Warehouses and industrial spaces were once the forgotten stepsister of commercial real estate’s more popular cousins, office space and retail. However, over the past few years, this industrial asset has made a startling comeback, with increases of about 10% year over year.
It seems warehouses can’t be built and filled fast enough – the demand is great and the payoff is solid. Despite increased demand, unlike other CRE and NNN lease properties, there is an ample supply, So, how do you begin investing in warehouse properties?
“Companies signed a record 57 U.S. warehouse leases of 1 million or more square feet in 2021, up 19% from 2020 levels, according to data published Thursday by real estate services firm CBRE Group Inc.” – ModernShipper
Why Warehouse Property Investing is a Good Idea
Before you invest, let’s look at some of the reasons why warehouse investing is a good idea. First and foremost, growth. E-fulfillment has skyrocketed the need for more and bigger distribution and warehouse storage centers. Additionally, the technology sector is occupying industrial sites at a faster rate.
- Amazon and other e-commerce fulfillment organizations are responsible for roughly 40% of industrial property leases, and that number is steadily rising (Amazon alone is adding another 50+ locations by 2023) as companies rush to include e-commerce as part of their business models.
- Tech companies and bitcoin miners are also responsible for the increase in warehouse and industrial space demand due to the need for more server farms and online commerce.
- Post-pandemic online shopping and high-quantity buying are the new norms, creating a need for more warehouse properties and commercial real estate investors to help companies and developers add locations.
“The ‘general retail and wholesale’ sector, comprising occupiers with online and brick-and-mortar presences, accounted for 44 of the 100 largest leases last year, up from 32 transactions during 2020.” – John Morris, CBRE Group, Inc.
What to Consider When Investing in Warehouse Properties
As you begin your warehouse property investing journey, it’s helpful to know the various types of warehouses, industrial spaces, and distribution centers that may be available. Each of these has different characteristics and will have different lease structures, so be sure to do your research as you narrow your scope to what interests you and fits your financial and lifestyle objectives.
It’s also critical to know the tenant. Is the tenant an investment-grade corporation, a large franchise owner, or a privately owned business? You want the most reliable tenant with the best financials possible.
Warehouse & Industrial Property Characteristics to Compare
- Types of Warehouses
- Class B, C, D Properties
- Types of Warehouse Leases
Types of Warehouses for Sale
- e-Commerce fulfillment warehouses (distribution centers)
- Manufacturing warehouses
- Storage warehouses
- Distribution centers (extra-large warehouses)
- Flex-space warehouses (office space and warehouse in one)
- Technology warehouses
- Public warehouses
- Private warehouses (Type C warehouses)
- Institutional warehouses (banks, hospitals, railways, etc.)
- Automated warehouses
- Self-storage warehouses
- Climate-controlled warehouses
- Foodservice warehouses
- Raw materials warehouses
- Pick, pack, and ship warehouses
Weigh All Options: Class B, C, D Warehouse and Industrial Buildings
In addition to new warehouses for sale, there is a dearth of old industrial buildings for sale in prime urban and suburban locations, which means CRE investors are competing for previously obsolete or outdated industrial buildings. In this case, a Class B, C, or D building may be a great investment option.
These buildings would normally be considered too old to lease, however, these “Last Mile” warehouses are usually less than 200,000 square feet in size and are seen by experts as the ideal opportunity for investors interested in purchasing industrial and warehouse properties.
On the contrary, some experts maintain that older warehouses should be avoided. They claim that since e-commerce companies use sophisticated robotic systems in order to process the large volumes of orders received daily, these aging warehouses require too much of an investment in order to bring them up to speed. They may also lack the taller designs common to newly-built distribution centers that maximize space. Instead, these experts recommend investing in brand new warehouse buildings, which can be built quickly and easily.
Westwood Net Lease Advisors feel it’s never a good idea to rule out Class B, C, or D warehouses. Since land is scarce, a high percentage of warehouses for sale will be Class B, C, or D. Amazon and other e-commerce companies will often trade the cost of retrofitting these older, less-functional buildings for access to prime, centrally-located properties.
Though C-class and D-class warehouses can be in the “riskier” CRE investment category, they tend to offer some of the best potential cash-on-cash returns. It’s best to weigh all your options when investing in warehouse properties.
Warehouses Lease Types
- Absolute triple net (NNN) lease
- Double net (NN) lease (can also be called a modified gross lease or modified NNN)
- Gross lease
- Ground lease
Warehouse lease types vary, just like any other type of commercial real estate. Many are absolute triple net (NNN) leases, which means you own the property and the tenant pays for and takes care of everything else. This allows you to live and work from anywhere and own a warehouse in any city in any state without worry as there are no landlord responsibilities or expenses.
Other lease types include modified absolute NNNs and double-nets (NNs,) which may require the landlord to be responsible for some things, like the roof, parking lot, and structure. In a modified lease, the landlord may also be required to pay real estate taxes and insurance.
In a gross lease, also known as a full-service lease, the property owner/landlord pays all expenses, including property taxes, insurance, operating, CAM, and maintenance expenses then calculates one rent amount that covers all the monthly costs. The tenant then pays a base or “gross” rent, which includes a pro-rated or “pro-rata” share of those expenses.
A NNN ground lease separates ownership of the building from the parcel of land. If you purchase a ground lease warehouse property, you’ll have zero landlord responsibility, very low risk, and gain financial leverage. However, one drawback may be that you cannot take depreciation because you don’t own the building (unless the tenant vacates).
“Average US warehousing rents jumped 10 percent year over year in the third quarter 2021 to nearly $9 per square foot, while nationwide vacancy rate sank to a record low 3.6 percent.” – JOC.com
How to Estimate the Value of Warehouse Space
Warehouse property value is estimated using several factors, some of which include its size, location, and what the space will be used for. To calculate, start by comparing the property to similar warehouses in the same area or city. Since most warehouse space is priced by the square foot, you’ll want to collect the exact measurements. Contact other owners or a local real estate broker to determine the average cost per square foot in your area.
Next, assess the condition of the warehouse. Is it older and less secure? Does it contain any specialized equipment, or is it simply empty space? What type of forklift types does it accommodate? What is the lease type and tenant potential? Is there a tenant already or one who is eyeing the space? All of these will affect the cost of the warehouse.
This is when a Westwood Net Lease Advisors’ buyer advisor can really help. It is almost impossible to figure out the value of a warehouse and the rental potential without expertise in this area.
Where to Invest in Warehouses
Where should you invest in a warehouse? The ability to receive/deliver products quickly is a critical component of selecting the site for a warehouse. For e-commerce companies, warehouses need to be located near transportation and have access to airports and seaports in addition to highways. Site selection is critical, especially since the costs of bringing in product or materials and shipping it out can make up 60% of a company’s expenses.
Distribution companies also need to be near larger population centers, since that is where more trucks – which are needed for cross-country delivery – are located. However, not all large population centers are considered prime areas. In some cases, increased traffic and the higher cost of land can make them less attractive.
If you choose an absolute triple net lease warehouse property with a high-credit tenant that guarantees the lease, you could own one in any state without having to worry about hands-on maintenance and landlord costs.
Did you know … you can sell a high-maintenance income property or residential rental and use a 1031 exchange to buy a warehouse?
To Wrap it Up – Your Guide to Warehouse & Industrial Real Estate Investments
The industrial and warehouse real estate market is going strong with no slow down in sight, making warehouse property investing worth considering. We hope this guide was helpful and shows that with any type of investment, it pays to do your homework. Be sure to review the type and age of the warehouse, the quality of the tenant, the lease structure, the location, and get an assessment of the value before investing.
Whether you are a seasoned investor or you’re new to the triple net lease market, the most efficient way to find ideal warehouse investments and strategically diversify is to partner with a net lease advisor. At Westwood Net Lease Advisors, we work with you from before the property search through closing and thereafter to ensure your net lease investments fit your financial and lifestyle criteria and complement your portfolio, all at no cost to you. Contact us today for a free, no-obligation conversation to see if warehouse investing is right for you. 314-997-5227