By Mike Kunz
BOSTON–The industrial real estate market in New England is currently in a state of flux, characterized by softened demand, increased vacancy rates, and significant challenges for developers and investors. While certain areas are still experiencing growth, the region as a whole is grappling with oversupply and rising construction costs, which complicate the financial viability of new projects. In Greater Boston, for example, the overall Industrial vacancy rose to 9.4 percent at the end of 2024 with a bulk of new construction without commitments from tenants. This article provides an overview of the current trends, challenges, and opportunities within New England’s industrial market, with insights from an architectural perspective.
The State of the Market: Slowing Demand and Rising Vacancies
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.
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.
The Role of Flexibility and Technology in Attracting Tenants
To navigate 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. For example, 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.
One 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 raise the construction costs of industrial buildings. 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.
A Growing Demand for Automation and Robotics
One of the most significant trends reshaping the industrial real estate market is the rise of automation and robotics. Large-scale warehouses, such as those operated by Amazon, are increasingly relying on automated systems to handle inventory management, product sorting, and order fulfillment. In some of these facilities, as few as five to ten employees manage a million-square-foot warehouse, with robots handling the bulk of the operations. Cold storage facilities, where maintaining a controlled temperature is critical, are also incorporating automated systems to minimize the need for manual labor.
While automation presents a potential opportunity for developers to design more efficient spaces, it also introduces new complexities. The integration of robotic systems into industrial buildings requires careful planning to ensure that buildings can support the weight and layout of such equipment. Furthermore, automation systems are capital-intensive, requiring tenants to have the financial resources to invest in advanced technologies.
Multifamily and Mixed-Use Developments: A Possible Solution
Given the current oversupply in the industrial market, some developers are looking to repurpose vacant industrial spaces or integrate mixed-use developments. Multifamily housing, for example, is seeing increasing demand in certain areas, 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 spaces may become more common in the future. These developments allow for more flexible land use, enabling property owners to diversify their portfolios and reduce their reliance on a single market sector.
Shifts in the Medical Devices and Pharmaceutical Manufacturing Sector
The medical devices and pharmaceutical manufacturing sectors in New England, which have traditionally been significant drivers of demand for industrial space, are facing their own set of challenges. Although these sectors have not contracted dramatically, growth has slowed compared to the boom experienced in the years following the COVID-19 pandemic. With advancements in manufacturing technology, many companies are able to achieve higher productivity within the same physical footprint, reducing the need for expansion.
As technology continues to improve, companies are optimizing their manufacturing processes, allowing them to produce more with less space. This trend is contributing to a stabilization in demand for industrial properties, as companies are unwilling to bear the high costs associated with moving to larger, more expensive spaces.
Reconfiguring Industrial Spaces: A Potential Solution for Data Centers
As the demand for data storage and computing power continues to rise, some industrial buildings are being repurposed as data centers. The increasing importance of artificial intelligence, cloud computing, and big data has spurred demand for data centers, especially in regions with access to reliable power and cooling infrastructure.
Although New England has yet to see significant repurposing of industrial space for data centers, there is growing interest in this potential market. In other parts of the country, such as Texas, major investments are being made in building state-of-the-art data centers. As more companies expand their reliance on AI and other data-intensive technologies, industrial buildings in New England could be adapted to meet these needs.
Conclusion: Navigating a Complex Market
The industrial real estate market in New England is facing a period of transformation, with shifting tenant demands, rising construction costs, and technological advancements reshaping the landscape. Developers and investors must adapt to these changes by embracing flexibility, incorporating new technologies, and exploring alternative uses for industrial properties. While the future remains uncertain, opportunities exist for those willing to innovate and respond to the evolving needs of tenants.
As we look to the future, it is clear that the industrial real estate market in New England will continue to evolve, shaped by forces such as automation, sustainability, and mixed-use development. Developers who can stay ahead of these trends will be well-positioned to thrive in an increasingly competitive market.
(Mike Kunz is an owner and principal at Maugel DeStefano Architects. With a 25-year career in the architectural industry, his exceptional knowledge and expertise have made him a sought-after professional in both the industrial and commercial sectors.)
