Chapter 1: The US Industrial Real Estate Market

Rise of E-Commerce Video

The Largest Change in the Industrial Market has been the Rise of E-Commerce.

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3PL Video

Third Party Logistics Companies have been a huge beneficiary of E-Commerce. Find out How!

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Join Us as We Explore Strategies that Different Owners Use.

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I love to run marathons, plus another five miles. My favorite distance to run is fifty kilometers, which is roughly thirty-one miles, and I like running mountain races in lower-elevation mountain ranges. I race in the Pacific Northwest and British Columbia: I have run through the Tillamook Forest of Oregon and up and down mountains in Washington, Vancouver, and throughout the Canadian Rockies. Coming from sea level in Southern California, it can be a rude awakening to run at higher elevations without suitable acclimation time.

Each race requires extensive due diligence. I have to build a proper training plan with a running coach. I have to refine my race day plan of attack. But the most important planning steps come months before any of this: I take stock of all of the available races and comb over all the elevation profiles, seasonal temperatures, predator populations, river crossings, and more. This gives me a high-level perspective that always pays dividends on race day.

The same is true for commercial real estate—it is important to plan. Before we embark on your company’s real estate journey, I want to offer you a background of the national industrial market that will give you some high-level perspective. Here you will gain an introduction and better understanding of the market’s major trends, geographic submarket comparisons, and prevalent industry trends.


The 2020 CoStar United States Industrial Inventory Report calculated the United States industrial market to be 17 billion square feet. To put this into perspective, if the total amount of industrial space were all consolidated into one gigantic warehouse, it would cover the entirety of Los Angeles and all of its four million residents under one roof. There is literally 52 square feet of warehouse space for every person in the country.

The market is affected by a multitude of variables, and each year is different. Brokers live in this market on a daily basis. They are your guides, making sure that you know the trends in your market and that you are making comparisons that are insightful, and simplifying the industry jargon and nuance.

Here are the most relevant market metrics that will have an impact on your next commercial real estate project:

Net absorption: Think of net absorption as how supply relates to demand. Supply factors include new construction deliveries increasing supply, along with the demolition and redevelopment of older industrial property stock decreasing the supply. Demand factors are related to the increasing and decreasing footprints of the companies that call industrial properties home.

Increasing supply or decreasing demand can cause negative net absorption, whereas decreasing supply or increasing demand can have the opposite effect. Every year, the industrial markets oscillate between negative 200 million and more than 285 million square feet of net absorption. Seeing multiple quarters of positive or negative net absorption can help you identify if there is a larger trend within a market.

Growth rates: In any given year, and within any given North American city, the industrial lease growth rate changes between negative 3.8 percent and more than 6.2 percent on average. Lease rates fluctuate as supply and demand factors change. They can

also fluctuate due to changes in capital inflows/outflows, economic shocks, investor confidence, industry structural changes, tax laws, and other legislation. Note: this is an annual change in the market’s pricing. You will likely sign a multiple-yearlong lease with annual increases. Your lease contract’s annual increases and the overall market’s annual increases are two separate things. When these two separate increases become wildly out of sync, that is when there can be cause for concern for tenants and landlords alike.

Sales volume: Annual total industrial sales volumes range from $11 billion to $85 billion. To put this into perspective, Orange County usually sees a range of $1 billion to $3 billion in annual industrial sales each year. Knowing your market size and evaluating quarterly sales volume in dollars and in number of transactions is another good method to help spot trends and identify greater market shifts.

Vacancy rates: Vacancy rates can range from 0.06 percent to 10.10 percent, depending on which city you do business in. For example, in the Greater LA Basin, a 5 percent vacancy rate is considered equilibrium, whereas a 1 to 3 percent vacancy rate is considered tight. This is common in most metropolitan industrial markets. Before e-commerce, the market equilibrium vacancy rate was closer to 10 percent. This has led to more creative property sourcing methods by brokers, which we will discuss in Chapter 6, Engage the Market.

Price per square foot: This is not as simple as you might expect. The majority of the country (and the world, for that matter) quotes prices for industrial properties as price per square foot annually. However, many geographic areas have their own quirks. In Southern California and Houston, prices are quoted

in monthly terms per square foot. Markets like Seattle separate the office from the warehouse in their rent calculations and quote each rate separately. In Charlotte, you will hear rates quoted on a triple net basis plus TICAM (taxes, insurance, and common area maintenance). In Florida, tenant use tax is a percentage of the rent, which is billed to the landlord and then passed through to the tenant. The bottom line is, you want to make sure you know what is included in the price per square foot that is quoted.


The national landscape is largely affected by geography, incentives, and investments. Inland and ocean waterways, intermodal rails, air cargo hubs, and interstate transportation continue to play outsized roles in where the industrial market grows.

Here are the top twenty industrial real estate markets based upon figures from the 2020 CoStar United States Industrial Inventory Report. They are broken down by number of buildings, total square feet, and percentage of the total national inventory.Looking at the numbers, you will see that the Greater LA area (which includes Los Angeles, the Inland Empire, and Orange County) makes up one of the largest real estate markets in the country, totaling approximately 11.2 percent of the national inventory. That is 1.9 billion square feet. This market is home of the two largest ports, and is the central market for inbound and outbound cargo to and from Asia. I point this out because this is the market in which I have the most experience.

It should come as no surprise that the largest industrial markets are also the ones experiencing the most sustained growth. New construction in 2019 totaled roughly 258 million square feet. When you look at the data below for new construction, you see that we are building larger warehouses, as the size of new warehouses being developed is two to ten times the size of the average existing inventory.

The population density in each market has an influence on what can be developed. Each market also develops differently based on its shifting population centers, new supply chain nodes, and changing labor dynamics.


Now that we have looked at the overall size of the US industrial market, I want to show you the major forces that are shaping its future.


Customers now largely buy products online instead of buying them in stores. As a result, e-commerce has marked a structural shift in the industrial real estate arena. It is large enough to have a material effect on the entire industrial market, and its future growth prospects are robust. According to the US Department of Commerce, e-commerce accounted for about one-sixth of the total $3.7 trillion in retail sales in 2019. Online sales grew from 6 percent in 2010 to 16 percent in 2019. In a recent research report titled Accelerated Retail Evolution Could Bolster Demand for Well-Located Logistics Space, Prologis estimates e-commerce sales will increase upward of 27 percent by 2024. This shift to online purchasing comes with a corresponding change in how products move from store to customer, which is where the industrial real estate market enters the picture.

The primary effect of e-commerce on the commercial real estate world is that far less retail space is needed in exchange for larger industrial footprints. Recent research suggests that 125 million square feet of distribution space is required for each $1 billion increase in e-commerce sales. Prologis, one of the largest industrial landlords globally, issued a research report suggesting that three times the amount of industrial property is needed for every square foot of traditional retail. Ashfaque Chowdhury, president of supply chain, Americas and Asia Pacific at XPO Logistics, commented on the conversion from retail to e-commerce. He noted that e-commerce takes three times the warehouse space and demands three times the work.

E-commerce can be broken down into three activity segments: omnichannel, Last Mile, and reverse logistics.


Omnichannel is the industry term used to describe retailers who have both brick-and-mortar stores and an e-commerce channel. Customers can buy in person or online and have product shipped to their house, the store, or another third-party location of their convenience.

As a result of consumer preference for omnichannel, buyers have higher expectations and increased spending habits, and there is more brand loyalty. Nordstrom is an excellent example of this, as they used to be in every high-end mall in the United States. They have not evaporated from the retail environment— they have changed how they do business and supplement their retail stores with online shopping. In Southern California, Nordstrom leased 1 million square feet in the Inland Empire alone for e-commerce fulfillment. If you order clothing online and it is not available anywhere else, Nordstrom will ship it to a store for customer pickup. Nordstrom uses this as an opportunity to continue to provide concierge service: customers can pull into the mall’s parking lot, and a Nordstrom associate will hand-deliver their clothing.

This shift in customer buying behavior has led to a shift in size, location, and orientation of retail stores, as well as corresponding retailer distribution and fulfillment centers.

In an interview with Melinda McLaughlin, head of research for Prologis, she explains that not only has omnichannel fulfillment led distributors to locate warehouses closer to customers, but it has also led distributors to focus on replenishing retail stores at a more rapid rate. This allows retailers to provide customers with the opportunity to buy online and pick up curbside.


We will discuss the last place that a product sold online inhabits before the delivery driver drives the “Last Mile” to the customer’s house, store, or place of business. Last Mile warehouses are also called urban fulfillment, micro fulfillment, and final mile facilities. This last point of departure is the bridge between the distribution center and the customer. Most companies struggle delivering goods the Last Mile because deliveries are no longer going to retail stores but to residential neighborhoods. Companies are now leasing Last Mile warehouses that allow manufacturers and distributors to hold specific levels of inventory in select urban and suburban centers so they can increase delivery speed to the customer. The pioneer in this space is, of course, Amazon, where they guarantee two-day delivery of products bought through their platform for an annual subscription costing $119.

With Last Mile warehouses, same-day delivery is now possible for many retailers. These warehouses can be far smaller than general fulfillment centers, sometimes as small as 30,000 square feet. The challenge with smaller warehouses is that they can often have lower warehouse clearances and inadequate loading. Last Mile warehouses will usually accommodate parcels instead of pallets, see higher velocity, and sometimes handle returns within five to eight miles of the population centers they serve.

Ashfaque Chowdhury of XPO Logistics explains that the increasing market size of Last Mile delivery for delivery of heavy goods is occurring due to changes in consumer online purchasing behavior and habits. Heavy goods and white-glove delivery are specialized skill sets that separate XPO Logistics from most other companies that handle deliveries in-house.


E-commerce has dramatically changed the process of returning goods that are the wrong fit, wrong color, damaged, or not what was expected by the customer. As e-commerce grows and the total number of overall product returns increases, so will the emphasis on optimizing reverse logistics.

The larger a company’s operation, the larger their reverse logistics operation, until you reach the most massive scale, where companies dedicate entire facilities to reverse logistics. In fact, there are entire supply chain consulting practices that focus solely on reverse logistics. You can imagine how many returns go through a 2-million-square-foot Amazon fulfillment center in Southern California, and that is just one of their 175 fulfillment centers all over the world.

According to the retail analytics firm the Retail Equation, the return rate for the retail industry in the United States and Canada currently averages 8 percent of total sales. Research shows that customers are three times more likely to return products they purchase online versus ones they purchase in person at a retail store. As a result, e-commerce businesses need 20 percent more space to manage reverse logistics compared to retail stores.


If e-commerce is expanding during the current evolution of the industrial real estate market, third-party logistics companies (3PK) would be the “who.” When you think of a company like Nordstrom pivoting from selling clothing at their flagship store in the Fashion Island mall in Newport Beach, California, and all of their retail stores throughout the country to also selling clothing online, you realize it takes time to build this capability. 3PK companies, on the other hand, are specialists in shipping, transportation, supply chain, logistics, and warehousing. You can see why it would be easier for a retailer to begin their e-commerce journey by leveraging 3PKs’ capabilities along with their information technology systems. E-commerce and 3PK companies in many markets now represent over 50 percent of all demand for bulk industrial properties over 100,000 square feet.

With the rise of e-commerce, the flow of capital going into the 3PK industry has increased dramatically, causing the 3PK space to expand, consolidate, and grow yet again. Robust 3PK offerings are now available on a global scale and can be contracted to provide services for any aspect of your business operations from a supply chain perspective. The purpose of me mentioning 3PKs is not purely for you to be aware of their services. It is also so you can understand they are often a model for optimal warehouse operations, and they are the largest tenant industry within the industrial real estate market. The ramifications of e-commerce that we will discuss in a moment apply equally to 3PKs.


The rise of warehouse automation and robotics is the last of the main influences within the greater industrial real estate market. Warehousing automation is a broad category with applications in manufacturing, production, storage, distribution, and fulfillment businesses. When you speak with equipment manufacturers, process engineers, integrators, and end users, you really get the sense that warehouse automation and robotics technology is accelerating at lightning speed with new solutions and implementation options.

For manufacturing, warehouse automation is viewed as the means to increase domestic manufacturing. The idea is that fully automated and robot-assisted production lines will augment labor, allowing manufacturers to manage new production methods locally and abroad in a more efficient and productive manner.

On the distribution and fulfillment front, warehouse automation increasingly includes:

  • Automated storage and retrieval systems 
  • Automated conveyor systems
  • Autonomous guided vehicles
  • Autonomous mobile robots

Automation and robotics are the physical manifestation of technology within warehouse facilities. This technology, however, is only as good as the software and cloud services that power it and that integrate into a business’s ERP, transportation, and warehouse management systems.

The constant need to produce gains in efficiency and productivity and the ever-expanding need to meet customer service levels are the main factors that will lead to increasing warehouse automation. The decision used to be based on whether or not you could justify the return on investment (ROI) in a satisfactory time frame. Today, the decision to implement warehouse automation and robotics is a necessary evolutionary step in order to survive and thrive during the next business cycle.

With the rise of warehouse automation and robotics comes the rise of predictive analytics and artificial intelligence (AI). XPO Logistics’ Ashfaque Chowdhury explains, “For the first time, we have large-scale robotics that are entering warehouses. There are facilities where you have hundreds of robots and collaborative robots—or cobots—that work alongside employees to help improve productivity. You have predictive analytics and

AI technology is becoming more capable at forecasting, and the ability to manage on a predictive basis is far more accurate than before.”


What if your company is not involved in e-commerce? What if you run a diagnostic laboratory, an aerospace manufacturing company, or a construction company? Countless businesses do not sell anything online. They do not ship products to stores or houses, and they never will.

However, all companies will feel the effects of the increase in industrial demand, due to increasing competition for all suitable warehouses and a corresponding increase in lease rates. During each year of the last economic expansion, lease rates have increased an average of 7 to 10 percent per year.

Another entrant to the industrial real estate market, along with e-commerce companies, is the institutional investor. Due to their ever-increasing interest in industrial real estate and continued pursuit of risk-adjusted returns, the new adage of the modern industrial era is that there are too many dollars chasing too few deals.

One significant implication of the influx of the institutional investment community is the increased investment demand driving down the rate of return for the rest of the investment community. If that were the only significant implication, then companies utilizing industrial buildings for their businesses would be mostly unaffected. However, the increase in investment appetite coupled with the lack of suitable inventory for institutional investors has led to those investors being willing to buy smaller and smaller buildings in which to place capital. The result of this refocusing of asset size is that it is now harder for businesses to buy their industrial facilities, as would-be owners are competing with institutional investors for the same building. We call this the owner/user market, as companies can own the building and use it for their business. Currently, the market is roughly 50 percent institutional investment sales and 50 percent owner/user sales by dollar volume.

Although institutional investment means there are more dollars chasing fewer deals, the upside is that there is more capital building new state-of-the-art facilities, more value-add projects where investors contribute significant capital into improving and renovating older properties, and more investment in the software and technology needed to manage such investments.



This book would have a gaping blind spot if we did not elaborate on Amazon’s presence and impact on the industrial real estate marketplace. They are number two on the Fortune 500, second only to Walmart. When this book hits the shelves, it will likely be sold on their digital marketplace platform and printed within one of their warehouses. It will be sent through their fulfillment center and delivered to your door from their truck. If you are listening to the audiobook, it is likely on their audio platform, and you are listening with headphones you purchased through their marketplace.


The Properties section of Amazon’s 2019 Securities and Exchange Commission (SEC) 10-K report illustrates their real estate portfolio, which, in North America, consists of 18 million square feet of office space, 20 million square feet of retail stores, and 187 million square feet of industrial property.

According to Bloomberg, as of this writing, Amazon reported its intent to open one thousand warehouses in suburbs and cities across the United States in a quest for faster shipments and increased proximity to customers. In addition, Amazon is expected to increase its fulfillment center square footage by 50 percent in 2020. If the US industrial market development pipeline averages some 200 million square feet of new industrial space annually, you can see why it would be increasingly attractive for institutional investors to fund more inventory over the course of the next couple of years. This is with e-commerce representing only 14 to 16 percent of all retail purchases.

In California alone, Amazon maintains approximately twenty five fulfillment centers, many of which are in excess of 1 million square feet individually. Amazon is a great example of all the evolutionary factors of industry discussed above, as they are one of the most sophisticated e-commerce operators. A simple walk-through of their fulfillment centers provides you with a mind-blowing lesson in sophisticated technology and warehouse automation systems. If you are expanding within Class A industrial space of more than 300,000 square feet in any of the major metropolitan markets, there is an excellent chance they are in the market with you.


XPO Logistics has risen to prominence over the past decade to become a global leader in the logistics space. XPO ranks number 196 on the overall Fortune 500 rankings for 2020, and is the number-one-ranked transportation and logistics firm on that list. XPO is also one of the top five industrial tenants in the United States. XPO demonstrates all of the admirable qualities businesses can aspire to attain as it continues to build its warehouse capabilities.

XPO uses advanced automation and intelligent machines, including robots, cobots, and the systems described in the Warehouse Automation and Robotics section. The payoff of

sustained capital investment in advanced automation creates efficiencies in sorting, picking, and packing. Advanced automation increases speed, lowers risk, and satisfies customer expectations.

Information technology (IT) systems is another area where XPO excels over traditional companies that handle their own logistics and fulfillment. XPO has created IT infrastructure that can integrate with its warehouse automation systems to manage orders, provide visibility of fulfillment flows, and integrate into ERP systems. These technologies allow XPO to enhance safety, increase productivity, reduce errors, and help employees manage large volumes during peak.

XPO also offers XPO Direct, a network of shared-space distribution facilities that provides customers with a fluid way to position inventory close to their customers on demand. There is also XPO Smart, a service that manages labor costs for customers by organizing shift schedules and moving inventory closer to fulfillment sites.


Industrial landlords take many different forms. The leading players in this space are public companies, private equity funds, pension fund advisors, insurance funds, and real estate investment trusts (REITs). In this book, we will focus on the most significant two current players in the industrial investment space, Prologis and Blackstone. If you have not dealt with either company yet, you likely will soon. Both have aggressively grown their portfolios to the extent that they have reached virtually every market across the United States, as well as having established a sizable international presence.

While the US portfolio size for these two investors is similar in size and scope, they are two very different companies. We can gain context and insight by comparing and contrasting the two, as your company’s warehouse landlord is likely to have similar attributes. It cannot be overstated that understanding your landlord will help you with your next commercial real estate project.


Prologis is a public company and REIT focused exclusively on industrial real estate and, more specifically, logistics real estate. Over the past thirty years, Prologis has become the world’s leading industrial real estate company. With a focus on high barrier, high-growth markets, they have built a portfolio of over forty-six hundred buildings in nineteen countries across the world. Today, their US portfolio exceeds 964 million square feet. To put that into context, if you took their entire portfolio and included it in the above referenced matrix of the US industrial market, Prologis would rank second only to the entire Chicagoland industrial market in terms of total square footage.

The company, in its current composition, was formed in 2011 with a “merger of equals” between Prologis and AMB, making it the most significant industrial real estate investor globally. Prologis has continued to grow by acquiring the following:

  • Keystone Industrial Trust in 2004 for $1.5 billion
  • Catellus in 2005 for $5.3 billion
  • KTR Capital Partners in 2015 for $5.9 billion
  • DCT Industrial Trust in 2018 for $8.5 billion
  • Industrial Property Trust in 2020 for $4 billion, adding 236 properties and 28 million square feet
  • Liberty Property Trust in 2020 for $13 billion. The Liberty portfolio consisted of 550 industrial operating properties, totaling 108 million square feet. The acquisition expanded Prologis’s presence in target markets such as Lehigh Valley, Chicago, Houston, Central Pennsylvania, New Jersey, and Southern California.

Prologis takes pride in offering their customers and investors the most modern and geographically diverse platform of distribution space in the world. They have over seventeen hundred employees serving more than fifty-five hundred customers, such as Amazon, Home Depot, FedEx, and DHL. Their commitment to sustainable development has placed them at number twenty-six on the Global 100 Most Sustainable Corporations ranking.

Since Prologis is a pure industrial player, they have an unusually high level of commitment to their tenant customers, the brokerage community, and the greater community at large. By “pure player,” I mean they do not invest in retail, office, apartments, hospitality, senior living, or any other asset class of real estate.
This commitment manifests in several ways:

  • Prologis has opened several innovation centers, called Prologis Labs, where they experiment with innovative ways to solve some of the pain points of their customers.
  • They invest in startups that work on supply chain and logistical challenges. Customers have an opportunity to participate within this ecosystem and help provide real-time feedback to each startup.
  • They continually invest in the upgrading of their properties, whether it be tearing down and redeveloping older properties, increasing trailer storage where appropriate, or reworking property layouts to incorporate more loading docks.

When dealing with Prologis, my sense is that the company wants to accommodate tenants’ facility and geographic growth needs. It is often possible for them to expand within their portfolio and to do so in a meaningful way that provides a competitive advantage.


Blackstone’s industrial platform operates under the name Link Properties, which was recently created after their $18.7 billion acquisition of GLP properties. As of 2020, this acquisition is the largest private real estate transaction globally of all time. Blackstone has been in and out of the industrial real estate asset classes over the years with their prior industrial platform, operating under the name IndCor.

Link Properties is made up of approximately 250 people across the United States and manages roughly 400 million square feet of industrial property. They focus primarily on major markets and gateway cities, and their portfolio consists of smaller infill buildings, rather than larger distribution and fulfillment centers.

Their portfolio also focuses on multiple smaller, strategically located warehouses close to population centers. This means you are more likely to encounter Blackstone in urban and suburban markets, in spaces that are typically less than 300,000 square feet.

Blackstone is banking on e-commerce growing another two to three times its size and plans to benefit from e-commerce’s continued push into infill markets with high barriers to entry. They see location as becoming more critical to e-commerce users over time, and since supply is limited, they see an opportunity to push rents and increase their returns on invested capital.

The increasing scale of Link Properties’ portfolio means they have more access to data and tenant relationships than most of their peers. What is more, their operating abilities are exponentially increased within the Blackstone private equity platform, one of the world’s most technologically and quantitatively sophisticated private equity investment firms. They invest institutional investors’ capital into real estate, private equity, hedge funds, and credit investments, with real estate accounting for $163 billion of their total $571 billion assets under management.


We discussed the size and depth of the entire US industrial market, along with rental rates and future growth prospects of several individual markets. Then we covered the lasting role of e-commerce and how it affects the same market where you do business. Lastly, we introduced the two leading players in the tenant and landlord market, so you can understand who they are and how they operate.

This chapter was part of your orientation into today’s industrial real estate world. My hope is that you were able to pick up enough information to understand how your facility fits into the greater market, so you have context as you make decisions. In the next chapter, we will discuss the inception of your next real estate project and how to think about it strategically and tactically.