How Is Class B Industrial Adapting to Modern Demand?

Despite often being overshadowed by the modern facilities built during the development surge of the past few years, Class B industrial assets continue to attract a diverse range of businesses.

These properties make up 53.5 percent of the total U.S. industrial inventory, equating to 10.7 billion square feet, according to CommercialEdge. Their appeal has only grown in recent years, particularly following the sharp decline in vacancy rates and surging rental costs post-2021.

“This pricing pressure pushed many users out of Class A availabilities, resulting in Class B properties achieving the lowest vacancy levels among all building classes,” said Tom Harmon, vice president of transactions at Bridge Industrial. “Vintage buildings play a pivotal role in the industrial real estate landscape, offering cost-effective options to occupiers while being situated in highly desirable locations near densely populated areas.”

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One particular segment of the Class B industrial market that performs exceptionally well is shallow bay industrial properties. These assets have remained highly sought-after, especially among last-mile users and small- to mid-size tenants, while larger industrial facilities from the 1980s and 1990s sometimes struggle to compete with modern developments. JLL reports that buildings from this era make up 25 percent of the nation’s industrial stock, with around 30 percent classified as shallow bay.

“You might be surprised to learn that the vacancy rate in this cohort is lower than the overall industrial vacancy rate—approximately 4.5 percent compared to 7.1 percent,” said Trent Agnew, JLL Capital Markets industrial co-lead & senior managing director.

While modern facilities prioritize higher ceilings, more docks and increased power capacity, shallow bay assets thrive due to their flexibility and prime infill locations, making them a competitive alternative to newer developments.

Staying in the game

To prove their enduring relevance, Class B industrial properties are adjusting to evolving tenant needs. Their appeal lies in a combination of strategic locations and modernization potential.

Enhancements such as high-efficiency HVAC systems, LED lighting and energy-efficient roofing improve sustainability and reduce operational costs, while also playing a crucial role in maintaining the assets’ competitiveness. Other capital improvements like additional loading docks, reconfigured layouts and modernized fire suppression systems significantly boost both functionality and market appeal. Expanding docking facilities and increasing parking capacity further enhance these facilities’ suitability for a multitude of businesses, including logistics-focused tenants.

But beyond any physical upgrade, location remains a key demand driver.

“Properties in high-barrier-to-entry infill locations continue to be sought-after, and there is no indication that this trend will change,” Harmon believes. “Time and time again, occupiers have demonstrated their willingness to compromise on features such as lower clear heights or tighter truck courts to secure a location they consider ideal.”

Among those occupying Class B assets today are manufacturers, e-commerce businesses and last-mile delivery services—sectors that benefit from the accessibility and distribution efficiency these properties offer, according to Erik Foster, principal & leader of U.S. Industrial Capital Markets at Avison Young. The 12th annual U.S. Industrial Tenant Demand Study by JLL further underscores growing demand for manufacturing facilities, signaling a shift in industrial activity and an uptick in domestic production.

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Class B industrial assets’ adaptability also makes them attractive to non-traditional tenants. Toby Nelson, vice president of leasing at The Silverman Group, believes their flexibility is drawing in tech firms, medical labs and restoration businesses, and even unconventional occupiers like churches.

“These properties remain competitive by focusing on what they do best—offering flexibility and affordability,” Nelson said. “As long as these buildings are well-maintained and adapted to today’s needs, they’ll continue to hold their own in the market.”

This is especially true as many tenants now seek spaces that integrate office areas with manufacturing, storage or showroom functions. Demand is also growing for facilities that can accommodate specialized uses such as laboratories or small-scale production.

Relevancy vs redevelopment: a balancing act

Class B industrial assets are at a crossroads in today’s rapidly evolving logistics and e-commerce landscape. While their strategic infill locations make them highly valuable for last-mile distribution, many lack the modern infrastructure tenants now require. So many investors and owners need to decide what offers them the greatest advantages: upgrading existing structures or pursuing full-scale redevelopment.

The decision to modernize a Class B facility rather than redevelop it depends on multiple factors. While retrofitting older properties with modern HVAC systems, LED lighting and additional loading docks can improve efficiency and keep costs lower than new construction, in certain scenarios, demolishing existing structures to construct modern assets on premium sites may yield better investment returns.

“If redeveloped, these properties would likely be turned into highly efficient, multistory logistics hubs,” Foster said.

In high-barrier-to-entry locations, where new development is expensive and time-consuming, renovations are a more practical option.

“Many older buildings have good bones and layouts that can be updated for modern tenants without starting from scratch,” Nelson pointed out. “In tight markets or areas with zoning restrictions, upgrades can also save a lot of time.”

Looking ahead, Class B industrial properties will likely remain integral to the logistics ecosystem. Their cost-effectiveness, prime locations, and potential for innovative redevelopment render them attractive in the long term. Additionally, with industrial investment projected to regain momentum in 2025, demand for well-positioned Class B spaces is anticipated to rise.

Concurrently, sustainability concerns and technological advancements are expected to further drive modernization efforts, compelling investors to balance immediate costs with long-term gains in property value and tenant satisfaction.

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