Warehouses and industrial spaces were once the forgotten stepsister of commercial real estate’s more popular commercial cousins, office space and retail. However, over the past five-to-seven 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, and unlike other CRE and NNN lease properties, there is a stable supply, So, is a warehouse the right commercial property investment for you?
Q4 2020, the U.S. industrial rents increased $0.09 to $6.39 per square foot. Since 2019, rents have increased 4.2 percent. – JLL Research
Why Warehouses are Suddenly Popular in CRE
Prior to the pandemic, many retail operations had already begun the shift away from physical stores to online and omnichannel sales and distribution. Now, post-2020, online shopping and quantity buying are the new norms, which leads to a need for more warehouse space.
Part of the growth in warehouse real estate is due to Amazon expanding to accommodate same-day and next-day delivery. Amazon warehouses and distribution centers are popping up in cities across America as we write this – to date, there are 110 U.S. fulfillment centers and dozens more planned.
Amazon and other e-commerce fulfillment organizations are responsible for roughly 40% of industrial property leases, with that number steadily rising as other brick-and-mortar companies rush to include e-commerce as part of their business models. Tech companies are also responsible for the increase in demand for warehouse and industrial space due to the need for more server farms to support online commerce.
In 2020, leasing activity jumped 26.9% from 2019, with e-commerce being the primary driver of demand. – JLL Research
Class B, C, and D Buildings Leading the Way?
Unlike other asset types, the industrial category’s recent popularity has not resulted in a spate of new construction. As a result, there is a dearth of available warehouses in prime urban and suburban locations, which means CRE investors are competing for previously obsolete or outdated industrial buildings.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 properties are actually outperforming newer facilities. 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 investing in industrial 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, 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.
During Q4 2020, 97.5 million square feet of industrial space was realized, bringing year-to-date absorption to 273.5 million square feet. Deliveries totaled 327.2 million square feet, surpassing the prior year by 52.7 million square feet. – JLL Research
How to Estimate the Value of Warehouse Space
Warehouse value is estimated using several factors, some of which include its size, location, and what the space can 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 measure the warehouse to ensure you have the exact measurements. Contact other owners or a local 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 when a buyer’s 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.
Ideal Locations for Warehouses
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.
The competition for Amazon’s new warehouse sites, for example, was so fierce that Amazon asked investors not to apply – their version of “don’t call us, we’ll call you.” But 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 these cases, increased traffic and the higher cost of land can make them less attractive.
Depending on the lease type – absolute triple-net (NNN) lease, a gross modified lease, or a gross lease – and tenant (i.e., Amazon or an investment-grade tenant) you may choose a warehouse in any state or city, no matter where you reside. In most cases, you can depend on the reliable monthly income with few landlord responsibilities.
To Wrap it Up – Your Guide to Warehouse & Industrial Real Estate Investments
With the industrial and warehouse real estate market going strong with no slow down in sight, it’s definitely worth considering investing in a warehouse property. We hope this guide was helpful and shows that with any type of investment, it pays to do your homework. Diversifying with different tenant types and asset classes helps mitigate risk with a guard against market instability, offering reliable, passive income with many rewards.
Whether you are a seasoned investor or you’re new to the net lease market, the most efficient way to find ideal investments and strategically diversify is to partner with a net lease advisor.
At Westwood Net Lease Advisors, we assess your risk tolerance and financials, then find and acquire net lease investments that fit your criteria and complement your portfolio. We provide objective advice, education, knowledge, and advocacy – from the property search to closing – 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