Why Middle Market Industrial Doesn't Follow the Big-Box Headlines

Last Updated: August 2026
Read Time: 6-10 minutes
Author: Andrew Lofredo, CEO, CRE Vertical Advisors

Industrial fundamentals are having a moment. Leasing activity hit approximately 175.7 million square feet in the second quarter, up 49.4% year over year, and national vacancy compressed 60 basis points to 6.8%, the first meaningful contraction in three years. Prologis signed a record 67 million square feet of leases and pushed occupancy to 95.5%, raising its full year guidance for the second time in 2026. Read at that altitude, the industrial sector looks like it is back on firm footing.

However, just like most things – it is not so black and white, the story is more nuanced when you zoom into a specific market. In New York City's outer boroughs, industrial vacancy climbed for a fourth straight quarter to 7.0%, with average asking rents down to $27.50 per square foot and still sliding from their Q4 2024 peak. Same asset class, same quarter, and a meaningfully different set of leasing conditions on the ground. Look closer at where that softness is concentrated, and the picture gets more specific still: it's newer, premium space taking the hit, while older, functional buildings are the ones tenants are actually choosing.

For an owner with an older industrial or flex property, that divergence is the reason to look closely at a question: is this building simply old, or is it becoming functionally obsolete for the tenants who will actually drive demand over the next five to ten years?  Age and obsolescence get treated as synonyms more often than they should.

It's worth pausing on where these headline numbers come from, because they don't always describe the segment most middle market owners actually operate in. JLL and Cushman's national and metro figures are built substantially from big-box leasing activity, and the concentration is measurable. CBRE reports that the 100 largest U.S. industrial leases totaled 93.6 million square feet in the first half of 2026, and that mega leases of 1 million square feet or more jumped to 38, up from 16 a year earlier. Those 38 deals alone account for at least 38 million square feet, and the top 100 leases represent roughly 17% of CBRE's total first half leasing volume, all from a fraction of one percent of the transactions signed nationally. Prologis's results describe Prologis's own portfolio: a REIT built around large-format, institutionally owned logistics assets. None of that is a criticism of the data it is all informative, however, it simply a different segment of the market than the one this newsletter is usually written for.

CBRE's own research on shallow-bay industrial, buildings under 50,000 square feet with clear heights between 14 and 28 feet and the closest proxy for middle market product, tells a more directly relevant story. Vacancy in that segment has run roughly 2.5 percentage points below the headline industrial vacancy rate, a gap that has widened as new construction concentrated almost entirely on big-box product. Shallow-bay rents climbed more than 50% since 2010, a steadier trajectory than the boom-and-correction pattern that defined big-box rents over the same period. CBRE attributes the divergence directly to capital allocation: institutional capital has favored large distribution assets with long-term leases to national tenants, so shallow-bay development has all but stopped. Nearly half of existing shallow-bay inventory was built before 1980, and buildings constructed since 2010 account for only about 5% of the total.

That last point relates to obsolescence question. The segment of the industrial market with the tightest vacancy and the steadiest rent growth over the past decade is also the oldest. It's a market that has kept choosing older, right sized, functional space because the newest product coming online was never built for the tenants this segment serves. ‍

Age and Obsolescence Are Not the Same Question

A building's age tells you how long it's been standing. On its own, it says very little about whether that building can still do the job a tenant needs it to do.

A 30 or 40 year old industrial building with adequate power, workable clear height, functional loading and a competitive total occupancy cost can hold its own against newer product for years, sometimes indefinitely, if it continues to serve a tenant base whose requirements it was built to meet. A newer building can underperform for the opposite reason: its configuration doesn't match what tenants in that particular submarket actually need. A speculative Class A box built around a large logistics user's specifications isn't necessarily the right fit for a 15,000 square foot light manufacturer or a last mile operator that cares more about yard space than 40 foot clear height.

That distinction carries even more weight at the middle market than it does at the trophy end of the business, because the tenant base looks different. Most tenants leasing older industrial and flex space aren't shopping for institutional finishes. They're evaluating whether a building lets them run their operation efficiently at a total occupancy cost that works for their margins, and functionality tends to carry more of that decision than appearance does.

None of this argues for leaving an aging building untouched. There are opportunities to upgrade by adding power or raising the roof when returns make sense. It argues for evaluating capital against the tenant segments a property can realistically serve, rather than against a generic industry standard for what a competitive industrial building is supposed to look like.

What Tenants Are Looking For

JLL's Q2 data points to a shift in priorities among larger occupiers toward power availability, automation ready specifications, and access to skilled labor. The underlying logic scales down to middle market and flex properties around a smaller set of variables: electrical capacity, loading configuration, clear height, column spacing and bay size, divisibility for multi-tenant use, truck circulation, and outdoor yard space. Zoning flexibility and proximity to labor matter as well, along with whether the building can accommodate light manufacturing or a specialized user rather than only conventional warehousing.

Working through that list property by property, and being honest about which factors genuinely narrow the tenant pool versus which are just cosmetic preferences, is what separates a useful capital plan from one built on assumption or misaligned metrics.

The Northeast Counterpoint

The data coming out of the city right now points in a specific direction: older industrial buildings in the outer boroughs are, in relative terms, doing well. CBRE's Q2 2026 numbers, reported by CRE Daily, show citywide industrial vacancy at 7.8% on 589,000 square feet of negative net absorption, with Staten Island running as high as 21.5%. But the softness isn't evenly distributed across the building stock. Class A rents fell 15% year over year to $30.38 per square foot, nearly half again as steep as the 10% decline in the market's overall average rent, and CRE Daily's reporting attributes the gap directly to tenants shifting toward older, more affordable buildings rather than paying a premium for newer facilities. The vacancy increase and the sharper rent erosion are both concentrated at the newer, premium end of the market. Older, functional product is where demand is landing for a specific tenant base.

This is a critical distinction for anyone who assumed a softening market would automatically hurt older buildings the most.  As asking rents pull back from their Q4 2024 peak, total occupancy cost is playing a larger role in a tenant's decision, which favors owners of well located, functional older product priced to reflect what it offers. A tenant with more choices in a looser market is more likely to choose a lower cost building with adequate functionality over a newer one it can't fully utilize.

That said, a looser market still cuts against one specific type of older building: one that isn't just old, but functionally deficient. A property with constrained power or poor truck circulation still loses deals to a competing building that has solved those problems, older or not. The current data doesn't reward age on its own. It rewards functional, well priced buildings, and right now, a lot of those happen to be older ones.

A Process for Classifying an Older Industrial Property

Ownership evaluating an aging industrial or flex asset can generally place it into one of four categories, and the category should drive the strategy rather than the other way around.

An older but competitive property delivers the functionality its target tenant segment needs and competes effectively on total occupancy cost. The right response is to maintain the asset and make selective, targeted improvements, without spending capital to solve a problem the property doesn't have.

A functionally improvable property has real shortcomings, but they're the kind that targeted capital can address: additional power, improved loading, yard improvements, roof lifting, subdivision for multi tenant use, or mechanical system upgrades. The right response is to invest where there's a measurable leasing or valuation case for doing so, not on the general premise that improvement is always worthwhile.

A functionally obsolete property has physical constraints that materially limit its future tenant pool and can't be economically corrected. Clear height that can't be raised, a site that can't accommodate modern truck circulation, or a location that has shifted away from its historical tenant base all fall into this category. The right response is usually repositioning, redevelopment, a change of use, or disposition, rather than continued reinvestment in improvements that can't overcome the underlying constraint.

A strategically mispositioned property is functional, but ownership is targeting the wrong tenant segment or trying to compete with buildings it never needed to emulate. The fix here has nothing to do with additional capital in the building. It's a change in leasing and asset strategy.

Placing a property honestly into one of these categories, will help you develop a workable capital plan instead of following general metrics, which may not apply to your asset.

Evaluating the Capital Decision

With the asset’s fundamentals clear, the capital allocation becomes: what does this asset need to remain competitive for the tenant base it can realistically serve, and does the expected return justify that spend.

An owner should not upgrade an older building simply because a newer competing property exists nearby, and shouldn't assume an occupied building remains competitive simply because a tenant is in place today. The more useful questions are narrower: which specific functional gaps are costing the property leasing velocity or rent, what would it cost to close them, and what improvement in occupancy, rent, or valuation should reasonably follow.

The remaining useful economic life of the existing improvements belongs in that analysis too. Capital directed at a building with twenty years of functional life ahead of it is a different decision than the same capital directed at a building nearing the end of its useful configuration for its market, and every dollar under consideration should be weighed against the other places it could go, whether that's a different asset in the portfolio or simply preserving liquidity.

The Strategic Decision

This is a holistic strategic decision more than a property management one, which is why it belongs at the ownership level and should connect directly to the strategy set for the asset, and for the portfolio it sits within.

A functionally obsolete property might still be worth holding if the underlying land value or redevelopment potential supports the investment thesis, even where the existing improvements don't. A strategically mispositioned property might need nothing more than a change in leasing direction, which frees up capital that would otherwise go toward chasing the wrong tenant.

The current market backdrop makes this analysis timely. National fundamentals are giving owners more favorable conditions in many markets, while parts of the Northeast are giving tenants more leverage than they've had in several years. Both conditions reward ownership that has done the work of understanding what a specific property can and can't do, and both are less forgiving of ownership that hasn't.

One should ask whether the building can continue serving the tenants ownership expects to attract over the next five to ten years, what capital is required to keep it competitive for that tenant base, and whether that investment supports the strategy ownership has actually set for the asset. Answer that well, and an older building remains a productive part of the portfolio for years. Skip the analysis, and even a newer building can become a capital drain if it was never matched to the demand it needs to serve.

This article is for general informational and educational purposes only and does not constitute legal, tax, financial, or investment advice. The views expressed are those of the author and are based on market conditions as of the date of publication, which are subject to change. Readers should consult with their own legal, financial, and tax advisors before making any real estate or capital planning decisions.

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