Investors are flocking to a new sweet spot in the net lease industry, and it’s all due to what some experts are calling the “Amazon Effect.”
Amazon has changed the way consumers view the entire shopping experience, creating waves of disruption within the traditional retail sector.
It’s forcing investors to reconsider which markets offer the highest returns, and with the waves of retail closings across the U.S., many investors are turning towards other, more secure property types.
One property type, in particular, is finding particular favor amongst investors: industrial.
Once the dowdy stepsister of the commercial real estate, industrial properties – particularly warehouses – are hotter than a Carolina chili pepper right now, and for good reason.
Same-Day Delivery Fuels Demand For Industrial Properties Closer To Cities
In order to fulfill customer demands for same day or next day delivery, Amazon and other online retailers are leasing spaces next to main cities and around the country. This has resulted in investors around the country scrambling to buy or build industrial properties.
In fact, industrial real estate sales make up nearly 10% of overall sales in commercial real estate and 82 million square feet of net absorption.
One-fourth of the demand for industrial properties came from three cities: Atlanta, Chicago, and Dallas. Atlanta, which is a major logistics crossroads, is experiencing incredible population growth thanks to the migration of workers from the Rust Belt. Chicago has major rail systems in all four directions, and Dallas is bursting with new companies and in turn, the employees that work there.
The demand for industrial space is spread throughout all size ranges, but the greatest deal volume is in midsized properties, specifically those that from 100,000 – 250,000 square foot and the 250,000 – 500,000 square foot size categories.
Investors Seeking A Leg Up With Innovative Construction And Logistics
Rental rates are also rising, with low vacancy rates and increasing competition fueling demand. Right now the market appears to be at an all-time high and innovative construction like multi-story warehouses pushing market averages even higher.
An additional demand driver for industrial property is the continual search by businesses for premium properties. Intent on competing with the increasingly competitive e-commerce market, these companies are turning to sophisticated storage and logistics solutions that will allow them to get a leg up on their competitors.
State of the art sprinkler systems, high dock doors, 28 to 30-foot clear height ceilings, and wide loading areas are just some of the features they are demanding – and they are willing to pay premium prices in order to get them. That’s because these assets make it easier for businesses to offer quicker turnaround; the increased profits gained from improving their bottom line make the additional costs a no-brainer.
These changes are in line with the general trend of concentrating all product in one huge warehouse to maintaining several warehouses around the U.S., conveniently located next to major U.S. cities. Companies then use sophisticated logistics systems to manage distribution.
Statistics Reveal Industrial Real Estate Is A Safe Asset Class
A third driver for the industrial real estate is the perception that it is a safe asset class. For one, they are usually net lease properties, which means tenants are responsible for covering some of all of the expenses involved in running the property.
Net lease properties also come with long leases, which ensures owners a steady income. There are also lower tenant turnover rates, which means investors save a significant amount of money. And even though properties often require layouts and equipment connections particular to a particular tenant, these are easily changed in order to accommodate new tenants, lowering the cost of acquiring a new tenant.
Class B Properties Even More Lucrative
And finally, a combination of trade agreements and new legislature on repairing old and outdated infrastructure are also impacting on property demand and availability. Combined with the trend towards urbanization, the surge in a building should increase the demand for warehouses to store the raw materials needed.
If you’re an investor finding it difficult to acquire Class A properties, you might want to consider upgrading Class B buildings in order to make them more efficient. This makes sense when you consider the fact that investors are holding on to prime Class A properties, and that there are twice as many Class B properties as Class A properties.
Keep in mind that you won’t find a great industrial property on LoopNet: the best industrial properties are off-market, particularly in this competitive market. If you’re serious about acquiring an industrial property and diversifying your portfolio, contact Westwood at [phone number].
