Changes to Commercial Real Estate – Rising Costs for Industrial Real Estate

By Christopher Moore & Joe Latina, LMT Commercial Realty, LLC/CORFAC International

Many sectors of commercial real estate have recovered substantially since COVID, with rising base rental rates in industrial, increased rents in multifamily and positive retail absorption. Downtown office, especially class B and C have faced challenges, while class A suburban office has been very active. Unfortunately, all the classes of commercial real estate have faced challenges with rapidly increasing operating expenses. The lion share of rising operating costs come from rising insurance premiums, property taxes (specifically school taxes in Delaware), maintenance, labor costs, higher construction and systems costs, and rising utility costs. We are anticipating that the growing operating costs will begin to put downward pressure on base rent prices if these costs continue to rise unchecked.

Historically, industrial properties have benefitted from operating expenses much lower than other commercial real estate genres such as retail and office. Just a few years ago, total operating costs for industrial buildings rarely eclipsed $2 psf /annually. However, rising costs are now driving these traditionally lower operating costs much higher, in some cases in excess of $3 psf and beyond. These increase costs are hitting from a variety of different sources;

Rising Property Taxes

Property Taxes are most often the largest operating expense for an industrial building typically accounting for as much as 60% of the total operating costs. A recent state-wide property tax reassessment for the State of Delaware was very poorly managed and resulted in a secondary round of school tax assessments levied directly against commercial properties resulting in increases in some cases of 300%. All commercial designated properties were impacted with widely ranging assessed values, generated by computer algorithms, and higher tax mileage rates. Commercial property owners will now have to pay to appeal in order to bring the assessed values back in alignment with market values.

Rising Insurance Premiums

Insurance premiums have experienced increases upwards of 45% in recent years due to several factors including a recent surge in climate-related disasters such as floods, hurricanes, wildfires, and the large amount of claims payouts that followed. Historically high replacement and repair costs for commercial properties have reportedly increased about 44% since the pandemic. Multifamily premium rates have doubled in many cases in the last five years, with some carriers abandoning entire markets, resulting in less competition.

Increased Maintenance Expenses

Roof repairs, HVAC systems, lighting and parking lot maintenance (including snow plowing) have experienced notable cost increases since 2021. While the days of year long deliveries for industrial electrical equipment and HVAC have improved substantially, the costs owners are required to pay have never recovered and remain high.

Utilities and Energy Costs

Energy costs have risen significantly since COVID, driven by greater power demand from automated warehouses and cold storage, as well as infrastructure upgrades for modern logistics facilities. While many states have allowed consumers to choose who provides their power, the local utilities have greatly increased their delivery charges for gas and electric. Since 2015 gas delivery charges have increased 46% and electric delivery charges have doubled. These increasing charges have far outpaced inflation. Volatility in natural gas prices, changing fuel use for electricity generation (coal being replaced by gas peaking), rising grid infrastructure costs (70% of transmission lines in the US are over 25 years old), and extreme weather have all contributed to higher utility costs.

While the industrial sector of commercial real estate has remained one of the most resilient asset classes in the post-pandemic market, it is no longer immune to the rapid escalation of operating expenses. Rising property taxes, surging insurance premiums, higher maintenance costs, and significant increases in utility delivery charges are collectively pushing operating costs to levels not historically associated with industrial properties. If these trends continue, landlords and tenants alike will need to adapt through improved efficiency, cost management, and careful lease structuring. Ultimately, the long-term stability of industrial real estate will depend not only on strong demand for logistics and distribution space, but also on the industry’s ability to manage and offset these accelerating operating expenses.

Chris Moore, CCIM is managing principal and broker at LMT Commercial Realty, LLC/CORFAC International.

Joe Latina, SIOR is managing principal at LMT Commercial Realty, LLC/CORFAC International.