Although developing industrial real estate remains relatively simple in comparison to other real estate asset classes such as hotels and offices, contemporary logistics real estate development is fraught with several risks that are unique to this particular asset class. Unlike traditional big-box warehouses, modern logistics real estate assets are becoming increasingly sophisticated to meet the needs of the fast-moving tenants that occupy these spaces. This additional complexity has spawned several challenges that can stall, hinder, or completely derail an entire project without a pre-planned risk management strategy. This short article explores four critical components of developing industrial real estate – specifically high throughput logistics real estate – and lists potential problems that may notice investors and developers encounter when developing logistics real estate.

1. FOUR CRITICAL FACTORS TO
CONSIDER BEFORE INVESTING IN A
LOGISTICS REAL ESTATE
DEVELOPMENT

2. TABLE OF
CONTENTS
▪ Introduction
▪ Factor #1: Entitlements & Zoning
▪ Factor #2: Parking
▪ Factor #3: Proximity To Labor
▪ Factor #4: Proximity To Customers
▪ Conclusion

3. INTRODUCTION
▪ With the demand for industrial real
estate expected to grow by over 1.2
billion square feet over the next five
years, the oft-forgotten, humdrum
real estate sector has now emerged
to become of the best performing
real estate asset classes over the past
20 years.
▪ With strong underlying
fundamentals, strong rent growth,
and dwindling vacancies, logistics
real estate is considered a favorite
amongst family offices and
institutional investors.

4. INTRODUCTION
▪ The capital markets have
similarly been bullish on the
long-term outlook for the
industrial REITs as drops in
valuations for industrial REITS
have been far tamer in
comparison to other
commercial real estate asset
classes.

5. INTRODUCTION
▪ Several factors attract
sophisticated capital to
the asset class, which
include long term NNN-
leases, lower Tenant
Improvement
Allowances on a per
square foot basis, and
the fact that industrial
real estate has
historically been less
prone to oversupply.

6. INTRODUCTION
▪ However,one of the problematic
features of industrial real estate is
that it is common to see
obsolescence with older properties.
▪ Multifamily properties, for example,
built in the 1970s and 1980s, can be
repositioned to become a viable
asset with the right value-add
strategy in place. In contrast, the
primary features that attract tenants
to an industrial building have to do
with the physical design and
construction of the property.

7. INTRODUCTION
▪ For example, it is common to see older
warehouses having clear heights between
16 and 20 feet.
▪ Modern tenants, particularly logistics and
e-commerce tenants, are seeking
buildings with clear heights as high as 40
feet in some cases. As a result, leasing an
older building is out of the question for a
wide range of modern industrial tenants.

8. ▪ Older buildings may also have
issues regarding configuration,
parking, or building construction.
▪ Unlike previous generations of
warehouses, which can be summed
up as ‘four walls and roof’ modern
logistics facilities are becoming
increasingly sophisticated in
comparison to their predecessors.

9. INTRODUCTION
▪ Through the adoption of energy-
efficient lighting, advanced power
systems, and specific docking
configurations designed to enable
high-throughput distribution, the
contemporary logistics facility reflects
the sophistication of modern logistics
tenants operating in the fast-moving
world of e-commerce.

10. ▪ Large scale development is taking place
across several major metropolitan areas
across the United States as landlords and
investors alike seek to attract top tiers
tenants that are willing to premium rental
rates.

11. ▪ While the development of
industrial properties is relatively
simple in comparison to office
buildings or apartments, there
are several unique
considerations that developers
and investors should consider
before pursuing any particular
project.

12. ▪ Although the development of industrial
assets itself is a highly nuanced endeavor
that is well beyond the scope of this writing,
this short presentation will serve as an
introductory overview of the essential factors
involved with investing in industrial
development.
▪ In summary, this short presentation will
explore four factors that should be
considered before deciding to develop a
logistics facility.

13. ▪ Markets characterized by scarcity
are starting to see industrial
buildings inch closer towards non-
industrial neighbors – namely retail
and residential buildings.

14. ▪ This will inevitably lead to conflicts related to
truck traffic and pollution.
▪ Despite the insatiable consumer demand for
one-day, and even same-day shipping,
NIMBYism and local resistance can still stifle
or stall new developments – especially if it
involves amending or receiving exemptions to
local zoning.

15. ▪ In fact, most municipalities have some sort of
restrictions on industrial uses. For logistics
properties, the most common restrictions
have to do with limitations on volume and
restrictions on the hours in which trucks can
operate.
▪ These restrictions tend to be localized in
nature and can change from suburb to
suburb.

16. Before choosing a site, here are a few
important questions to consider:
▪ “Is this site zoned for industrial real
estate. If not, will I require an
amendment or exemption to local
zoning?
▪ “If I do require an amendment or
exemption to local zoning, what is the
likelihood that I will receive this. How
long will this take?

17. ▪ How receptive are my potential
neighbors towards the development
of industrial property?”
▪ “Will building on this site interfere
with my neighbor’s right to enjoy
their property?”
▪ “If this development does interfere
with neighbor’s right to enjoy their
property, how severe is it, and how
can this be remediated cost-
effectively?”

18. ▪ Despite the shift towards automation and
increased adoption of robotics, the
parking ratio for logistics real estate
continues to increase.

19. ▪ Increased adoption of robotics, the parking
ratio for logistics real estate continues to
increase.
▪ Traditionally, two parking spots per one
thousand square feet of industrial space was
considered the standard.
▪ Newer industrial developments, however, are
being designed with up to three spots per
thousand square feet of industrial space.

20. ▪As parking requirements for
office, retail and multifamily
see declines, how is it such
that the demand for parking
continues to burgeon for
industrial properties in the
age of artificial intelligence
and automation?

21. ▪One possible explanation as to why this is
occurring has to do with the fact firms are
now able to process more orders per day
than ever before.
▪The speed at which these orders can reach
the end-consumer is dependent on the
number of vehicles that can be stored and
loaded on-site.

22. ▪ As expectations for same-day delivery
continues to normalize, distribution
centers will require larger fleets of
delivery vehicles to deliver on-demand.
▪ As a result, parking has become a critical
consideration for the end-users of
industrial real estate and is arguably as
important as proximity to major
transportation routes and intermodal
ports.

23. ▪With previous developments,
developers focused on maximizing
the square footage of the building
with little regard for parking.
▪However, property owners are now
realizing that top tier tenants are
turning down specific properties on
the basis of insufficient parking.

24. ▪In addition to being a hub for
delivery vehicles, parking lots
are also utilized for containers
and portable storage units for
auto parts.

25. ▪ Recent trends in industrial
leasing show that with
buildings with additional
acreage are not only leasing
for a premium but are also
leasing up faster given the
dearth of adequate product
that meets the demands of
modern tenants.

26. ▪ In addition to having parking
problems, these properties also have
lower clear heights, fewer loading
docks, and may require certain
sections to be torn down in order to
create room for additional parking – a
highly risky endeavor that rarely
makes sense from an investment
standpoint.

27. With regards to parking, here are a few
questions to consider before moving ahead
with development:
▪ “What are the parking ratios for the
competitive set in my submarket?”
▪ “Where should parking be placed to ensure
there are no ingress/egress issues in the near
future?”
▪ “What kind of tenants are looking to lease in
this submarket? What are they looking for in
terms of property?”

28. ▪ “How big are truck courts for the competitive set
in my submarket?”
▪ “How do industrial tenants in this area utilize
parking? Is it mainly trailers trucks, or is it a
combination of several different delivery
vehicles?”
▪ “How can I best configure the parking of this
building to ensure that I have a competitive
product that meets the demand of my ideal
tenant?”

29. ▪ Despite the highly digitized
nature of the modern distribution
center, labor is still a crucial
factor that drives the success of
the vast majority of industrial
tenants.

30. ▪ The success of several cities as logistics
hubs, such as Orlando and Dallas-Fort Worth,
can be attributed to the talented and rapidly
growing labor pool that is readily available in
those respective cities.
▪ Unlike previous generations, industrial jobs
do not carry the same aura as it did during
the heyday of American manufacturing.

31. PROXIMITY TO LABOR
▪ As a result, industrial tenants rely
heavily on the local labor pool.
▪ Although industrial labor requires
less training than manufacturing,
firms strategically aim for leasing
industrial space in densely
populated in-fill locations to have
access to a large workforce.

32. ▪ This is especially important because
having a qualified, large pool of labor is a
significant competitive advantage from a
business standpoint.
▪ As a result, firms are willing to pay more
for space that is within reasonable
proximity to the labor force.

33. Here are a few critical questions to consider when evaluating
proximity to labor:
▪ “Who are my tenants, and what kind of workforce are they looking
for? Blue-collar or skilled?”
▪ “Is the surrounding 5-mile radius a hotspot for the desired
workforce that my tenants are looking for?”
▪ “Where do my ideal tenants’ workforce live?”
▪ “What is the average commute for these tenants in terms of length
and distance. Depending on the city and state, this can vary
drastically and will materially impact the decision whether to move
forward with a project?”
▪ “If my tenants require skilled labor, how far is the nearest
university/college?”

34. ▪ With the last mile constituting over
25% of the total cost associated with
delivering an item to the consumer,
large industrial tenants are willing to
pay healthy premiums for infill
industrial sites close to major
populations to reduce their last-mile
delivery costs

35. ▪ This has prompted some
developers to undertake
lengthy and complex projects
that involve environmental
remediation because infill
locations in major metro
regions have become such a
scarce commodity, and the
only available land leftover
are brownfields.

36. ▪This sentiment is echoed by several
experts who assert that the only remaining
opportunity left is to redevelop on
challenging sites, including those with
environmental issues.
▪In addition to the scarcity of infill sites,
some of the already developed infill
products feature obsolete properties.

37. ▪ The lack of available infill sites has cued
some developers to consider demolishing
the existing structures and then subsequently
redeveloping the sites from the ground up – a
complex and capital-intensive endeavor.
▪ Similarly, many industrial developers are
reaching out to mall owners to see if they
would consider selling their malls. Several
dead malls, especially in crossroads states
like Ohio, have become hotspots for
developers looking to capitalize on the mall-
to-warehouse conversion.

38. ▪ Despite the old adage of ‘location, location,
location’, the costs associated with acquiring and
redeveloping the perfect location into a viable
industrial asset can be alarming and potentially
derail an otherwise sound opportunity.
▪ Instead, it may be more reasonable to search for a
site with ‘perfect price’ – a price that accounts for
inherent risks involved with the development of
the industrial real estate.

39. ▪ As prime infill locations zoned for
industrial real estate continue to
disappear, investors and developers
alike may be better off considering
developing on reasonably priced
greenfield sites located on the periphery
of a major metropolitan area.

40. Here are several questions to ask when
considering a site’s proximity to customers:
▪ “How much has the population grown over the
past two decades?”
▪ “Why has it grown, and what are factors that will
continue to draw people towards his market –
both metro market and submarket?”
▪ “Are there major employment drivers or
developments taking place over the next five
years that will continue to draw more potential
customers and businesses to the area?”
▪ “How business-friendly is the state and metro
area?”

41. ▪ “If you were to draw a 300-mile radius around
your property, how many people would you be
able to reach?”
▪ “What is the current median income and median
home value?”
▪ “What will the metro, city & submarket look in 20
years with regards to median income and median
home values?”
▪ “Has crime increased or decreased over the past
ten years in this metropolitan area and specific
submarket?”
▪ “Who are the end-consumers of your prospective
tenants? Where do they live, and how long would
it take for your tenant to reach them?”

42. ▪In summary, before giving the green
light to a particular project, Investors
and developers alike should pay close
attention to issues regarding
entitlements, parking, proximity to
labor, and proximity to customers.

43. ▪ Given the exorbitant cost of last-mile delivery, sites that have
easy access to a growing consumer base in a business-
friendly jurisdiction will be well-positioned to outperform
the benchmark.
▪ It is essential to analyze regional and domestic migration
patterns to determine the presence and sustainability of the
demand drivers that are drawing people to a particular
metro region to make an informed decision as to whether a
site makes sense from a demographic standpoint

44. ▪ In addition to considering
the demographics of a
specific site, it is also
imperative to think about
labor and how easy it
would be for firms to
recruit labor for their
respective businesses.
▪ Industrial jobs do not
carry the same clout as
other industries, such as
tech or healthcare.

45. ▪ As a result, the labor force is highly localized in nature and
can vary significantly depending on the municipality.
▪ Although investors and developers may not actively consider
the implications of the labor force on their investment,
modern industrial tenants are willing to pay a premium for
space that has access to a reliable labor pool.

46. ▪ From a physical standpoint, one of the
overlooked aspects of an industrial
site is the parking requirements.
▪ Although parking ratio seems to be
trending downwards for several asset
classes, the requirements for modern
logistics facilities continue to
increase.

47. ▪Modern industrial tenants, namely 3PL
and e-commerce tenants, require large
fleets of delivery vehicles to fulfill the
same day and one-day delivery
shipments.
▪Parking requirements that may have
sufficed a decade ago can no longer
accommodate the increasingly
complex high-throughput operations
that take place in a modern logistics
facility.

48. ▪Lastly, developers and investors should
consider issues related to entitlements
and zoning regarding industrial
development.
▪As the need for logistics facilities and
warehouses spawn new industrial
development, the line between
business parks and residential
communities is slowly starting to blur,
spurring a host of new land use issues.

49. ▪ Given the highly localized nature of
land use regulation, developers
need to have a solid rapport with the
municipality and understand
community concerns at a granular
level.

50. ▪As firms continue to adopt e-
commerce in droves, the opportunity
to build or invest in industrial real
estate assets remains a compelling
narrative despite the economic
challenges posed by the COVID-19
pandemic.

51. ▪ Although the industrial real estate has historically
been immune to downturns in the economy, there are
several challenges associated with investing or
developing industrial properties that are unique to
this particular asset class.
▪ As a highly nuanced, multidisciplinary endeavor that
involves the orchestration of several different teams,
the development of industrial real estate is riddled
with challenges that can be easily overlooked by a
novice investor accustomed to run-of-the-mill value-
add or core-plus offerings

52. ▪Similarly, it is easy for the entrepreneurial
spirit to overlook critical pieces that make
up the puzzle of modern industrial
development.

53. ▪ The four particular factors discussed in
this article are by no means an exhaustive
overview of the development process,
nor should it be considered as a
definitive checklist for analyzing an
offering or site.
▪ Rather, it should serve as a starting point
for anybody looking to make informed
decisions regarding industrial real estate
development.

54. ▪ Although real estate development is fraught
with both covert and latent risk, the COVID-
19 induced lockdown orders and prolonged
work from home stretches have not only
facilitated increased online shopping but has
also radically reconfigured consumer
behavior at a fundamental level.

55. ▪ As the floodgates for e-
commerce entrepreneurship
slams wide open, the
development of logistics
facilities in the age of online
shopping is the quintessential
parallel to selling shovels
during a gold rush.