Functionality Is the First Filter in Industrial Real Estate

Industrial real estate is often discussed through pricing:

Price per square foot.
Cap rates.
Replacement cost.
Vacancy rates.

But valuation does not begin with price.

It begins with a simpler question:

What types of businesses operate here and can they operate in this building?

Southern California Is Not a Generic Industrial Market

This region is shaped by:

• Port-driven logistics

• Infill land constraints

• High operating costs

• Zoning limitations

• Political resistance to certain uses

• Outdoor storage enforcement in some cities

• Long entitlement timelines

Raw land exists.

But infill industrial land with compatible zoning and adequate infrastructure is constrained.

In this environment, value is determined by how a property competes within the existing supply. As a result, valuation is driven primarily by the sales comparison and income approaches.

Replacement cost is often cited in marketing materials, usually framed as “below replacement cost.” In established Southern California infill markets, that statement is rarely meaningful. Many existing infill buildings trade below current replacement cost.

Buyers and tenants are not underwriting reconstruction. They are underwriting functional competitiveness and income durability relative to comparable properties.

Replacement cost matters in specific contexts such as insurance valuation, cost segregation, or development feasibility. It does not anchor resale pricing for stabilized infill industrial assets.

Industrial Buildings Are Operating Infrastructure

Industrial space is expensive.

Occupancy costs are high.

Inefficiency compresses margin quickly.

For some industries, functional incompatibility is disqualifying.

If power is insufficient for a manufacturer, core equipment may not operate.

If yard use is legally unstable for a recycler or trucking company, enforcement risk can shut the operation down.

In those cases, functionality determines whether the business can operate at all.

Start With the Business, Not the Building

Square footage alone is not meaningful.

The real questions are:

• What does this business do?

• How many trucks move daily?

• How high is inventory racked?

• What amperage is required?

• Is outdoor storage critical?

• Is the use politically sensitive in this city?

• Is the property legally conforming for this use?

Without understanding the business model, the building cannot be evaluated properly.

Compatibility comes first.

Functional Variables Are Industry-Specific

Certain variables consistently matter:

• Clear height

• Dock configuration

• Power capacity

• Truck court depth

• Yard legality

• Zoning stability

Their weight depends on the business.

Distribution users prioritize cubic capacity and dock ratio.
Manufacturers prioritize power and layout flexibility.
Contractors may prioritize yard and parking.
Niche uses prioritize niche requirements, often layered on top of zoning and regulatory complexity.

The building does not change.

The weighting does.

Functional Standards Evolve

Much of Southern California’s infill industrial inventory was built decades ago.

As operating requirements change, functional competitiveness shifts.

Fire protection is one example. A building may have an existing sprinkler system that was adequate for prior manufacturing use but insufficient for modern high-pile storage density. Others lack sprinklers entirely. Under current fire code interpretation and insurance underwriting standards, that distinction affects who can legally and economically operate in the space.

Loading configuration is another. Older buildings sometimes have 6-foot ground-level doors. When standard pallets are approximately 4 feet high, clearance becomes operationally restrictive. What once functioned for light service use may not accommodate modern distribution practices.

These conditions do not automatically render a property unusable. But they narrow the pool of compatible operators.

Functional Supply Is Smaller Than Vacancy Suggests

Vacancy measures empty space.

It does not measure compatible space.

Once you filter inventory by:

• Adequate power

• Clear heights

• 53-foot truck maneuverability

• Legal outdoor storage

• Conforming use status

Real scarcity appears after compatibility filters are applied, not in vacancy statistics.

Operators and Investor-Landlords Evaluate Differently

An operator asks:

Can I run my business here?

An investor-landlord asks:

How many viable businesses can run here?

That distinction determines risk.

Buildings that support a broad range of users have deeper tenant pools.

Buildings that only work for narrow operational categories face greater volatility when demand softens.

Functionality determines eligibility.

Demand depth determines durability.

Compatibility Drives Pricing

Comparable sales and cap rates matter.

But they are downstream of the building’s functionality.

In high-cost, infill-constrained markets:

• Functionally competitive buildings maintain stronger demand.

• Obsolete functional profiles experience wider pricing dispersion.

• Zoning complexity introduces additional risk.

Industrial value reflects whether a building supports profitability given local zoning, costs, and operating realities.

Functionality is the first filter.

Everything else layers on top.