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 regional 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 EW, September 2007), after Sonepar bought Eagle Electric years ago and renamed it 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 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.”
Steve Helle, president and chief operating officer, Granite City Electric Supply Co., Quincy, Mass., cites the “Facing the Forces of Change” study published by the National Association of Wholesaler-Distributors, Washington, D.C., when he talks about the changing Boston market. The study said consolidation would “pinch” distributors, manufacturers and reps and change how they do business. As an example, he says two major manufacturers' reps that never had lighting (The Yanow Cos. and Yusen), are in the lighting business. “That's an example of a dynamic that never used to be the case. You rarely had a guy who had a wire line who also had lighting lines,” he says.
Stretching from the South Shore area near Cape Cod, west to Worcester, Mass., and north to the New Hampshire border, the Boston metropolitan area and its 4 million-plus residents dominate the New England economy. Financial firms such as Bank of America and Sovereign Bank 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, insurance companies such as Prudential and brokerage firms such as Fidelity. 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 shows. Downtown Boston's office vacancy rate was 6 percent, down from 6.1 percent in the previous quarter. A handful of downtown office developments are now underway and are due to be completed in the next three to five years, including Two Financial Center, a 214,000-square-foot building near South Station; Russia Wharf at 5490 Atlantic Ave. on the downtown waterfront with 660,000 square feet of new office space; and the new 1.4 million-square-foot South Station tower.
“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., agrees that office space is tight in downtown Boston. “We see minimal new office growth in downtown Boston,” he says. “Most of the expansion is either residential condominiums in existing commercial space or financial/insurance companies moving into existing space. 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 says big financial companies continue 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.”
The New York-based buyout fund Blackstone Group recently acquired an array of downtown office towers, making it Boston's largest single landlord. In some instances, higher rents for downtown office space are believed to be pushing some tenants to look for office space in other areas outside of downtown Boston.
“For Boston, the overall office vacancy rates have dropped, which led the way for the rise in rental rates (some as high as $75 to $90 per square foot), creating a tighter market,” says one industry veteran. “Recent articles continue to show that Boston has approximately $16 million in the pipeline for office and mixed-use space. Once this begins to flush out, we would hope to see a swing favoring tenants at that time. As a distributor, depending on the market conditions, this would award us opportunities based on the new construction.”
The South Boston waterfront is another area that is seeing significant growth. In late September, three years after Boston developer Joseph Fallon and his financial partners bought land from the Pritzker family for $115 million, guests and dignitaries gathered to celebrate the groundbreaking for Fan Pier, a 21-acre, $3 billion mixed-use development. The first building to rise will be One Fan Pier Boulevard, an 18-story office building designed by Elkus/Manfredi Architects of Boston and being built on speculation.
Fan Pier is just one of several development projects planned or under consideration in the Seaport District. Since 2000, more than 8 million square feet has been developed in the area, and an additional 20 million is under construction, approved or proposed, according to the Boston Redevelopment Authority, the city's planning and economic development agency. Access to the South Boston waterfront has improved with the new Ted Williams Tunnel connecting the Seaport District to Logan International Airport across the harbor and Massachusetts Turnpike extension. Boston also recently completed the much-maligned “Big Dig,” the nation's most costly highway project.
Several miles outside downtown Boston along the Route 128 beltway, biotech has been a growth industry and in many cases has replaced the manufacturing business that left long ago. Pharmaceutical and medical businesses as well as software and IT-related work are common in the inner suburbs, says Byron Brewer Jr. of Northeast Marketing.
“Due to the recent tighter market conditions in Boston and Cambridge, tenants were forced to make their way farther into the 128 belt, seeking alternatives for space and lower rents,” adds an electrical distributor who asked not to be identified. “This created activity in this beltway, with new state-of-the-art facilities boasting enticing amenities to attract and accommodate these tenants. In addition, retail complexes and restaurants followed pursuit of this activity.”
While the area's I-495 corridor farther outside the city appears to be the latest beneficiary of strong economic growth in the area, he says funding is holding back some of the projects. “The next logical transition will be for companies to be drawn to further opportunities along Route 495, in particular in the northwest sector,” he says. “Companies can still find ample land and existing infrastructures there.”
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. Plans for Patriot Place include a 14-screen movie theater, a 150-room Renaissance hotel, stores, restaurants and a 100,000-square-foot medical office center. The first phase of Patriot Place opened in November and has some large retail chains, including Bass Pro Shops.
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 says, “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.”
Says Steve Helle of Granite City Electric Supply, “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.”
While the area's electrical distributors and reps say the industrial business is not growing in Boston, they are optimistic about commercial business. “I'm excited about the commercial business,” says Helle. “There's a lot of stuff on the drawing boards. There's a lot of funded projects. The dilemma is that 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.”
Several distributors and reps were also excited about the market potential of green construction. In early 2007, the city of Boston amended its zoning code to require all private development projects of more than 50,000 square feet to be LEED certifiable, meaning they meet minimum standards of the United States Green Building Council's Leadership in Energy and Environmental Design rating system.
“In the near future, you will also see a continued wider spread focus on green building space as well as energy efficiencies,” says the distributor who asked not to be identified. “This concept is not new, but this is the most momentum our industry and market has ever seen. The green boom also forces new mandates/codes to be passed, leading manufacturers to re-invest more in new product advances and contractors to change their focus onto other products versus items they have been accustomed to working with for years and years. Advances in the lighting industry in particular will show explosive signs of growth.
“The institutions should see growth as well. For example, as our schools and universities continue to see record high enrollments, these institutions will be forced to continue to add enhancements, expand and re-invest. With Boston being one of the cities with the most schools in a particular square mile radius, the city and the industry should benefit. Hospitals will also need to keep up with the faster advances in technology and medicine as well as maintaining their facilities to meet the new codes and standards. All of these combined show promise .”
Boston by the Numbers
2007 sales through electrical distributors
No growth in total sales is expected in 2008, according to November 2007 forecast data provided by DISC Corp., Orange, Conn., www.disccorp.com.
Total building permits year-to-date through December 2007 for Boston-Cambridge-Quincy, Mass., are down 23 percent.
Major construction projects underway
Robert Kraft, the owner of the New England Patriots, is building a vast real estate development on about 350 acres surrounding Gillette Stadium. Plans for Patriot Place include a 14-screen movie theater, a 150-room Renaissance hotel, stores and restaurants and a 100,000-square-foot medical office center.