Industrial real estate properties may not be as glamorous as retail investment properties, but with over $12.6 billion in sales in 2015 and a lower vacancy rate than any other sector excepting multi-family, it’s proving to be a silent winner.
In fact, a survey conducted by the Urban Land Institute and Pricewaterhouse and Coopers revealed that the industrial real estate sector is a top choice for 2016, with activity in purchase, development, and rehabbing of industrial space.
It is believed that overseas manufacturing and online purchasing has reduced market demand for industrial space. However, statistics show that not only are industrial properties still in demand by traditional sectors but that online entrepreneurs – most notably Amazon- are increasing their offline presence in order to fulfill on-demand services.
As a commercial property investor, you can take advantage of the steady returns, long leases, and 6-7% returns while rounding out your portfolio for a more diversified, yet profitable, spread.
Types Of Industrial Real Estate Properties
Industrial real estate properties can be categorized according to six primary categories. Categories are determined based on the physical characteristics of the building, as well as how the building is used.
There are certain characteristics that all buildings must have in order to be considered industrial real estate property, but there are also differences between each type of industrial property and within the same category.
For example, all telecom centers must be located next to major communications trunk lines, but each individual center may or may not have high ceilings.
The exterior and interior features of a building that are typical of an industrial property category are termed core differentiating features, while characteristics that may or may not be present in any individual building are called ancillary differentiating characteristics.
Understanding what is typical for the industrial category you are interested in, as well as being aware of “extra” features is essential for evaluating the profit potential of a property.
Warehouse Distribution Industrial Properties
Warehouse industrial properties make up over 55% of industrial properties. As the largest of all the categories, warehouse properties may be called by various names, such as bulk warehouse, office warehouse, and Big Box. Each building has a particular use and a dominating feature that is depicted by its name.
Warehouse distribution buildings vary in terms of what percentage of the building is used for warehousing versus distribution, but all share similar features in terms of ceiling height, loading capabilities, and general building design.
Buildings are box-shaped with a ceiling height of between 16 ft to 80 ft and have a range of between 3,000 to 15,000 sq ft per dock in order to facilitate the movement of goods quickly and efficiently.
Manufacturing Industrial Properties
There are about 7 billion square feet of manufacturing space in the U.S., making this property type the second largest category of industrial properties.
There are three types of manufacturing space:
- and warehouse
All, however, have at least 50% (and usually up to 70%) of space dedicated to manufacturing.
Buildings are equipped with infrastructure to support the heavy power and machinery requirements of tenants and may include interior features like pressurized water and airlines, an HVAC system, and storage tanks and cranes.
Space set aside for loading is minimal, while a large percentage of outdoor space is dedicated to parking.
Flex Industrial Properties
Flex buildings can be used for a wide variety of purposes, and are typically favored by tech companies, research, and development, start-ups, light manufacturing, or other companies who need both office and manufacturing space in one building.
These properties are more upscale than other industrial buildings, featuring superior exterior and interior finishes and professional landscaping. They are called flex properties because their configuration makes it easy for tenants to adjust the proportion of office to warehouse space in order to best suit their needs.
Multi-Tenant Industrial Properties
Typically not categorized as a separate property type, multi-tenant industrial properties are basically smaller facilities with more than one tenant. Thus, it is particularly suited to adjust to the growing needs of small to mid-size businesses, who can “add-on” space by incorporating space in the same building.
Telecommunications facilities have only recently become part of the industrial real estate since in the past these were solely owner-occupied or were lumped together with office properties. However, with technology and particularly the cloud, becoming more advanced, this sector is rapidly becoming a lucrative investment opportunity.
These facilities don’t require a specific type of building and can be found in a variety of build-outs. Buildings do need to be able to support high power levels, due to high power requirements, be next to a major communications trunk lines. They also need to be able to support a high floor load per square foot in order to support scores of heavy yet compact equipment.
Benefits Of Investing In Industrial Real Estate:
There are several advantages to investing in industrial real estate:
- Higher Yields
The industrial real estate takes it value from the number of square meters available for rent, resulting in higher rental income. Combined with fixed annual price increases often linked to CPI, yields are generally around 8%. This may seem less lucrative than, for example, retail, but it also means that industrial properties are less subject to the ups and downs of the market, making them a good option for investors looking to lower their risks.
- Net leases
Since most industrial leases are net leases, this means that not only do tenants sign lease agreements for longer periods, but tenants also agree to pay for most major expenses including maintenance and repair.
And because the appearance of the building reflects on the company, any repairs needed are performed quickly. Industrial properties also suffer from lower turnover rates than other commercial investment properties, which represents significant savings in costs.
Industrial properties vary greatly in terms of shape, size, and building requirements. And while some industries require very specific layouts and equipment connections, many types can be reconfigured to accommodate a variety of tenants.
What Are The Risks?
Like any commercial income property, there are risks when considering industrial property as an investment. Here are some common risks:
The sheer size of industrial properties means they will cost more than other types of commercial properties.
However, depending on the location, they may cost less than a comparable property in a prime area. Due to the fact that they are usually located outside of the city, in industrial zones, or in parts of the city with less demand. This is partially offset by the increasing trend of either renovating older buildings or turning them into mixed-use properties.
- Out of date
Although some types of industrial buildings can be used for a variety of purposes with only a moderate amount of renovation, other types can quickly become obsolete once a tenant opts not to renew their lease.
Since requirements, particularly in the technology sector, change rapidly, a building that might have been sufficient just five or ten years ago might need extensive renovation in order to appeal to your ideal tenant.
A good location might also turn into a less desirable one if newer complexes are built in a distant location, major road changes occur, or logistical features, like power and communications centers, are relocated to more favorable locations.
- Greater environmental risk
Industrial properties are more likely to face environmental problems due to the nature of the tenants occupying the property. Issues such as hazardous waste disposal, asbestos-containing materials, underground storage tanks, and vehicle refueling are some of the most common.
Another important factor whether or not there are environmental encumbrances or institutional controls that will prevent you as an investor for leasing the property to prospective tenants.
In order to avoid finding out about critical issues at the last minute, it would be a good idea to consider hiring an environmental consultant who will not only be up to date on the latest regulations but will also know how to discover any potential environmental landmines.