Strong Momentum in the Industrial Sector Accelerates Through the Pandemic


  • » Demand drivers accelerated by the pandemic include:
    • » e-commerce growth and corresponding tenant needs for industrial product,
    • » growing inventories and supply chain disruptions and
    • » limited supply of in-demand industrial product, especially in infill locations.
  • » Investment risks in the mid-term include:
    • » obsolescence of older, undifferentiated building stock,
    • » oversupply potential, given the ability to deliver new industrial product in a quick, cost-effective manner and
    • » industrial’s ability to consolidate recent price appreciation with continued rent increases.
  • » Overall, industrial fundamentals remain solid. While we expect the sector’s accelerated growth to moderate in the mid-term, our outlook for the sector remains very positive.

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The U.S. industrial real estate market proved its resilience through the initial months of the pandemic and consolidated its position as a darling of the real estate sector as it outperformed other real estate asset types. Although industrial has been highlighted for its performance during the pandemic, the sector already had momentum in rent growth, investment volumes, and cap rate compression prior to COVID-19. The rise of e-commerce, growing inventories from a global supply chain and the underdevelopment of space meeting modern requirements are all factors that have led to the sector’s growth.

Along with every major asset class, investor confidence in the industrial sector faltered at the onset of the COVID-19 outbreak in the United States. In mid-March 2020, share prices of the leading industrial REITs fell an average of 30% (Figure 1). However, confidence quickly returned to the industrial sector with the leading public REITs each surpassing pre-COVID pricing within four months.1

The stock market’s confidence in the industrial REITs was based upon the resilience of U.S. industrial rents, which rose an average of 1.7% during the most extreme economic lockdowns in the second and third quarters of 2020. This rent growth occurred while rents in the office (-1.5%) and multifamily (-0.1%) sectors fell or stagnated.2 By the end of 2Q 2021, average industrial rents were up an additional 5.5% over the trailing twelve months; continuing the growth from 2015-2020, which saw rental rates increase at a compound annual growth rate of 5.7%.

In 2020, the continued demand for industrial product, as illustrated by rent growth, sustained a wave of capital from investors, which caused industrial sales volume to surpass office volume for the first time. Prior to the pandemic, increasing investment volumes were putting downward pressure on cap rates and by the end of 2019, cap rates had fallen to 4.6%, a 240 bps decrease from the 20-year average of 7.0%.3 This momentum carried into 2020 and 2021 as cap rates compressed an additional 60 bps to a historic low of 4.0% at the end of 2Q 2021.4

Industrial industry growth continues to be driven by e-commerce adoption, the expansion and increased complexity of the global supply chain, and the limited supply of in-demand industrial product.

E-Commerce Demand & Changing Space Needs – At the end of 2010, e-commerce made up only 4.6% of retail sales.5 In 2021, eMarketer estimated that 15.3% of retail sales were through e-commerce channels and anticipated that share will grow to 23.6% of retail sales by 2025.6 The critical benefit for industrial is that e-commerce fulfillment requires approximately three times the space of traditional distribution. Space requirements expand because e-commerce facilities must maintain greater product variety, carry additional buffer stock, have order-picking and -packing operations and manage reverse logistics when interacting directly with consumers.7 As a result, e-commerce tenant demand is focused on high-efficiency, modern distribution centers to balance these needs.

The distribution requirements for direct-to-consumer e-commerce have also driven a modest evolution in industrial due to additional demand for last-mile distribution in infill locations to enable same-day deliveries. While the traditional hub-and-spoke model continues to be the backbone of industrial, the evolution and growth of last-mile distribution demand continues to be challenged by land availability and pricing. Creative solutions may be identified to help ease the supply shortage in these areas, such as multi-story industrial or conversions of office and retail spaces, as the supply and demand imbalance in last-mile locations drives increased pricing as well as creativity by owners and investors.

Growing Inventories and Supply Chain Disruptions – As higher levels of international trade and inventories demand greater capacity from the sector, operators require more space to manage these inventories. Over the last decade the volume of retail and warehouse inventories have risen in value by 58.9% and 47.1%. Although manufacturing inventories only grew by 10.3%, the manufacturing sector already makes up approximately 28.0% of leasing.

The supply chain disruptions encountered during the last 18 months (i.e., COVID-19, Suez Canal Blockage, trade wars) are likely to accelerate the growth in inventories. In the short-term, businesses are recovering from depleted inventories that ran low due to supply chain disruptions in 2020 and 2021 with additional orders. In the longer-term, the appeal of maintaining emergency stocks of 5-10% to insulate operations from disruptions and shortages has increased.8 Manufacturers may also choose to re-shore select operations to avoid overseas supply chain risk, which would reinvigorate domestic demand for manufacturing inventories within the industrial sector. These additional inventories would provide a favorable tailwind for the industrial sector by creating additional demand for space.

Limited Supply of In-Demand Industrial Product – Since the Global Financial Crisis (i.e., between 2Q 2009 and 2Q 2021) 2.1 billion sq. ft. of industrial product has been absorbed but building supply grew by only 1.5 billion sq. ft. (9.5% growth) during the same period. The undersupply of new industrial product drove vacancy rates down from the 20-year average vacancy rate of approximately 9.7% to 5.1% at the end of 2Q 2021. The lack of vacant and available product makes it difficult for users to find space that suits their needs. The limited availability of space is expected to persist, with the U.S. industrial vacancy rate projected to remain below 6.0% through 2026.9

Additionally, users are increasingly demanding modern buildings with large floor plates, clear heights of 32 feet or greater, a plethora of dock high doors, and significant power capacity. Few buildings are able to accommodate these needs. For example, only 3.5% of the industrial stock has a clear height of 32 feet or more. Therefore, landlords with modern product often encounter multiple tenants competing for availabilities, driving up lease rates, and in turn, sales pricing. Demand is so strong for modern product that in markets like the Inland Empire spec buildings are being leased before the building permit has been issued, and nationwide 48.5% of industrial developments under construction were pre-leased or owner occupied in 2Q 2021.

Despite massive demand for industrial product, risks still exist. For example, functional obsolescence could threaten older stock, the relatively fast and low-cost construction of industrial buildings provides an ever-present threat of oversupply, and the surge in pricing (both rents and sales prices) over recent years has created some hesitation for those making long-term industrial investments in these assets at historically low cap rates.

Obsolescence – Over time a building’s capabilities may no longer be able to meet the demands of tenants, resulting in functional obsolescence. For example, a distribution tenant may require higher ceiling heights for racking or more doors than an existing building is able to accommodate. As a building ages, it typically becomes functional for a smaller and smaller pool of tenants. The speed of this process can fluctuate depending on the depth of the tenant pool in the market and on the pace of change in tenant preferences. For instance, a distribution tenant might move out in exchange for a building with modern efficiencies, making room for a light manufacturing tenant that prefers to pay cheaper rents and spend more on skilled labor.

Prologis estimates that the rate of obsolescence is between two and four percent, giving a typical building a life of 25-50 years.10 However, CoStar reports that approximately 29.3% of the current U.S. building stock, of 10,000 sq. ft. or greater, is over 50 years old. Due to the limited supply of industrial product the lifespan of older buildings may have been extended, but tenants will have greater opportunity to leave behind buildings that do not fully suit their needs as more buildings with modern functionality are delivered. This paired with the maturing e-commerce sector and its unique demands, along with the growth in technological sophistication of tenant operations, could put a large portion of the building stock at risk of functional obsolescence. The result for these buildings would be a loss of pricing power and difficulty in attracting tenants as they migrate to higher quality options.

Oversupply Potential – While demand outpaced supply in recent years and the industrial market remains tight, oversupply is an ever-present risk in the industrial sector due to the speed at which industrial buildings can be constructed. The average industrial building takes 8-12 months to deliver, while multifamily projects usually take over two years and office timelines regularly extend past three years. Although the expectation is that demand will grow with the addition of new supply, there is a risk that development could outrun demand as developers try to rebalance the supply-demand equation.

Suburban industrial markets with available land and amenable land-use policy will be the most at risk due to the pace at which new developments could arise unimpeded. For example, Dallas delivered 8.9% of its building stock over the last three years, contributing to its above-average vacancy of 6.3% in 2Q 2021. Austin is also undergoing an above-average expansion of its building stock, with new construction totaling 11.7% of its current inventory. Markets with less developable land and more stringent land approval processes, like New York and Los Angeles, have less risk of oversupply due to the higher barriers to development in infill markets. The uneven distribution of development is depicted more broadly in that only 5.4% of the current construction pipeline in the United States is being built in urban markets despite those markets having a vacancy rate of 4.0%.11 While the risk of oversupply seems remote today, especially in high-barrier infill locations, investors will want to keep a close eye on the supply pipeline from both a macro and local viewpoint.

Consolidation of Recent Price Appreciation – An additional risk to the industrial sector is the sustainability of recent price appreciation. An influx of capital targeting industrial for its strong rent growth and pandemic-resistant growth drivers compressed cap rates to historic lows as the perception of risk in industrial assets plummeted. However, a slowdown in rent growth or an increase in the perceived risk of industrial investments could lead to a rise in cap rates and leave owners with diminished returns. Large rent increases are testing the price elasticity of tenant demand, overdevelopment (should it materialize) could threaten landlords’ pricing power, and unforeseen external factors could endanger the rent growth and historically low cap rates upon which recent industrial valuations have been predicated.


When considering the balance of risks and opportunities in the industrial sector, our view is that the industrial sector is in a strong position for continued outperformance. This is particularly the case for industrial assets that meet the needs of large e-commerce distributors. Modern buildings in infill locations near major population centers with clear heights of 32 feet or higher, substantial dock-high access, excess parking and large floor plates will continue to attract tenants and investors. These assets are not only positioned well for continued demand but are also relatively defensible against the potential risks facing the sector. While we believe that future development will increase the supply of modern stock faster than in the recent past, we foresee demand growing with that new supply. Balanced growth in both supply and demand will lead to a healthier more stable industrial sector.


1 Yahoo Finance, Historical Data, July 2021

2 CoStar, Analytics, July 2021

3 CoStar, Analytics, July 2021

4 CoStar, Analytics, July 2021 / Green Street, July 2021

5 U.S. Census, Quarterly Retail E-commerce Sales, July 2021

6 eMarketer, U.S. E-commerce Forecast, June 2021

7 Prologis, E-commerce and A New Demand Model for Logistics Real Estate, July 2014

8 Prologis, Supply Chain Shifts Poised to Generate Substantial New Demand, May 2020

9 CoStar, Analytics, July 2021

10 Prologis, Obsolescence: The Implications for Global Logistics Real Estate, March 2015

11 CoStar, Analytics, July 2021

Dennis Grzeskowiak


Mr. Grzeskowiak co-founded Bellwether in 2013 and has 20 years of experience in asset management and special servicing. At Bellwether, Mr. Grzeskowiak focuses on portfolio management and technology initiatives, with particular asset management expertise in debt as well as multifamily equity investments totaling over 33k units. Prior to forming Bellwether, he was Vice President of Asset Management at Trimont Real Estate Advisors, where he was responsible for a $2bn portfolio of performing and non-performing commercial real estate investments related to multiple property types throughout the United States. During his time at Trimont, Mr. Grzeskowiak developed a proprietary valuation cash flow model used to analyze over $30bn of debt and equity investments. Mr. Grzeskowiak has a B.A. in Economics and International Studies from Rhodes College.

Joe Mossotti


Mr. Mossotti co-founded Bellwether in 2013 and currently focuses on residential, corporate, development and hotel investments throughout the United States. Prior to founding Bellwether, he worked in the Asset Management / Portfolio Management group at JER Partners, a Washington D.C. based private equity firm. At JER, he was responsible for investment- and fund- level modeling as well as the disposition and workout of the remaining portfolio. Before joining JER, Mr. Mossotti worked at Billy Casper Golf Management. Mr. Mossotti holds a B.S. in Finance from Siena College, and is a licensed CPA.

Mitch Magoshi

Managing Director, Construction

Mr. Magoshi joined Bellwether Asset Management in 2018 after 15 years of experience in the construction industry. Prior to joining Bellwether, he most recently worked as a senior consultant with Gardiner & Theobald, Inc., an international construction project and cost management firm. Before joining G&T, Mr. Magoshi was a Construction Manager and Partner at Plant Construction Company, L.P., a leading general contractor in the San Francisco Bay Area. At Plant, he was involved in all aspects of the construction process from business development and preconstruction to project management and site supervision. Mr. Magoshi holds a B.S. degree in Business Administration with a minor in Architecture from Carnegie Mellon University.

Omar Vargas

Senior Vice President, Controller

Mr. Vargas joined Bellwether Asset Management, Inc. in 2018 and has over 15 years of professional experience. Prior to joining Bellwether, he was the Corporate Controller at Landmark Dividend LLC, a Los Angeles based real estate company. At Landmark Dividend, he was responsible for all aspects of the accounting, financial reporting, and asset management functions. Before joining Landmark Dividend, Mr. Vargas was an Audit Senior Manager at Deloitte, where he was responsible for overseeing various teams on real estate advisory services. Mr. Vargas holds a B.S. in Accounting from California State University, Long Beach, and is a licensed CPA.

Carolyn Leslie

Managing Director, Equity

Ms. Leslie joined Bellwether in August 2020 and is primarily responsible for the asset management of west coast office investments.  She has twenty years of commercial real estate investment experience, most recently as the Director of Asset Management at Atlas Capital Group, a New York based owner and developer, and oversaw the redevelopment of ROW DTLA.  Before joining Atlas Capital Group, she was at Watt Companies as a Senior Asset Manager responsible for an office, retail and multifamily portfolio.  Ms. Leslie has a B.A in economics from Vanderbilt University and an M.B.A from Pepperdine University’s Graziadio Business School.

Patrick Foley


Mr. Foley joined Bellwether in 2014 and is currently responsible for coverage of corporate, development and residential investments in the United States. Prior to joining Bellwether, he was an associate at Cross Properties, a Philadelphia based multifamily developer. Mr. Foley has a B.S. in Economics with a concentration in Finance from the Wharton School at the University of Pennsylvania.

Benjamin Easton

Managing Director, Equity

Mr. Easton joined Bellwether in April 2014, after having spent two years at NMS Properties, a Los Angeles based multifamily company. Prior experience includes two years at Mesa West Capital, a Los Angeles based commercial real estate finance company. Mr. Easton began his career in Los Angeles working in brokerage in 2007. He holds a B.A. degree in International Business from Loyola Marymount University.

David Chalison


Mr. Chalison joined Bellwether in 2016 and is responsible for supporting portfolio management functions for Bellwether’s institutional clients. Prior to joining Bellwether, he was Director of FP&A at Chronos Solutions, a Texas-based mortgage service company. Mr. Chalison received a B.S. in Finance from Santa Clara University and holds an M.B.A. from Loyola Marymount University.

Chris Carlson

Senior Vice President, Structured Finance

Mr. Carlson joined Bellwether Asset Management in July 2014 and is currently a Senior Vice President responsible for the performing residential whole loan strategy. He has fourteen years of experience in structured products and the secondary mortgage market. Prior to joining Bellwether, he was a risk analyst with Western Asset Management, where he was responsible for analytics on a $50bn portfolio of whole loans, structured mortgage products and private corporate investments. Mr. Carlson began his career as a member of the Fannie Mae Analyst program in 2005. He has an M.B.A. from UCLA Anderson and a B.A. in Economics and Philosophy from Washington & Lee University.

Michael Baracco


Mr. Baracco has been a part of Bellwether since its inception and is currently responsible for asset management coverage of office and hotel investments. Prior to joining Bellwether, he was a Senior Project Engineer at Lockheed Martin Corp. where he supported and ensured successful execution of multi-billion dollar contracts including satellites, flight modernization systems, and submarines. Mr. Baracco has an M.B.A. from the University of Denver and a B.S. in Physics from Washington & Lee University.