Industrial real estate might not be the most exciting asset, but it’s rapidly becoming one of the most popular property types in the CRE world, surpassing even commercial office space.
The most popular type of industrial real estate is multi-tenant industrial space, which makes up about 40% of all industrial space; 60% of all new leases were light industrial multi-tenant real estate.
The light industrial real estate is space that is used to assemble products whose components are produced off-site.
E-Commerce Changing The Face Of Industrial Real Estate
E-commerce is changing the face of retail, and the tremendous growth in online sales, along with the demand for instant gratification has pushed retailers to shorten the time it takes for product delivery.
By building taller warehouses, retailers are able to store my products while saving on real estate costs. However, since offering next day and same day delivery means product needs to be stored closer to consumers, retailers are leasing a number of smaller warehouses in more locations.
But e-commerce isn’t the only industry attracted to the industrial real estate. The massive growth of the IoT, The Internet of Things, has led to a need for smaller data centers closer to population centers.
The IoT is making its way into more and more homes, with everything from home appliances to children’s toys to self-driving cars connecting wirelessly to the internet. These products must be able to quickly and accurately process large amounts of data in order to function properly, which means they must be located closer to a data center.
Cloud server farms and other tech companies are also looking to industrial properties to house massive servers and other tech equipment their businesses require. However, instead of heading to urban centers, mega-companies like Amazon, Microsoft, and Facebook are targeting remote centers in order to take advantage of inexpensive power, large tracts of land, and access to water for cooling systems.
Farm states like Ohio, Iowa, and other rural cities end up being cheaper than land off the coasts, and thus states are offering huge tax and business incentives and adding the infrastructure necessary to lure big players.
Many businesses, particularly those who value open layouts, find it cheaper to retrofit the space, and more affordable to manage and operate.
Why Investors Like Industrial Real Estate
Multi-tenant industrial space has several advantages that appeal to investors.
First of all, the diversity of tenants means there is less reliance on a single tenant, thereby lowering risk. And although e-commerce companies are responsible for a large portion of the demand for this type of space, there are still numerous other businesses, such as Research and Development, construction, light manufacturing and distribution, and technology start-ups.
Why Industrial Real Estate Appeals To Lenders
Although other commercial real estate property classes are doing well, it’s getting harder and harder to create value for most commercial real estate asset types.
The office market is cooling down, with fewer deals, lower cap rates, and businesses downsizing to smaller, more efficient spaces. Multi families are still a hot sector but rife with competition, and retail is still struggling to adjust to the impact of e-commerce on consumer buying.
Industrial real estate, on the other hand, is doing well. With e-commerce retailers seeking more space for fulfillment centers, even B and C properties are in-demand, bringing in two and even three times as much rent per square foot as other assets.
Ironically, these same warehouses were in high demand a century ago for the same reason: businesses needing a place to store products closer to city centers. However, with the creation of interstate highways and the expansion of rail lines and later airports, businesses moved to single story warehouses located in outlying areas.
These same properties, though obsolete and often far from functional according to today’s standards, with RFID systems and advanced automation systems a necessity in order to quickly fill and pack customer orders.
As a result, lenders have been willing to give financing to 50%-70% LTV, and investors who understand market dynamics have been snapping up urban infill properties. Lenders have been less enthusiastic about new construction, and with concerns about supply going out of control, have limited financing to well-located urban sites.
Which Industrial Real Estate Property Type Is Best For You?
Industrial real estate properties encompass a wide variety of property types.
The lowest risk properties are single-tenant warehouses, with leasebacks being the least risky. Long-term leases and premium yields offset the expense and risk of expensive capital improvements.
Higher up on the risk ladder are value-add deals, where investors purchase out-of-date warehouses, renovating them in order to accommodate machinery that supports modern supply chain logistics.
These properties are often multi-tenant, with shorter leases, and though they have higher profit potential require investors to rely on a well-vetted property management service to ensure vacancy levels are minimized.
Last are new development projects, which offer higher yields but are few and far between. These deals present the greatest risk due to the process of acquiring zoning permits, entitlements, and the inevitable lag time.
The property type you choose to invest in will also depend on the amount of capital available. While private investors can do well with smaller multi-tenant properties, e-commerce hubs and private distribution facilities require significantly more capital and thus are more suitable for institutions.
Where To Find Deals
Availability of industrial properties is at a 16 year low, with demand high and tenants primarily interested in a location more than price.
Competition has made it difficult for most investors to get a foothold in many primary markets. Cities like Washington D.C., Seattle, and Dallas are at the top of the list due to steady job creation, rising population numbers, and positive economic growth. However, in order to hop on the industrial trend without emptying their pockets, many investors are heading to secondary and tertiary markets instead.
Popular cities in secondary markets include Las Vegas, Houston, Austin, and Raleigh; in tertiary markets Tucson, Columbus, and Richmond lead the market, offering a low barrier to entry as well as a perfect opportunity to diversify portfolios and increase cash flow.