As such a broad category, it’s best discussed on a global level. Since 1990, several entities with large capital have concluded that the risk for real estate is less than that of equity markets—or at least a balancing asset class—and that portfolios should include good quality net-leased properties. These entities—insurance companies, pension funds, managed equity funds for high net-worth individuals, sovereign funds from outside the U.S., etc.—have entered the commercial real estate investment market in a big way.
Another factor for holders of wealth is that with U.S. inflation rates and interest rates so low, a much lower return is acceptable for a real estate investment. Therefore, individual properties and portfolios of properties can be sold at much higher prices than ever believed possible. In 2019, those new developers who had sprung up since the U.S. economic recovery came to discover that they could buy land, develop property on a speculative basis, fully lease that property, and sell it for a huge spread over actual hard and soft costs of development. Many of these new development firms were lean, mean offshoots of some of the larger players of the early 2000’s, but without the overhead, and in many cases were not public companies or beholden to one or few source(s) of income.
Another recent trend: huge portfolio sales by major players like Blackstone, Exeter, Stag, Ivanhoe Cambridge, and sovereign funds from the Middle East and Singapore. Prologis—a publicly traded Real Estate Investment Trust, or REIT— bought two other REITS: first DCT in August 2018 for $8.5 billion, and then Liberty Property Trust for $12.6 billion in October 2019. . In just four days, Blackstone purchased the U.S. Logistics assets of Colony Capital for $5.9 billion, and then the U.S. Logistics assets of China’s GLP for $18.7 billion.
The big industrial changes from 1990 to 2020 have been the fallback in manufacturing and the dramatic increase in large bulk distribution centers. Refrigerated food buildings continued to service America’s breadbasket. Printing companies died by the hundreds, with survivors having huge investments in specialized machinery.
As far as the biggest change to industrial CRE goes—e-commerce fulfillment—nobody is a bigger part of this story than Amazon. Several buildings they occupy in cities all over the country are well over a million square feet each. In Memphis they are building a 4.2 million square foot facility; in Nashville, a 3.6 million square foot building; and in Northern Kentucky, their new Prime Air Hub at the airport will be 2.8 million square feet. They claim to have created 100,000 new jobs by beginning their last mile delivery initiative in 2018.
In 1990, new bulk warehouses were mostly 24 feet clear height, whereas in the months preceding the dawn of 2020, most new bulk buildings were 36 feet or 40 feet clear height. Thirty years ago, concrete floors were leveled with strings and straightedges measured by humans; now they’re precisely flat with new technologies with lasers and dozens of computer calculations, in all directions.
Two other big changes in new warehouse development is the presence of truck and trailer parking that’s located away from the building, as well as column spacing that’s generally now over 50 feet in all directions as compared to the traditional 40 feet by 40 feet of the ‘90s. Wider spacing provides more racking configuration options.
Fire protection and response times to such disasters have also faced a makeover in the last 30 years. Previously, it was also quite common to have in-rack sprinklers, whereas now with Early Suppression Fast Response sprinkler systems (ESFR), large volumes of water are discharged directly to the fire and are specifically created for warehouses with high piles of materials.
Lighting is another big improvement. The ‘90s saw fluorescent bulb systems, sodium vapor lighting (yellowish), and metal halide systems. All were energy hogs and expensive to repair. The first breakthrough in the early 2000s was the efficient small diameter fluorescent systems, T-5 and T-8. They had a short time in the limelight, though, as high-efficiency LED lighting systems came out with motion sensors, further saving bulb life and energy costs.
Most big bulk warehouses before 2008 were constructed with pre-cast panels that were factory-produced, with insulation sandwiched in. Some developers, though, stayed with the older “tilt-up” technology that involved the building slab being poured first and then, after curing, pouring the wall panels on top of the new floor before being tilted up. The tilt-up method was more cost-effective, so when the recession hit, many of the pre-cast panel factories went out of business. Once the economy picked up again, most builders went back to tilt-up since the lead times for the few panel manufacturers still in business could be over 12 months. Eventually new plants either opened or re-opened, and lead times became more reasonable.
A final—but not small—change to the industrial sector was the rapid growth of big bulk warehouses, specifically between 2015-2020. With this growth, firms began constructing e-commerce-specific facilities and leasing them out to good credit tenants. This trend gave birth to the new darling in the institutional investment community: net leased industrial. With these solid credit tenants in tier one markets, CAP rates were often below 4%, hinting at property values that were astoundingly higher than in years past.
Never before has so much money been chasing so many buildings at so many record prices. The investment market and the industrial leasing market have the same marquee stars: net leased e-commerce distribution centers and free one-day delivery!