In an era where commercial real estate growth has slowed, logistics properties have emerged as a standout performer, demonstrating remarkable resilience and vitality. According to Grubb & Ellis' "2012 National Real Estate Forecast" report, logistics real estate now represents the most dynamic segment of the U.S. industrial property market.
The Shining Star of Industrial Real Estate
While logistics properties account for just one-quarter of total industrial space, they've generated approximately 70% of total demand since Q2 2010. This disproportionate contribution highlights the sector's dominant position and growth potential within industrial real estate.
The numbers tell a compelling story: logistics property demand turned positive in mid-2010—well before the broader industrial market's recovery in late 2011—and reached 75 million square feet by year-end 2011. Approximately 70% of new construction since 2001 has been logistics-related, though investors should note that supply continues to outpace demand in many markets.
The "Trade-Up" Phenomenon Driving Growth
Tim Feemster, Senior Vice President and National Director of Logistics at Grubb & Ellis, identifies tenant upgrades to Class A facilities as a key market driver—a phenomenon comparable to the automotive industry's "cash for clunkers" program.
Class A logistics buildings distinguish themselves through:
- Advanced functionality: Featuring automation systems, smart warehouse management, and energy-efficient lighting
- Minimum clear heights: 28 feet for buildings exceeding 100,000 square feet
- Superior truck door ratios: Minimum 1 door per 7,500 square feet
- Spacious truck courts: Minimum 135-foot turning radius
This upgrade trend has seen companies moving from Class B to Class A facilities, often securing larger spaces (200,000 to 300,000 square feet) at comparable rental rates.
Vacancy Rates: The Market's Vital Signs
After peaking at 13.8% in late 2009, U.S. logistics vacancy rates declined by over 300 basis points by late 2011, with projections suggesting single-digit rates by 2012's end. However, slowing economic growth and accelerated new deliveries may moderate this decline.
Notably, speculative construction has begun in select markets, with Grubb & Ellis anticipating expansion to 16 major U.S. markets in 2012.
Case Study: The Inland Empire's Transformation
The Inland Empire region of Southern California exemplifies this growth trajectory. Once facing shortages of large logistics facilities, the market now sees rapid development of 500,000-600,000+ square foot properties. In 2011 alone, two to three million-square-foot distribution centers were constructed and quickly leased—mirroring the rapid absorption of ten similar-sized facilities just 18 months prior.
This development pattern reflects strategic, vacancy-driven construction rather than speculative building. Despite low vacancy rates, the Inland Empire's massive market size means even modest percentages represent substantial available space—a dynamic discouraging construction of smaller (200,000 square foot) facilities that already saturate the market.
Market Outlook: Opportunities and Challenges
Industrial property net absorption reached 110 million square feet in 2011—more than triple 2010's 34 million square feet. Warehouse/distribution space accounted for three-quarters of this demand despite representing just half of total inventory. Class A logistics properties, constituting 20% of industrial inventory, captured 50% of 2011's total demand.
Projected 2012 demand growth of approximately 15% (to 130 million square feet) reflects cautious optimism amid economic uncertainty. Third-party logistics (3PL) providers are expected to play an increasingly important role in driving Class A distribution space demand as companies continue outsourcing non-core operations.
Investment Considerations
Key recommendations for investors include:
- Prioritizing Class A logistics properties
- Targeting economically vibrant, transportation-rich markets
- Monitoring supply-demand dynamics
- Tracking 3PL industry growth
- Maintaining disciplined risk management practices
Emerging Market Trends
The logistics real estate sector continues evolving through:
- E-commerce expansion: Driving unprecedented warehouse and distribution center demand
- Supply chain optimization: Increasing efficiency-focused real estate requirements
- Technological innovation: Automation, robotics, and AI transforming facility operations
- Policy support: Government initiatives improving logistics infrastructure
While the sector presents significant opportunities, investors must remain mindful of economic fluctuations, policy changes, competitive pressures, and operational risks that could impact returns.