By Stephen Ursery
Senior Associate Editor

During the past few years, Corporate America has worked to improve the efficiency and decrease the costs of its supply chains. For the industrial sector, the result is that companies are eliminating distribution facilities that are not performing up to standards, said Irving F. Lyons, president and chief investment officer of Aurora, Colo.-based ProLogis Trust.

Companies are consolidating operations into new properties located in major distribution areas such as Los Angeles, the San Francisco Bay area, Dallas, Atlanta, Chicago and northern New Jersey, he added. "These areas allow for one- to two-day drives to a substantial portion of the country," Lyons said. "This is still a truck-driven business."

The new industrial facilities that are built in the major distribution areas are large, with a minimum size of approximately 400,000 sq. ft., noted Lyons. And properties that are 1 million sq. ft. or larger are not uncommon in today's market, he added.

In the midst of the consolidation trend, NREI surveyed the industrial sector to rank the top owners and developers in 2000. The results are in. ProLogis Trust finished No. 1 in NREI's survey of industrial owners with 161.5 million sq. ft. of space as of Dec. 31, 2000. Meanwhile, Dallas-based Trammell Crow Co. topped our survey of industrial developers with 20.5 million sq. ft. of space either developed in 2000 or under construction at the end of the year.

The year 2000 also witnessed the continuation of discipline when it comes to developing new properties. Lyons notes there are a couple of reasons for a development climate that is very different from the early 1990s. "A lot of developers are public companies, and their responsibility to shareholders makes them less likely to take huge risks," he said. "As for lenders, they are more stringent about wanting real equity, and they employ stricter underwriting. Their memories aren't as short as perhaps they used to be."

Tom McNearney, senior managing director of capital markets for Trammell Crow, attributed increased lender discipline to the securitization of the marketplace. "CMBS and the REITs have introduced a lot of discipline," he said. "There are lots of Wall Street analysts producing lots of quality information. If need be, it's easier to put the brakes on much earlier."

During 2000, pension funds grew more interested in industrial properties, McNearney said. The funds are seeking to balance their portfolios and lessen their reliance on office properties, and acquire solid, consistent properties in light of recent economic conditions, he added.

"Industrial investments are viewed as defensive investments," McNearney said. "There's less upside, but there's less downside as well. I would say 2000 was the year of the industrial property for institutional investors."

Industrial construction starts declined from 1999 to 2000, and should decline again in 2001 as the economy continues to sputter, according to Pryor Blackwell, president of development and investment for Trammell Crow.

"There may not be as feverish a construction pace as before, but there will still be steady product creation," he said. "You'll see the capital markets continue to maintain discipline."

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