Logistics and Industrial Real Estate

Logistics and industrial real estate has become one of the most sought-after sectors over the past decade, transforming from a “boring” asset into a favorite among institutional investors. The drivers of this transformation have been the growth of e-commerce, the reconfiguration of global supply chains, and changing consumer habits.

Demand Drivers: The E-commerce Revolution

Quantitative Impact of E-commerce

• Every $1 billion in online sales requires approximately 1.25 million sq ft of warehouse space
• E-commerce requires 3 times more logistics space than traditional retail
• The share of online sales has grown from 5% (2010) to 15%+ (2024) in developed countries
• The pandemic accelerated e-commerce growth by 5+ years

Structural Demand Factors

• Same-day / Next-day delivery — requires proximity to the end consumer
• Inventory buffering — companies are increasing reserves after supply chain disruptions
• Nearshoring / Reshoring — return of production closer to sales markets
• Third-party logistics (3PL) growth — growth in logistics outsourcing
• Cold chain expansion — rise in food delivery

Typology of Logistics Assets

1. Big Box / Regional Distribution Centers

   • Size: 500,000 - 1,500,000+ sq ft
   • Ceiling Height: 36-40 ft clear height
   • Location: Hub markets along transport corridors
   • Tenants: Amazon, Walmart, major 3PLs
   • Lease Terms: 10-20 years
   • Cap rates: 4.0-5.5%

2. Last-Mile Delivery Facilities

   • Size: 50,000 - 200,000 sq ft
   • Ceiling Height: 28-32 ft
   • Location: Inside or on the border of cities, infill locations
   • Characteristics: High number of dock doors, large parking lots for vans
   • Tenants: Courier services, Amazon, UPS, FedEx
   • Cap rates: 3.5-5.0%

3. Light Industrial / Flex

   • Size: 10,000 - 100,000 sq ft
   • Characteristics: Combination of warehouse and office (10-30% office)
   • Uses: R&D, small manufacturing, showrooms
   • Multi-tenant: Often multiple tenants
   • Cap rates: 5.0-6.5%

4. Cold Storage

   • Temperature modes: Frozen (-20°F), Chilled (33-38°F), Controlled atmosphere
   • Capital expenses: 2-3 times higher than regular warehouses
   • Operating expenses: Significantly higher (energy)
   • Entry barriers: High, limited supply
   • Cap rates: 5.5-7.0%

5. Manufacturing / Heavy Industrial

   • Features: Reinforced floors, crane-ready, heavy power
   • Build-to-suit: Often built for a specific manufacturer
   • Lease terms: 15-25 years (long due to specialization)
   • Conversion: Complicated due to specific features

Last-Mile Logistics: The New Favorite

Last-mile facilities have become the most in-demand subsegment:

Characteristics of Successful Last-Mile Assets

• Location: Within 15-20 miles of dense residential areas
• Transportation access: Proximity to highways and major arteries
• Configuration: High dock door to area ratio
• Parking: Large areas for delivery vans
• Ceiling height: 28-32 ft (less than big box)
• Cross-dock capability: Possible for rapid cross-loading

Economics of Last-Mile

Cold Storage: A Specialized Segment

Growth Drivers for Cold Storage

• Grocery delivery — increase in online grocery orders
• Meal kit delivery — ready-made meal kit delivery services
• Pharma/Biotech — vaccines and pharmaceuticals requiring cold chain
• Restaurant supply chain — centralization of supplies for restaurants

Technical Requirements

• Insulation: 6-8 inches of polyurethane foam
• Refrigeration equipment: Ammonia or Freon systems
• Backup power: Generators for critical zones
• Floors: Heated in freezer zones to prevent frost heave
• Dock design: Temperature-controlled airlocks

Rental Rate Dynamics

Rent Growth (2019-2024)

Factors Supporting Rent Growth

• Vacancy near historic lows — 3-5% in key markets
• Limited new supply — restricted sites for new construction
• Construction cost inflation — rising construction costs
• Entitlement challenges — permitting difficulties near residential areas

Compression of Capitalization Rates

Historical Cap Rate Dynamics

Important: The rise in interest rates in 2022-2024 led to an expansion of cap rates, but industrial remains the most “defensive” sector due to strong rent growth.

Key Markets and Developers

Top US Industrial Markets

• Inland Empire, CA — largest in the US, serves LA/Long Beach ports
• Dallas-Fort Worth — central location, hub for the entire South
• Chicago — historic hub, access to Midwest
• Pennsylvania (I-78/81 Corridor) — serves the Northeast
• Atlanta — southeastern hub
• Phoenix — growing nearshoring hub

Major Developers/Owners

• Prologis — largest in the world, ~1.2 billion sq ft
• Duke Realty — acquired by Prologis in 2022
• GLP — global player (Asia, US, Europe)
• Blackstone — largest private owner
• Brookfield — diversified portfolio
• STAG Industrial — focus on secondary markets

Investment Strategies

Core Strategy

• Stabilized assets in prime markets
• Long-term leases with credit tenants
• Cap rates: 4.0-5.5%
• Target IRR: 7-10%

Value-Add Strategy

• Lease-up of vacant spaces
• Repositioning of obsolete assets
• Mark-to-market opportunity (below-market rents)
• Target IRR: 12-16%

Development Strategy

• Spec development in high-demand markets
• Build-to-suit for major tenants
• Land banking for future development
• Target IRR: 15-20%+

Key Metrics for Analysis

Risks and Challenges

• Supply wave — significant volume of new construction in some markets
• Interest rate sensitivity — impact of rising rates on value
• Labor availability — shortage of workforce near expensive cities
• Automation risk — automation may reduce need for space
• Environmental regulations — restrictions on diesel transport (California)
• NIMBY opposition — resistance to construction near residential areas