The Case for Infill: A Strategic Approach to Industrial Real Estate in Changing Markets

Industrial real estate markets are undergoing significant transformations, driven by rezoning trends, shifting tenant demands, and evolving logistical priorities. Infill development—a strategy focused on repurposing urban and suburban industrial properties—is emerging as a key solution to these challenges. It offers a sustainable and profitable approach to meet rising demand, particularly in high-demand, densely populated areas.

Shrinking Industrial Supply: The Rezoning Dilemma

Municipalities across the U.S. are increasingly responding to environmental and residential pressures by rezoning industrial areas for alternative uses. For example, New Jersey implemented a sweeping ban on industrial development across 400,000 acres in 2023, further tightening the approval requirements for existing industrial zones. In New York City, industrial land now comprises less than 3% of the city’s land area, marking a 15% decrease since 2003 as older industrial properties are converted into residential or creative office spaces. This trend accelerated in May 2024 when NYC introduced a law mandating special permits for new last-mile distribution centers.

This shrinking industrial land supply creates a dual effect: not only are developers and tenants competing for fewer spaces, but each removal of industrial assets also transforms potential competitors into sources of demand. As competition increases, market dynamics shift, favoring properties in strategic, high-value locations.

Strong Market Fundamentals for Infill Properties

Despite supply-side constraints, industrial real estate has demonstrated robust performance in recent years. Revenue per available foot (RevPAF), which accounts for rent growth and occupancy rates, has shown consistent growth. According to Green Street, industrial RevPAF growth exceeded 5% annually in 9 of the past 10 years, with record growth of 19.5% and 28.5% in 2021 and 2022, respectively. Infill markets—such as New York City, Northern and Central New Jersey, Boston, and Miami—have consistently outperformed broader U.S. averages in RevPAF growth, underscoring the value of proximity to demand hubs.

Infill markets benefit from several competitive advantages, including:

• Proximity to Population Centers: Being close to urban areas ensures faster delivery times, critical for last-mile logistics.
• Higher Tenant Demand: Tenants are increasingly willing to pay premium rents for well-located properties because rent constitutes a relatively small portion (4.3%) of total logistics costs compared to transportation (80%) and labor.

This willingness to pay for the “right space” in the “right location” aligns with the strategic goals of tenants aiming to optimize their supply chain operations.

Transportation Costs: The Infill Advantage

Transportation remains the single largest expense in logistics operations, accounting for 80% of total costs. Traffic congestion exacerbates these costs, especially in major U.S. cities, where last-mile delivery times are critical. A 2023 report by INRIX revealed that nine of the world’s 21 most congested cities are in the United States, with traffic in the top 10 U.S. cities costing $42.5 billion annually.

New York City, the most congested urban center, sees average last-mile delivery speeds of less than 14 mph, with drivers losing over 100 hours per year in traffic. Such inefficiencies amplify the importance of strategically located infill properties that can minimize transportation costs and improve operational efficiency. By reducing distances to end consumers, infill properties offer tenants a way to offset rising transportation and labor expenses.

Tenant Economics: Why Location is Worth the Premium

For tenants of logistics real estate, rent is a relatively minor component of their operating budget compared to transportation and labor costs. For every $1 spent on rent, logistics companies typically spend $10 on transportation and $5–$7 on labor. This cost dynamic creates a strong incentive for tenants to invest in well-located facilities, even at premium rents.

The ability to reduce delivery times and transportation costs directly impacts a company’s profitability and competitiveness. As e-commerce growth continues to drive demand for efficient last-mile logistics solutions, the strategic value of infill properties will only increase.

The Sustainability of Infill Development

Infill development aligns with broader environmental and sustainability goals. Repurposing existing industrial properties reduces the need for greenfield development, preserving natural landscapes and mitigating urban sprawl. Furthermore, many municipalities are prioritizing sustainability by requiring higher standards for stormwater management and energy efficiency in new developments.

By focusing on redeveloping underutilized industrial spaces within urban areas, infill projects can leverage existing infrastructure, reduce carbon footprints, and contribute to a more sustainable urban fabric. These attributes not only align with regulatory trends but also appeal to environmentally conscious tenants and investors.

The Future of Industrial Real Estate: A Call for Strategic Investments

The ongoing transformation of industrial real estate markets underscores the need for strategic, forward-looking investments. As municipalities continue to rezone and regulate industrial land, the supply of suitable properties will remain constrained, further driving demand for infill solutions.

Investors and developers should prioritize markets with high barriers to entry, strong population growth, and robust tenant demand. By focusing on strategic infill locations, stakeholders can position themselves to capitalize on the evolving needs of tenants and the broader logistics sector.

Conclusion: The Case for Infill is Clear

Infill development represents a powerful opportunity to address the challenges and capitalize on the trends shaping industrial real estate. With its ability to mitigate transportation costs, support sustainability goals, and deliver consistent revenue growth, infill is poised to remain a cornerstone of industrial real estate strategy.

As the market evolves, developers and investors who embrace the infill model will be well-positioned to meet the needs of tenants, navigate regulatory landscapes, and achieve long-term success in a competitive and dynamic industry.