State of New England’s industrial real estate

As the industrial real estate market across New England adjusts to shifting tenant needs and an oversupply of new space, developers are facing new economic and design challenges. Our panelist shares insights on current trends, how developers are adapting and where he sees emerging opportunities from automation-ready facilities to mixed-use redevelopment.

Mike Kunz, owner and principal of Maugel DeStefano Architects, maugel.com

Q What is the current state of the industrial market in New England?

Across New England, the industrial real estate market is experiencing a slowdown. Developers have built millions of square feet of new space in recent years, but much of it remains unoccupied. Despite this, rents for Class A industrial properties have not dropped significantly, staying in the range of $16 to $18 per square foot.

In contrast, tenants are often opting to remain in older Class B buildings, where rents are approximately $12 per square foot. This disconnect between supply and demand is putting pressure on developers and investors, who now find themselves competing for tenants in an increasingly saturated market.

Q What is causing the slowdown?

One key factor contributing to this slowdown is the changing needs of industrial tenants, particularly in the wake of the COVID-19 pandemic. Many companies have reevaluated their operational requirements, leading to a decline in demand for traditional office space within industrial buildings. Tenants no longer need expansive office areas; instead, they are seeking functional spaces that prioritize warehousing and distribution.

The amount of office space in industrial properties has decreased drastically, from 10% of the building’s total square footage to just 3.5% to 5%. This shift in tenant preferences has made it more difficult for developers to design spaces that meet the current market demands and charge higher rent.

Q How are developers navigating these challenges?

Industrial developers and investors must be highly creative. The ability to adapt to tenants’ changing needs and integrate new technologies will be critical for success. Flexibility is key when designing industrial spaces.

Developers should prioritize the ability to reconfigure spaces, such as the potential to add mezzanines or expand warehouse areas. Outdoor storage and trailer storage options are also in high demand, especially for logistics and distribution tenants who require additional space for parking and staging.

Another crucial consideration for developers is ensuring that industrial buildings can support the increasing power demands of modern tenants. As industries become more reliant on automated technologies, such as robotics and AI, the need for reliable and abundant electricity is growing. Developers must plan for the necessary infrastructure to meet these needs, as power requirements are only expected to increase.

Additionally, new technologies and energy codes are influencing the design and cost of industrial buildings. With advancements in energy efficiency, developers are increasingly required to incorporate higher insulation standards, better windows and more energy-efficient systems.

While these changes are essential for long-term sustainability, they also increase construction costs. For instance, building costs for Class A industrial properties are hovering between $95 and $110 per square foot for core and shell construction. Smaller buildings tend to have a higher cost per square foot due to the lack of economies of scale.

Q What are some areas of opportunity in the market?

Automation and robotics are transforming industrial real estate. Large warehouses now use advanced systems for inventory and fulfillment, often requiring minimal staff. Cold storage facilities, where maintaining a controlled environment is critical, also leverage automation to reduce manual labor needs. While these innovations enable greater efficiency, they require careful building design and significant investment from tenants.

Some developers are looking to repurpose vacant industrial spaces or integrate mixed-use developments. Multifamily housing, for example, is seeing increasing demand, particularly as people seek affordable housing options near urban centers. By combining industrial space with residential units, developers can generate new revenue streams while addressing the region’s housing shortage. Additionally, mixed-use developments that combine industrial, residential and retail allow for more flexible land use, enabling property owners to diversify their portfolios and reduce their reliance on a single market sector.

Increasing demand for data storage and computing power is driving the conversion of some industrial buildings into data centers. While New England has seen limited conversions to date, interest in this market is steadily increasing.