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From 'The Butt End Of Real Estate' To Blind Bidding Wars: Inside The Staggering Rise Of Industrial

When Rooney Daschbach started working warehouses in 1986, finding tenants was a struggle. 

He would advertise teaser rates of 25 cents a square foot for the South Bay Los Angeles properties he was marketing, sending out rate cards illustrated with pictures of quarters. To woo tenant reps, he and colleagues would offer free weeklong vacations to Hawaii, even the occasional car. 

In a market with 12% vacancy, he would even allow tenants to lease space month-to-month, letting them pay just enough to cover warehouse owners' operating expenses and pay their mortgage.

How times have changed.

Izzy Sonenreich, of Denver-area industrial firm Sonenreich & Co., touring a small warehouse.

Bisnow spoke to brokers, developers and executives across the country with decades of industrial real estate experience to get a sense of just how different the industry is today from when they first started working warehouses.

It starts with the money piling into the sector: $160B was spent on industrial property in the Americas last year, according to CBRE, a 55% increase over 2020. Globally, industrial has grown from 11% of the real estate investment market in 2016 to 22% in 2021.

The nation’s warehouse stock has grown by roughly 75% in the last three decades, with the average size of a new warehouse roughly double that of ones built in the early 2000s. Last year, tenants leased 1B SF, per CBRE, a record since the firm started tracking the sector. Since 1989, the national average asking rent has more than doubled.

The least sexy mainstream commercial real estate asset class — by a wide margin — has become a booming sector that other real estate pros are fighting to enter.

“This was literally the butt end of real estate,” said Aviva Sonenreich, who runs an industrial brokerage in the Denver area, Sonenreich & Co., with her father. “Ten years ago, we used to go to continuing education events about industrial real estate, and there were just a couple of people in the room. It was T-shirts and sweatpants, if anybody was there at all. Now, it’s packed with guys in Armani suits."

Ed Mitchell, founder and CEO of Florida-based Mitchell Property Realty Inc., said it boggles his mind to see today areas where it is often more expensive to build warehouses than office buildings. 

“I heard the guys in industrial were the ones with the goatees,” said Gregg Healy, an executive vice president and head of the industrial group at Savills. “They look a bit more rough around the edges. They don’t have the savviness, they’re really just clumsily finding properties. But that’s totally different now.

"Look at leaders for major companies, Tim Cook at Apple or Mary Barra from GM," Healy added. "They all come from supply chain positions.”

In the 1980s and '90s, and even in the early days of e-commerce, working in industrial real estate meant slow-paced days that revolved around the loyalty between tenants and landlords, a leisurely pace of leasing up new buildings, and experience instead of data analytics determining a new warehouse site.

When many of the people interviewed for this story got involved in industrial real estate, the sector lacked today’s sheen. They signed on for the steady pace, the unique nature of the business and the lure of the deal. 

“Warehouses are one of the most pure forms of real estate,” Cabot Properties Chief Investment Officer Patrick Ryan said. “It’s not some fancy office building downtown. It’s four walls and a roof that doesn’t leak, which means the inherent true value is where they’re located. So in locating them, you’re in tune with all the drivers of demand.” 

In the past, brokers representing landlords needed to pound the pavement and dig harder than they do today, according to JLL Northeast Industrial Executive Managing Director Adam Citron. It was much more difficult to find a tenant.

“People thought industrial meant just manufacturing or factories, and that it's a hard-knock life, so to speak,” Citron said. 

If Cabot, a Boston-based industrial developer, was turning dirt and building walls on a new warehouse a decade or so ago and a Fortune 500 company came asking for a lease, the firm would drop everything to sign them on the spot, Ryan said.

“The word supply chain wasn’t spoken about 15 years ago,” Daschbach said. “When I started, guys would bring in inventory and it would sit, sometimes for six, 12 months. And as far as building warehouses was concerned, older structures in the '80s, under 20K SF didn’t even need sprinklers.”

Gregg Healy, executive vice president and head of Savills’ Industrial Services Group

That pace and pressure have given way to a fiercely competitive, high-tech industry that has been center stage during the pandemic’s wild supply chain swings and the rise of e-commerce. There is no "good enough," just scientific evaluation and explosive price growth.

Industrial as a career now requires more familiarity with tech, analytics and the same labor and transportation calculations that potential clients make when figuring out where to site and store their goods. Brokers need to know every statistic in every single market and submarket, said Citron, and how everything works “inside and outside of the box.” 

”It’s tons of spreadsheets and tabs, and clients demand it,” he said. “If you don’t do it, you’re not getting hired.”

Industrial brokers have gone from a necessary evil to a needed strategic partner for brands and tenants, Healy added.

“When you have a market like this, where your rates are going nothing but vertically straight up, your comps don’t matter anymore,” he said. “They’re all dated. That means you have to have someone who really understands what’s going on today. Not yesterday.”

Deals are signed before projects break ground, just-in-time delivery is the norm, and developers are going vertical and looking in unheard-of places — including office and mall conversions — for potential projects. And landlords run the show.

“Let me tell you what I’m going through every day with this insanity,”  Sonenreich said. “When a property comes online in Denver, it’ll get five bids in an hour, sight-unseen. Smart brokers have been shopping it before it even technically goes on the market.”  

Citron said price increases for available space are headed north before there are even proposals submitted, especially considering the state of the market.

“The adage is ‘Why not?'” he said. “Why can’t I ask more if the vacancy rate in the market is 1.9%?” 

Now, landlords ask for bids, and everything is basically a blind auction. Healy compared it to the residential housing market; companies bid up a property and all of a sudden Amazon, a potential dark horse until any deal is signed, comes in with better credit and cash in hand and swoops up a key property. 

2505 Bruckner, a multi-story distribution center in the Bronx, was leased by Amazon and the Home Depot.

“There was a time when we started getting blind offers with crazy numbers and realized they hadn’t even been in the property,” Sonenreich said. “With the influx of these megawarehouses over the last five years, those commission checks have exploded.”

Daschbach remembers thinking that depositing a $10K check made him rich, but then the monster deals became bigger and bigger. In 2006, he did a $420M portfolio sale and a $220M sale for an institutional owner, the biggest year in his career. But he tended to be conservative with his earnings, having weathered enough cycles to see that you need to put some of that commission away. 

“There were some guys, especially right before the recession in 2009, who had some big paydays and went out and bought a big house or something like that,” he said. “But when the market went back down, they ended up having to sell it a few years later.” 

In many ways, the market is becoming a victim of its own success. Now, new multi-story buildings and megawarehouses attract pushback from municipalities, campaigning against road congestion and the environmental costs of these buildings.

Ryan said Cabot now develops on sites “with hair on them” that require environmental remediation challenges or ones that were passed over just years ago, because the competition for space is relentless. The developer now waits until the last minute to sign a lease, because every additional week can mean rising rent rates.

“In today’s environment, you won’t even have a conversation, because you don’t want to lock in a rate that’s too low,” Ryan said.

“Industrial real estate was this thing nobody thought about that has become something that people realize has been in front of their face and they didn’t notice it,” he added. “It’s easily understood, and it’s everywhere.”