Industrial Real Estate Boom - How Did We Get Here?

Sixteen years ago, in 2008, the industrial market was heavily dependent on the housing market. Building materials suppliers, contractors, distributors and manufacturers leased warehouses and industrial outdoor storage.

Today the demand is much more diverse and robust. Demand has entered the market from; on-shoring, e-commerce, last mile distribution, cannabis, semi-conductor manufacturing, gigafactories, and quasi-retail uses like pickle ball, gyms and breweries. And that’s just to name a few.

With this robust demand, the ancillary businesses follow. The chip manufacturer needs air filters so now an air filter supplier leases a warehouse. Amazon builds a new distribution center so now their fleet repair mechanic needs to add a bigger location absorbing 5 acres.

Over the past ten years, more and more consumers started buying goods online. And then covid hit, everyone started buying goods from their phone and this put the industrial market on steroids. And then record low interest rates hit along with substantial increases in the money supply which led to more development and more consumer demand.

As the consumer began to buy more online, the consumer began to search more online. Now that gym doesn’t need the retail exposure.

Now Home Depot has to compete with Amazon so they lease a distribution center for last mile, 2 day delivery.

In addition to shifts from the consumer leading to more demand for warehousing, infill industrial started to be demolished. As high as demand is for infill class b industrial, it is typically not the highest and best use, especially as housing demand has outpaced supply. If a developer wants to build a mid rise with retail on the bottom and multi-family above, a class b industrial site at $100 per square foot makes sense to buy, re-zone and build vertical on.

With inflation rising, construction costs skyrocketed, outpacing lease rate growth. Then developers started to sit on the sidelines, struggling to pencil out high construction costs, rising interest rates and less financing options as banks hit a bump in the road.
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It really has been the perfect storm for industrial as demand for existing industrial is stronger than ever and existing warehouses get demolished faster than ever.  

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