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Industrial Property Investing

An industrial property is one that is used for the storage or manufacturer of merchandise by a business. It is also architecturally designed to facilitate loading and unloading of merchandise from trucks or sometimes train cars. The design of industrial properties has changed over the years, with newer assets offering interior heights as high at 40’. Older or smaller properties may have heights in the 14’-16’ foot range. The loading of merchandise is accommodated by loading docks, or entries into the property. Docks can be grade level, where the parking lot and the warehouse floor are on the same level, to semi‐dock height at 24 inches, which is the height of a pickup truck or delivery truck, or a full‐dock at 48 inches which is semi‐truck height. Industrial properties can be highly specialized, to chill foods, for example, or manufacture a particular type of product. Construction can be of concrete walls, sometimes known as “concrete tilt-up”, or simple corrugated metal.

Why industrial is currently a strong investment target:

  1. Industrial Property Investing, Investments through RealRite's Investor Network The U.S. industrial market is improving. In the first half of this year, the U.S. industrial vacancy rate declined to 9.7 percent, its third quarterly decline and its lowest level since the first quarter of 2009, according to Cushman & Wakefield. During the same period, a total of 70 million square feet traded hands, an increase of nearly 160 percent. And year-to-date, leasing activity has risen more than 27 percent to 205 million square feet, compared with the same period last year.
  2. The recovery of housing in the U.S. will positively impact industrial properties. New construction of housing has a significant impact on industrial facilities use.
  3. Depending on the region, the increasing use of ports can grow industrial values in the area. One example is the $5.25BBN expansion of the Panama Canal, due to be completed in 2014. This expansion will allow large cargo ships that currently anchor in California and use trucks or the railroad to move goods to the East Coast to sail directly to New Jersey.
  4. With the growth of “e-tailing”, high clear-height buildings with specialized racking systems should be in high demand. Approximately 35 percent of retail-related industrial demand is in the Northeast and 27 percent in southern California markets such as Los Angeles and the Inland Empire. With e-commerce expected to grow by 11.5 percent and mobile e-commerce by 48 percent, demand for such retail distribution centers will continue to increase in the near to mid-term.
  5. Although absorption of industrial space is still relatively low, the lack of industrial development isfueling strong rent growth in many markets. CoStar recorded just under 35 million square feet of positive absorption in the 210 largest metros across the country, with more than ¾ of those markets showing growth in demand. While that’s 20-30% below what absorption levels would be if GDP were growing at approximately 3% growth, there was only 8.4 million square feet of negative absorption spread across 54 of the 210 markets covered by CoStar, the lowest since the recovery began.

 

What factors should you consider when contemplating an industrial investment?

  1. Lease lengths for industrial properties tend to be long-term. Industrial tenants tend to prefer longer leases to ensure committed space for their businesses. This is particularly the case for facilities that have been constructed specifically for their business or industry – cold storage, or specialty manufacturing for example. Lease lengths of 7-10 years or longer are common in such cases.
  2. Industrial leases typically have fixed rental increases over the term of the lease. Such increases could be annually, or every three or five years. Increases could also be fixed, or linked to the Consumer Price Index (CPI) in some fashion.
  3. What factors should you consider when contemplating an industrial investment? RealRite investment informational toolsIndustrial leases are typically structured with the tenant paying all expenses associated with ownership, including maintenance, insurance and taxes. This is known as Triple Net, or NNN. Monitoring of the tenant’s execution of their responsibilities is still important, such as appropriate ongoing maintenance.
  4. Industrial properties typically require less ongoing maintenance than other real estate asset classes. Construction of industrial properties tends to be of more durable materials than many other asset classes. Further, their interiors are open, without the necessity of painting, tenant-specific improvements, glass windows, and other design features typical of other property types.
  5. With relatively few tenants or a single tenant, vacancy can materially affect your cash flow and overall yield. Industrial property occupancy can be significantly affected by economic trends. A poor regional or national economy will affect business manufacturing, shipping and storage requirements, the lifeblood of the industrial market.
  6. Lender underwriting for industrial properties tends to be more stringent than other asset classes. Lenders may require larger equity investments to mitigate vacancy or credit risk, and also demand higher interest rates.
  7. The ability of your tenants to weather economic downturns or competition is important. Carefully consider the industry that your tenants are in, and the tenant’s position in that industry – either locally or nationally. A detailed review of the tenant’s financial statements may demonstrate their ability to sustain occupancy in a downturn.
  8. The quality of the building: Its interior height, number of loading docks, number of interior structural members that might block ease of interior storage or movement and age are important considerations. Older buildings, for example, may not have as desirable interior height, or systems that must be upgraded to accommodate modern tenancies. Similarly, if the building is highly specialized, the pool of potential tenants is reduced.
  9. The location: Is the building close to significant arterials, highways, railways or shipping ports? Or are there any plans to construct or expand significant roadways nearby? These considerations will create more demand for the property in the future. Similarly, consider if there are any major manufacturers nearby whose absence or presence could impact your tenancy.

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