Demand Is the Second Filter in Industrial Real Estate
We established that functionality is the first filter in industrial valuation.
A building may work, but the degree to which it works determines how competitive it is.
Clear height, loading configuration, electrical capacity, fire protection, truck circulation, zoning, and outdoor storage legality determine whether a use is viable.
Once functionality is verified, the next question is:
How many operators can realistically use the asset?
Industrial real estate is segmented.
Segmentation Begins With Zoning
Before demand becomes operational, it needs to be legal.
Zoning code determines which uses are permitted, conditional, or not permitted. And in SoCal, those rules vary city, and, in unincorporated areas, by county.
Two buildings may look and function similarly, but if one sits in a zone that:
Allows outdoor storage by right
Permits intensive auto-related uses
Supports higher-intensity manufacturing
Tolerates trucking and trailer storage
…while the other does not, they do not participate in the same demand pool.
Legal compatibility determines which operators can even consider the site.
Outdoor storage rights.
Truck and trailer parking.
Conditional use permits.
Legal nonconforming status.
Although these constraints do not affect every business, when they do, they immediately narrow the competitive field.
And once the field narrows, pricing becomes more sensitive to shifts in supply and demand.
THE NUMBER OF VIABLE USE TYPES DEFINES THE COMPETITION
After zoning defines what is legally possible, the building’s physical characteristics determine which use profiles it fits.
A modern high-cube logistics facility competes in a broad distribution pool.
A small-bay service building competes in a narrower local operator pool.
An outdoor storage site with durable yard rights competes in a constrained entitlement-driven segment.
Each segment attracts different operator types, different capital structures, and different levels of competition.
Same region.
Different competitive universe.
Wide Demand Shapes Pricing Behavior
Once a property’s segment is defined, the size of that segment matters.
Flexible spaces tend to attract diversified demand, which produces:
More competitive bidding
Faster lease velocity
Tighter pricing bands
Greater transaction liquidity
Specialized spaces tend to attract concentrated demand, which produces:
Fewer qualified bidders
Wider pricing dispersion
Longer marketing periods
Greater sensitivity to regulatory shifts
When more operators can realistically use a property, replacement risk declines.
When fewer can, pricing becomes more volatile.
Participation depth differences show up in cap rates, lease terms, and sale prices.
Scarcity Varies by Use Type
Aggregate vacancy rates obscure what actually happens in the market because scarcity is not uniform across industrial property types.
Small-bay infill space may be tight, while dock-high logistics near freeway corridors may trade aggressively.
Legally permitted outdoor storage may command premiums due to scarcity.
High-power manufacturing space may be limited in certain jurisdictions that have shifted land use priorities away from heavy industry.
Two properties in the same city can trade at materially different cap rates not because the market is irrational, but because they participate in different demand ecosystems.
Why This Matters For Valuation
Traditional valuation methods such as the sales comparison, income approach and cost approaches remain fundamental.
Segmentation explains why pricing differs within the same local region.
Comparable sales are only meaningful when the properties could realistically compete for the same tenants or buyers.
Income stability depends on how many operators can realistically replace a tenant.
Replacement cost rarely anchors pricing because buildings compete within their segment, not against construction budgets.
Industrial valuation is not determined by square footage alone.
It is shaped by which demand pool the property participates in — and how deep that pool is.