trains, and ferries, covers 3,244 square miles. It accommodates nearly 5 million residents and extends to 175 communities. In Worcester, proximity to the MBTA is influential on rental rates. While rental rates are expected to move upwards for commercial properties, sublease rental prices have remained fairly steady in the past year.

As a result of Worcester's recent revitalization, strategically located retail and office space is in high demand. In the prominent downtown area and the Financial District, rental rates are averaging $16.00 - $18.00 per SF. Landlords are leasing a wide range of spaces, from 160 SF to over 4,600 SF. Proximity to major highways (I-290 and I-190) and the courthouses translate to a higher rental rate. In desirable locations and modernized buildings with amenities such as conference rooms and reception areas, rental rates are exceeding $20 per SF. The availability of parking spaces for tenants is also a factor in pricing. Throughout the city, office space rental rates start as low as $12 per SF. Purchase prices for prime Class A office buildings are exceeding $1M. Some office spaces on the market have the opportunity for expansion. Others are offered as part of a recent renovation.

The opportunity for retailers is also plentiful in Worcester, which has a wide range of retail properties available for sale and rent. Prospective tenants will find individual retail spaces in malls, stand-alone properties, and entire retail centers. Opportunity abounds for smaller retailers looking for a spot in the high-traffic downtown area of Worcester, as well as retailers searching for space in established shopping centers with big box stores. Some buildings offer mixed use potential with retail space on the ground floor and apartments above. In 2017, retail properties in Worcester are renting for an average of $10 - $18 per SF. Entire buildings and properties are selling for prices between $350,000 and $1M. Prices depend on location within the city, the age of the building, and amenities like parking, heating, and air conditioning. Prospective tenants are finding a range of spaces, from under 800 SF to over 42,000 SF. It is not uncommon to see a building or entire floor for sale or rent with the option to divide and sublease. The 2017 retail property market includes mixed use, special use, and general retail spaces.

Thanks to high demand for industrial sector products from Boston's educated and economically stable population, the industrial market in Worcester is thriving. Consumers are looking for same day or next-day delivery in places close to where they live. Of significance to investors and prospective industrial tenants is that this trend is not common across the United States, and the greater Boston area has the space to accommodate those needs. Locally, vacancies are falling in industrial properties. As of Q2 2017, industrial vacancy rates reached an all-time low of 10.7 percent in the greater Boston area. Large-scale retailers are finding significant value in properties throughout the region, as they are able to convert strategically located but outdated warehouse and manufacturing facilities into modern use. Rental growth rates in the industrial sector continue to climb. In 2017, industrial rental rates expanded 9.2 percent over rates in 2016. Conditions appear to be favorable in the near future for tenants and landlords, as economic growth looks strong. Landlords are accommodating tenants' needs for manufacturing, distribution, general warehousing, and flexible space.

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This year, the industrial real estate market in Worcester has seen a flurry of activity. Landlords and owners are renting and selling flexible, manufacturing, warehousing, and medical space. Rental prices for industrial properties are averaging $5 - $15 per SF. Sale prices for properties ranges between $350,000 and $1M. Prospective tenants can find space available in a range of sizes, from under 4,000 SF to over 600,000 SF. Properties are available for use as distribution warehouses, facilities, and flexible space with the opportunity for corporate offices and retail operations. Proximity to transportation centers, including the I-90 corridor and population densities is essential. The Worcester commercial and industrial real estate market also includes vacant land and lots ranging from 0.5 acres to over 2 acres. Proximity to high-traffic areas is a major selling point. Medical office space, another popular category, rents for an average of $15 - $20 per SF in Worcester. Tenants can find properties in a variety of sizes, from around 400 SF to over 5,000 SF. As with other areas of the commercial market, many medical office suites are coming to the market as a result of renovation and restoration projects.

In Worcester, demand is increasing for multifamily homes. Hundreds of new housing units have entered the local real estate market in the past year. Occupants are seeking proximity to workplaces and conveniences like shopping malls and grocery stores. Parking, especially in more densely populated areas, is at a premium. Instead of constructing complexes for multifamily living, developers are renovating historic buildings and structures like warehouses and facilities. With an abundance of higher education establishments in the vicinity and a population expansion from Boston to the surrounding suburbs, demand for housing units is expected to remain high in the near future.

With such a range of commercial properties to choose from, it might take some time to figure out which type you should buy or rent. The commercial property sector breaks down into six primary categories: multifamily, hotel, office, retail, industrial, and healthcare. Multifamily properties are residential buildings with more than four separate living units. They range from small one or two-level garden apartments to mid-rise apartment complexes, which extend five to ten stories, and high-rise complexes, which are 10 floors or more. Garden apartments are three or four stories tall. They have 50-400 units and are primarily self-sufficient. Mid-rise complexes have anywhere from 30-110 separate living units. They may or may not have an elevator. High-rise complexes often have concierge service. There are 100 units or more per building. Hotels also vary in size and purpose. Full service hotels are strategically located near main business centers and tourist areas. They have onsite amenities like restaurants, bars, and conference rooms. Limited service hotels are smaller. They may offer dining opportunities, but do not have amenities like meeting rooms. Extended stay hotels are similar to apartments. They are characterized by self-sufficient units with larger rooms and small kitchens. They are designed for longer term rentals of one week or more. Office buildings range from small single-tenant properties to suites in professional office buildings or towers and skyscrapers. Some corporations move into mixed-use environments, either with office space on the ground level and apartments above or with corporate offices attached to a warehouse and distribution center. The retail sector includes pad sites and standalone facilities. They are usually in visible locations near highways, shopping centers, retail buildings, and power centers with big brand anchor tenants like Best Buy, OfficeMax, Staples, and Walmart. Industrial properties have the most technical distinctions. Smaller industrial properties are classified as flexible spaces or research and development properties. Mid-range properties include warehouses, and the largest spaces are called "big box" lots. Clear height is a key differentiating factor in determining industrial property size. The term refers to the actual height of the building's interior, down to the bottom of the steel girders. Smaller properties typically have a clear height of 14-16 feet. That number increases to 40 feet for larger properties. The type of number of docks that industrial buildings have also determines their classification. Grade level docks mean that the parking lot and warehouse floor are on the same level. Semi-docks are docks raised 24 inches, which is the height of a delivery truck or a pickup truck. A full dock reaches 48 inches above ground level, which is the height of a semi-truck. Some industrial buildings have rail spurs for freight train cars to drop off and pick up loads.

Within the main categories of commercial properties are several subcategories. Office space breaks down into specific classifications of Class A, Class B, and Class C. Class A buildings are considered premier spaces. They are modern, have high quality construction, and offer amenities for tenants and their customers. Class B buildings are also generally made with high quality construction, but they are situated in less visible areas. Class C includes all other types of office buildings. Office buildings can also be classified based on location. Central business district (CBD) buildings are located in the heart of the city. They include skyscrapers and high-rise buildings. Suburban office buildings are mid-rise structures that cover approximately 80,000 to 400,000 SF. They are located outside of the city center and may exist in office parks, which is a complex of mid-rise buildings placed in a campus-like setting with restaurants, outdoor eating areas, small parks, and other perks. The industrial real estate sector breaks down into the categories of heavy manufacturing, light assembly, flex warehouse, and bulk warehouse. Heavy manufacturing facilities are categorized as special use. They can be very narrowly tailored to meet a tenant's needs. Because of their adaptability for each tenant, heavy manufacturing facilities are among the most difficult to re-purpose for future tenants. Light assembly buildings are smaller than heavy manufacturing buildings and much easier to convert. They are used for storage, product assembly, and even corporate office space. Flex warehouses are industrial properties that area easy to convert for multiple needs. They contain a mix of industrial and office space. Bulk warehouses are large facilities that span 50,000 – 100,000 SF. They are ideal for regional distribution and are often sited near major highways for easy truck transportation. Retail property includes strip centers, community retail centers, power centers, and regional malls. Strip centers are the smallest of this category. They primarily contain small local retail stores like nail salons and restaurants. They may or may not have a large anchor tenant like Walmart or Home Depot. Community retail centers average 150,000 – 300,000 SF. They usually have several anchor tenants and a few local businesses. Power centers feature a higher concentration of anchor tenants (big box retailers); each large tenant occupies between 30,000 and 200,000 SF. Power centers contain several out parcels. Regional malls range from 400,000 – 2,000,000 SF. They have numerous big box and department stores like Nordstrom, Barnes & Noble, and Best Buy. In addition to categories above, commercial property also includes land. Greenfield land is undeveloped land, such as farmland and pastures. Infill land is a normally vacant property located within a city's boundaries. It may have been developed in the past. Brownfield land is land that was once used for industrial or commercial development. These parcels may be environmentally damaged, but with modification and clean up they can be reused for a variety of purposes.

As with all real estate transactions, prospective buyers and tenants in commercial spaces follow certain trends. Individuals living in multifamily settings typically lease a unit for one or two years. For investors, multifamily units are considered to be defensive investments in the commercial sector. There is usually more stability among office space leases, as tenants occupy properties for longer periods of time. When leases expire, rental rates for those spaces may step-up or step-down to meet current market lease rates. Unlike residential tenants, commercial tenants can be quite selective about their requirements. In Worcester, tenants often request special features in their leases, such as the right of first refusal to rent contiguous space, signage rights, and building purchase options. The retail sector ranges from small neighborhood shopping centers to regional shopping malls that draw customers from great distances. As with office building tenants, retailers generally sign long-term leases. They may also be subject to step-up lease rates after a period of time to compensate for falling behind average current market rates. Retail tenants, especially newer clients, may demand special improvements and modifications to customize their space in a way that captures the look and feel of their business. Industrial properties are generally build-to-suit buildings. Due to size and special requirements, they can be difficult to renovate and repurpose without extensive modifications. Warehouse and distribution centers are the exception, as they often have a more generic layout. Investors appreciate the stability that the industrial market brings to an area. Unlike large-scale residential complexes and retail businesses, industrial facilities are not as dependent on trends in the local economy and population for success. Instead, they are influenced by larger economic drivers such as global trade growth and corporate inventory levels. As with office and retail properties, industrial tenants usually occupy a property for an extended period of time. Rented industrial properties are also subject to rate step-ups to account for rates that fall behind current market prices. For investors, a difference between retail and corporate tenants and industrial tenants is that industrial facilities are ordinarily occupied by a single tenant. This raises the risk of the property slightly.

Regardless of property type and whether you are looking to rent or buy, there is good opportunity in Worcester's commercial real estate market for businesses and investors.