When some investors think of commercial real estate, they often think of retail shopping centers, franchises, or office buildings.
However, there is another type of commercial investment property that is also quietly creating profit for investors: industrial real estate.
A great investment option, industrial real estate properties are poised for growth. While other asset groups have experienced such rapid growth that their present value may be limited, industrial real estate properties are considered a strong investment since their value has not yet inflated.
Thus, the investor has the opportunity to find undervalued properties and bring them up to market price, with less of the volatility that accompanies the more well-known commercial property types.
Industrial Real Estate Property: More Than Warehouses
Industrial real estate properties are more than just warehouses. The infiltration of technology into every aspect of daily life has fostered the growth of properties such as data centers, R&D buildings, and flex buildings.
- Data centers, which are used to power computer servers, telecom switching centers, and to store and manage internet technology operations and equipment, are becoming increasingly popular due to continued growth of the high-tech market.
- Amazon’s “just in time delivery” system has spurred “just in time” manufacturing, which means many manufacturers are cutting down on the amount of space they devote to storage and production. This has created an increase in demand for smaller warehouses with the potential to be used by more than one tenant, also called multi-tenant warehouses.
- Another type of building, the flex building, offers the advantage of being able to be used for a variety of purposes, such as research and development, light manufacturing, or showroom retail sales.
Because they include several types of space within one property, such as a warehouse, manufacturing, and office space, they are highly appealing to the high-tech industry. Typically flex buildings are located in industrial or business parks, but they can be freestanding.
Industrial Real Estate Property Market Drivers
The market for industrial property is driven by general economic conditions such as consumer and business confidence, unemployment rates, and interest rates. As the economy grows stronger, the demand for manufacturing materials and the increase in imports leads to a stronger demand for warehouses.
The value of industrial property is also highly dependent on the nearby infrastructure. Since companies serve as both manufacturing and distribution facilities, access to land, water, and air transportation is essential. Depending on the type of product being manufactured or distributed, some tenants also require an affordable labor pool.
Industrial Tenant Demands Differ From Other Asset Groups
Industrial tenant demand differs from other commercial property asset groups in that whereas most commercial property tenants prefer to be closer to cities, industrial tenants look for areas that are close to transportation hubs.
This makes transportation of products more efficient, and in turn, the property is usually priced lower than commercial space closer to the city with its constellation of services.
One area that is transforming the way industrial real estate properties are designed is the increasing focus on green buildings. Commercial real estate tenant’s are now demanding buildings with up-to-date technology that supports the environment, and in industrial properties, the changes are dramatic.
Buildings are more efficient, with cost-saving lighting, high-performance building materials, and plenty of natural light.
And whereas once upon a time Class B industrial buildings outperformed Class A buildings – since an outdated design wasn’t enough to interfere with functionality – today’s tenants appreciate the increased functionality and reduced operating costs of the new properties.
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