The Read - Max's Macro Take (Volume I)

I had this clock in my house growing up. It's the image that comes to mind when I think about today's market. There are a lot of emotions flying around right now — so let's start with the facts.

Take a look at the sheer number of industrial and flex deals in the Boston metro over the last few years. A boom and a pop during Covid — no surprise there. And while the numbers are down post-Covid versus pre-Covid, they're not down by much: 525 transactions in 2019 versus 476 last year. If your entire business was built in that delta — the 49 deals separating the two — it probably feels like a deep recession. If you're in the majority, it feels more like "back to normal," just a little worse off on interest rates, cap rates, and inflation.

Theme #1: The Marginal Buyer Is Gone

These are the buyers who ride the rocket ship on the way up — speculating on ever-rising rents and falling cap rates. The formula really rides on rapid appreciation from cap rate compression and rising rents. They're not a bad buyer in a rising market. When the market flips, they're stuck with two, maybe three options: fold their cards and go do something else; fixate on every basis point as the deals get razor thin; or tell a seller what they want to hear, tie them up under contract, kick the can as long as possible to exhaust the seller, and gamble on a re-trade at a new number that sort of makes sense.

So who are the core buyers left in the majority? This is who we have today: the truly motivated crowd. Not speculators — a constellation of players buying out of genuine need. The operator who just won a new contract and needs a facility to expand into. The private investor who just sold a multi-family and wants to 1031 into a small-bay building to hedge concentration and rent-control risk (I know it's off the ballot... but trust me, it's coming back). The high-net-worth family that picks up an investment property every year for the tax shelter. The list goes on.

What they share: it's their own money, so they don't need permission from an investment committee. Basis matters to them, but they don't fixate on every basis point of yield. And their horizon runs a lot longer than the next three years.

Theme #2: The Floor Feels Surprisingly Sturdy

I've been genuinely shocked at how resilient the economy has been these past few years. I made the mistake of listening to older and "wiser" voices who told me a foreclosure cycle was coming. It's not. In hindsight, it's obvious it was never going to. The Covid boom generated a mountain of new equity and very little debt. What overleverage exists is concentrated in a few specific pockets — it has nothing to do with the broad base of the core market.

Outside of the ~5M SF of big-box oversupply on the South Shore and the life-sciences overbuild, New England's industrial stock is generally undersupplied. Even at today's nominal values — which have risen considerably — it still trades at a meaningful discount to replacement cost. That's a supply/demand imbalance baked right into the market. Could vacancy tick up in a recession? Sure. Could rents fall? Sure. It’s a risk asset. But there's no persistent overhang of supply across the majority of the market, so even a downside scenario should be short and shallow before the powers that be juice the economy back into recovery. And my read continues to prove out: we're going to be in a persistent high-inflation environment for a while. In that world, prices go up and they're very tough to pull back down. Outside the oversupplied pockets — big-box, mainly — that see softer pricing, I just don't see it here.

Theme #3: Everybody's Feeling the Cost

So what does all of this actually feel like on the ground? I'd call it a balanced market. (Don't blame me for needing a market shift to see it — I came into the business in 2012, already into the recovery, so this is my first real cycle.) Tenants don't snap up space on a dime. Sellers give a lot of thought before deciding to list. Buyers are deliberate and don't rush. That tells me everyone is feeling the weight of today's costs — capital gains, a TI package, downtime on a vacant space. Everyone wants to be sure they're getting real value for the money they're spending. The memory of free money is basically gone.

Which brings me back to the clock. It isn't at high tide. It isn't at low. We're at half tide — and I think we stay here for a while: low inventory, higher nominal prices, long transaction timelines. But also — positive leverage (cap rates over the cost of debt), low vacancy, sticky rents.