Boston’s Changing Climate

Feb. 8, 2008
Boston’s growth has never been as explosive as the fast-track markets of the Sunbelt, but when business is good, the Hub City and its suburbs enjoy a very solid business climate.

Boston’s growth has never been as explosive as the fast-track markets of the Sunbelt, but when business is good, the Hub City and its suburbs enjoy a very solid business climate. On the flip side, when the economy turns sour, Boston distributors and reps feel the same pain as their brethren in more cyclical regions of the United States.

On the acquisition front, New England wasn’t seeing as many acquisitions as the Sunbelt until the past few years. But recent acquisitions have changed the market, with several national and large players acquiring strong independents. Northeast Electrical/Eagle Electric Supply, Canton, Mass., a subsidiary of Sonepar USA, most recently bought Ralph Pill Electric Supply, Boston, one of New England’s largest independent electrical distributors (see Electrical Marketing, June 29, 2007), after Sonepar bought Eagle Electric years ago and renamed it into NorthEast Electrical/Eagle Electric Supply. Last year, Consolidated Electrical Distributors Inc., Westlake Village, Calif., bought US Electrical Services (USESI), Exton, Pa. CED also owns Standard Electric Supply, Wilmington, Mass., which it purchased in November 2002 and runs as a stand-alone operation. Rexel’s purchase last year of GE Supply, Shelton, Conn., has also had an impact. Boston area distributors and reps agree the recent surge of acquisition activity is changing the Boston electrical distribution landscape.

“Market conditions are under more pressure than normal and are somewhat adversarial at times as everyone attempts to maintain economic health in their own ways,” says Randy Pinkofsky, president, The Yanow Companies, Brockton, Mass. “Distributors are experimenting with a CDC concept. Others are trying branch P&L formulas. Still others are looking at multiple mergers. Purchasing, logistical and sales decisions are being made from a more corporate position, sometimes local, sometimes national. Reps are being requested and required to manage more locations for growing distribution along with being given more responsibilities in general by distributors and manufacturers.

“All in all, it appears to me that New England is sort of ‘getting in line’ with many other market areas across the country, although we still see sister metro areas with the same trials, tribulations and business models as we have. We see this continuing to evolve with more consolidation, changes in procurement processes, changes in responsibility, etc.”
The Boston metropolitan area and its 4 million-plus residents dominate the New England economy. Financial firms are key employers in the area and much of the recent office construction in downtown Boston has accommodated the expansion of the area’s banks and insurance companies. Short-term demand appears high for downtown office construction, but some sources said financing future projects may be difficult. Boston had one of the lowest U.S. office vacancy rates during the last three months of 2007, CB Richard Ellis data show. Downtown Boston’s office vacancy rate was 6 percent, down from 6.1 percent, in the previous quarter.

“There is currently more than 4 million square feet of lease requirements in downtown Boston,” says Pinkofsky of The Yanow Companies. “There is not enough space to fill these needs. Large conversion/tenant fit-up work is strong. However, general construction will probably reach its peak mid-2010 fulfilling most of this demand, while at the same time and subsequently offering great opportunities for our company and many others. The bad news is there will still be negative space until this is complete, hindering new business and tax revenues for the city.”

Byron Brewer Jr., president of Northeast Marketing Group LLC, Wallingford, Conn., agreed that office space is tight in downtown Boston. Most of the expansion is either residential condominiums in existing commercial space or financial/insurance moving into existing space, he said. “The real opportunity exists with the educational sector, which spends money on infrastructure and upgrades to take advantage of utility rebates and LEED building certifications. Green is a growing trend in this segment.”

Brewer said it continues to be a trend for big financial companies to expand downtown. “This trend has been going on for the past five years, filling empty commercial space downtown. This has been a good source for submetering as well as lighting upgrades. These new office spaces are requiring dedicated power-quality lines to support their computer networks, which translates to sales opportunities for analyzing power quality, UPS’s, TVSS and other related power-quality grounding products are being consumed for these customers.”

In some instances, higher rents for downtown office space are pushing some tenants to look for office space in other areas outside of downtown Boston. Office vacancy rates have dropped, leading to a rise in rental rates, said one industry veteran. “Recent articles continue to show that Boston has approximately $16 million in the pipeline for office and mixed-use space,” he said.

The South Boston waterfront is another area that is seeing significant growth. Fan Pier, a 21-acre, $3 billion mixed-use development, is just one of several development projects planned or under consideration in the Seaport District.

Several miles outside downtown Boston along the Route 128 beltway, biotech has been a growth industry. Pharmaceutical and medical businesses as well as software and IT-related work are common in the inner suburbs, said Byron Brewer Jr. of Northeast Marketing.

Bristol-Myers Squibb plans to build a $660 million biotech manufacturing plant on the former Fort Devens U.S. Army base near the 495 beltway. Near the southern arm of the 495 beltway, Robert Kraft, owner of the New England Patriots, is building Patriot Place, a vast real-estate development on about 350 acres surrounding Gillette Stadium.

Residential construction in the Boston suburbs is slow. Total building permits are down 23 percent year-to-date through December 2007, according to the National Association of Home Builders, Washington, D.C. Although New England did not get hit as hard as Florida and some of the other high-growth Sunbelt markets, as Pinkofsky of Yanow Companies said, “When you’re talking double-digit drops, I am not sure it matters if the Southeast got hit harder. We are feeling the pain. We are acting and responding to market conditions, the same as every other area of the country. We adapt, become more conservative, dig deeper, stay patient and hopefully the next natural business cycle (will come) to improve our overall economic health. The economy, like nature, will seek a healthy balance.”

Said Steve Helle of Granite City Electric Supply, Quincy, Mass. “We’re taking a pounding. When there is a development that has 100 homes, that’s a good-sized development. When you go to California and Florida and they pop up 500 in a whack, we don’t understand that concept. You can’t put up 500 homes in New England. The land is rocks and hills and mountains; not big flat, open space. But the residential business is flat. Anyone who says it isn’t down is full of beans.”

The area’s electrical distributors are optimistic about commercial business. “I’m excited about the commercial business,” said Helle. “There’s a lot of stuff on the drawing boards. There’s a lot of funded projects. The dilemma is cash is getting tight. Somewhere in this chain, cash is getting tighter for a lot of our general contractors and our electrical contractors and people are looking for reasons to hold up money. So I think it’s going to be a little tough over the next five years. But we’re here for the long haul. We see it as an opportunity. We had a good ride for a number of years. I think the commercial business will continue to be strong over the next four to five years.”