Deconstructing Infill

Seven Realities of the Burgeoning, Challenging Infill Market

The flourishing e-commerce sector is driving demand for industrial space and that demand is now extending from the massive, port-side logistics facilities to last-mile distribution centers tucked into communities. A panel discussion at CRE.Converge Virtual 2020, moderated by JLL Senior Managing Director Leslie Lanne, dissected some of the opportunities, challenges, tenant needs and emerging trends in the bustling niche of infill, industrial developments.

1. Infill environments pose extra challenges.

“The environmental aspect of infill redevelopment is always there… and it has to be part of your core competency,” said Drew Hess, regional senior vice president for Duke Realty. In addition to thoroughly identifying and remediating environmental issues, developers must also be ready to address uncertainties and challenges involving entitlements, utilities and other site issues.

2. Developers need to be good neighbors.

Infill developments often drop industrial facilities near residential communities and draw the attention of the neighbors. Although residents are often pleased to see jobs created nearby and are willing to accommodate some changes to their communities, developers need to engage extensively with neighborhood groups and work to address their major concerns, such as traffic, noise and sightlines.

“Because of community involvement [on one development], we modified the building to ensure the loading doors are not facing the residences…. We had to provide a very robust landscaped area. Right off the bat, they wanted to see almost a full forest,” said Benjamin Horning, director of development for Dedeaux Properties. In addition, “there are a lot of operating restrictions that we ended up agreeing to… [including] hours of operation in certain areas of the yard within a certain number of feet of the residential properties.”

Local governments are also getting more involved in infill developments in efforts to manage traffic and pollution.

3. Templates can be challenging, flexible and small.

The types of facilities that many tenants want on infill sites can also be challenging from a financial perspective.

Increasingly, companies (other than Amazon) who are looking to set up a last-mile center, want a 100,000-150,000-square-foot facility with 25-30 docks and excess parking – in other words, a comparatively small building with significant functionality and a fairly large site. “We wouldn’t typically build that type of building, but it seems to be more in demand today,” Hess said.

Many small, local companies want small-bay facilities for a variety of uses.

“That’s a hard product to build from scratch,” said William Lu, senior vice president at CenterPoint Properties. “You have a different credit risk profile with the tenants that occupy that space, and it doesn’t make a lot of institutions and equity partners comfortable. And the per square foot cost for those facilities has gone through the roof.”

Given the mix of clients drawn to infill sites, developers also need to design buildings to accommodate a range of future uses.

“We need to build these buildings so they are flexible for a range of use,” Hess said. “We really need to open up the box and create a big, flexible canvass for tenants to go into, whether it is manufacturing or some type of value-added process or a warehouse distribution use.”

4. Yard space is prime.

Faced with increased needs to park trucks and trailers, tenants seek out facilities with ample yards. In some instances, tenants will compromise on the age or location of the facility in order to get sufficient yard space. In other facilities, owners are netting increasingly healthy lease fees per parking stall or square foot of yard space.

5. Costs and leases keep rising.

The demand for more distribution facilities, especially near population centers, has driven land prices higher than pre-COVID levels and challenged developers to secure sites. Even brokers who quietly approach landowners in hopes of securing off-market purchases have often found themselves facing competitive bids.

The other side of the balance sheet, however, is also increasing. Lease rates, especially on the West Coast, are continuing to climb with every new comp, and tenants are willing to pay higher rates for highly desirable facilities and speedy completion of new facilities.

6. There is wisdom in not developing.

Many cities have ample stock of under-demolished, under-utilized real estate that could, in theory, be used for infill development.  However, sometimes the smartest business move is to leave the property alone.

“Sometimes you can’t replicate these Class B and C facilities,” Lu said. His company purchased a 1 million square foot facility from J.C.Penney in Los Angeles with the intention of redeveloping it. “But we were able to get a much better return by just re-leasing the building the way it is and cleaning it up a little bit.”

7. Prepare for a greener future.

While the adoption of electric vehicles for personal or corporate use is still an emerging trend, some industrial developers are already outfitting new properties to support electric vehicle chargers and onsite renewable energy generation.

“We put the infrastructure in most of our buildings around the West Coast. We put conduit throughout the parking lot. We will increase the roof load on the building to accommodate solar,” Liu said. “We are building those things into our projects because we are seeing [those requirements] coming up more often … Adoption is going to come. We need to get in front of it.”

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