Industrial commercial properties are the plain-Jane of the commercial real estate. While they may lack the flashiness of a high-rise office property or retail property, they offer excellent returns which are slightly higher than the average return for other property types.
The factors that determine whether or not an industrial property will be profitable or quite different from other commercial investment properties. While the categories are the same, the underlying drivers that fuel each one depend on factors unique to industrial investment.
Types Of Industrial Commercial Properties
There are 8 major types of industrial commercial properties:
- Heavy Manufacturing (steel, autos, machinery, petroleum, heavy equipment, stone quarrying)
- Light Manufacturing
- Refrigeration, cold storage, or food processing plants
- R&D buildings
- Data hosting centers
- Showroom buildings (combine display space with storage and sales space)
Each type will have its own specific factors that either increase or decrease the value.
However, the demand drivers listed below can be used to evaluate industrial commercial properties on a macro level.
Industrial real estate that caters to manufacturers must be close to major transportation hubs in order to transport products and receive raw materials.
Access to rail, ports, airports, and interstate highways is essential for manufacturers, e-commerce, and retail companies. Properties with a higher percentage of transportation hubs will be more likely to attract industrial tenants.
The exception to this would be industrial commercial properties that function as flex space and cater to high-tech or as shared office space. In this instance, location requirements will be similar to those desired by typical office tenants.
Incentives are a large part of a tenant’s decision about which property to choose.
Companies occupying large industrial commercial properties bring jobs, boost tax income, and offer many other benefits to a city. As a result, it has become common for cities or towns to aggressively entice manufacturing firms with tax incentives and other benefits.
In fact, cities will go as far as offering low-cost loans and free land in order to attract companies, which of course will greatly affect the profitability of a project.
The location of an industrial property is also an important factor in determining its potential profitability.
In addition to being located next to major transportation hubs, industrial tenants need to be located in areas that offer skilled labor at reasonable prices.
Tenants will also evaluate the location of a property based on its proximity to suppliers, as well as the environmental regulations required by the state, city, and county the property is located.
At the same time, as an investor, you need to carefully consider what type of tenant you are willing to lease your property to.
Some manufacturer’s, for example, use underground storage tanks which contain toxic chemicals. PCB’s and asbestos are often present as well. Long-term contamination, leakage, and removal of these containers can create a major environmental hazard that is both difficult and costly to clean up.
The Design Of The Building
Surprisingly, the shape of the building is also a factor when evaluating industrial commercial properties.
A square or rectangular shape is considered the most flexible, efficient, and cost-effective since it can be used by a variety of tenant types.
Operating height is important too, since it defines the amount of space available, in particular with regards to storage. Higher ceilings allow storage and product shelves to be stacked even higher.
Some industrial buildings are composed of brick or masonry walls that go between 4-8 feet from the ground, with insulated metal walls above.
While manufacturers are not likely to object, office tenants occupying flex spaces which were previously industrial will find this less attractive, necessitating renovations on both the exterior building as well as the landscaping.
Note that some lenders won’t finance an industrial property with metal cladding.