Industrial real estate is one of three primary categories in the commercial property market. Of the three asset classes, industrial properties are the most versatile and specialist of all. Anybody interested in real estate investment with a twist should learn more about the possible opportunities the industrial world has to offer.
What Is Industrial Real Estate In a Nutshell?
To summarize, industrial real estate is the business of providing properties for non-public commercial use. An industrial property is rarely open to clients and is where behind-the-scenes work goes on. The specific uses for this type of real estate are incredibly varied, ranging from mechanical engineering to scientific research to parcel deliveries.
Generally, these properties are big- some are really big! The three size classes are small, large, and enormous, with many properties exceeding 100,000 square feet.
Types of Industrial Properties
There are many types of industrial real estate properties. Essentially, any building that prioritizes function over form could be considered an industrial space. Here are the three main categories in the industrial real estate sector and some of the popular uses that come under each umbrella.
One possible industrial use for real estate properties is as a manufacturing facility. From simple manual assembly lines to heavy-duty metal workers, every product needs somewhere to come into existence.
Heavy manufacturing usually requires a pretty impressive space. These properties tend to expand over tens of thousands of square feet- if not more! Some of the requirements include spacious loading docks, support for heavy machinery, and serious electrical power.
Industrial tenants that need this type of space often sign a triple net lease and customize the layout to match exactly what they need.
Light manufacturing facilities do not require quite so many square feet and are a lot more flexible. Used predominantly for light assembly and basic manufacturing, this type of facility is easy to adapt between tenants.
Industrial Building for Storage and Distribution
One of the biggest markets for industrial property owners is storage and distribution. People love stuff; they love buying stuff. Well, that stuff needs somewhere to sit until it gets added to cart. Additionally, many companies require a base for their equipment, overstock, vehicles, or parts.
Honestly, there is an almost endless list of potential uses for a good space with easy access and flexible potential.
Leasing property from which to operate truck terminals or house a large fleet of vehicles is common in the industrial real estate world. They tend to be very basic with little need for storage- instead, they work as intermediate sites for transportation to pass through to exchange deliveries, re-fuel, or park up until the next job begins.
Distribution centers are popping up all over the country to support the same-day delivery promises made by online retailers. Large-scale distribution companies need enormous spaces to stock enough products and leave room for loading docks.
Unlike multi-purpose warehouses, distribution hubs have a constant flurry of activity. Between the constant coming and going of trucks and the army of staff who control the stock and the floor, these are busy places! Any investor hoping to find a space that can serve as a distribution warehouse needs to ensure maximum square footage and a prime location.
The convenience offered by online shopping websites drives demand for fast delivery up more and more every day, which is why investing in a well-placed, well-equipped industrial warehouse could be a smart move for the future.
Storage Warehouse Space
General-purpose warehouses are easier to come by and do not demand quite so much space. Companies looking to store products they don't necessarily need constant access to do not usually mind so much where it is.
There is really no limit to what sort of uses a storage warehouse could have in the right hands. Usually, as long as there is sufficient space and security, it does the trick. However, there are some more specialist styles.
Cold storage facilities are one example of how a general use warehouse could adapt to suit a niche market. If an investor kits out their space with premium fridges and freezers, they can market the property as a cold storage space.
A flex space is an industrial building that is partially converted into office space. Usually, the office space portion of these buildings takes up around one-third of the property, while the rest remains a flexible space for multi-purpose use.
The idea behind a flex space industrial property is to give companies a place where they can work and operate a business right beside where the heavy work goes on. Here are a few examples of these kinds of spaces.
Whether it is a flashy showroom or a large-scale secondhand garage, a car dealership needs a lot of space to display the vehicles. However, they also need an office space to talk to potential customers and keep track of all of the relevant paperwork.
It doesn't make sense for this type of business to have their product in one place and operation in another, which is exactly why they need a flexible space.
Ever wondered what keeps the digital world up and running and how exactly cloud storage is even possible? It is all about data centers. A data center is essentially an enormous industrial property filled with servers and equipment that runs 24/7 to keep the world connected.
Of course, somebody needs to keep track of all the data and ensure the proverbial wheel never stops turning, and all that equipment needs a lot of security personnel on-site.
The largest data center in the world covers more than 6 million square feet to give you an idea of just how mammoth this type of operation really is.
Research and development is a pretty open-ended term that can mean almost anything, which is why any space these companies use must be flexible. From scientific studies to building a flying car- research takes space, time, and privacy.
Open spaces with adaptable layouts and distance from the public are ideal for research and development bases.
Commercial Real Estate VS Industrial Real Estate: What Is the Difference?
Industrial property is a type of commercial real estate, and the two terms are often used interchangeably. However, there are several key differences between the industrial sector and most commercial properties.
The first is simple: a commercial property is likely to have some kind of interaction with the public, but industrial facilities are not. This fact alone creates a huge divide between the two, particularly in how they look and operate.
Retail stores, for example, rely on an attractive shopfront, well-styled interior design, and a friendly atmosphere to entice people inside. Grocery stores, outlets, restaurants, and other commercial spaces need people to come into the property to make money. Office space is also considered commercial, as there is usually some sort of interaction with the public involved.
Industrial users, on the other hand, very rarely have clients in their properties. They do not need to look great or have commercial zoning- they just need the space and location. Industrial leases and similar to commercial leases, in that they are usually long-term and hand over almost all control and responsibility to the tenant.
Pros and Cons of Investing in Industrial Buildings
Every investment has its ups and downs. The benefits and risks of industrial property investments are worth noting before making any moves to join the market.
Industrial leases usually last a long time. Being able to sign long-term leases is hugely beneficial for investors as it means there is plenty of time to yield massive returns on the initial payout. As a landlord or property investor, one of the biggest concerns is not managing to secure a lease and generate income.
Industrial tenants are usually in it for the long haul, meaning the investors and owners are guaranteed income for a decent length of time. Sticking to one tenant for as long as possible has plenty of benefits; both financially, personally, and for business.
High Rental Income
Although many different tenants may have use of an industrial space, most of them come expecting to pay a lot of money to use the property. The income potential in industrial real estate is much higher than in residential real estate or even with a commercial property.
Many industrial buildings require very little TLC since their main purpose is to stock and store. Most spaces tend to be very simple and open, leaving a blank canvas for the tenants to come in and make it suit their needs.
Unlike commercial property, industrial real estate is all about businesses behind the scenes procedures and productivity, not looking good for clients.
In most industrial property agreements that use a net lease, the tenant pays most of the costs that would otherwise be the responsibility of the owner.
Triple net leases are the most convenient of all in that they effectively remove all financial responsibility (except the mortgage) from the owner. These leases are particularly popular in commercial property agreements, but they also apply to industrial real estate.
Although any investment comes with a certain level of risk, investing in industrial real estate is comparatively stable. Of all the types of real estate, industrial buildings tend to have the most recession-proof property values, as there is always a need for this kind of facility.
With the ever-expanding world of dot com shopping and shipping showing no signs of slowing down, the interest in industrial real estate is growing. Distribution companies are busier than ever, and they need a suitable property for storing goods and coordinating shipping routes.
New construction of enormous industrial properties shows that the global economy and consumer demand are on the rise for the industrial real estate market.
Risk Of Vacancy
Although industrial properties can adapt to many purposes, it remains a fairly niche market. If an investor or owner cannot find a company that needs the space for industrial activities, they can end up stuck with an expensive property with no incomings.
It can also take far longer to find a new tenant if one contract ends or the company using the space shuts down. Most investors what assets that ensure a steady income- not one that sits idle and unprofitable for months or even years in some cases.
High Interest Rates on Bank Loans
Industrial real estate investments often carry high interest rates when loaned from the bank. Some are even as high as 30%. From the bank's point of view, an industrial property carries more risk than residential property, and the loan terms are likely to reflect that.
Chance Of Becoming Obsolete
The industrial market is forever changing, with new rules and regulations coming into play all the time. If a property is not flexible enough to keep up with evolving new demand, it could run the risk of becoming obsolete and unusable.
Perhaps the roof is not high enough to accommodate new fixtures, or the latest machinery is too heavy for the floors- these things can happen. Obsolescence can also come into play because of developments going on around the property, from new roads to an expansion of a residential property, to any number of other changes.
Choosing a well-located industrial property with as much flexibility as possible is the key to avoiding obsolescence. Class B properties (usually older buildings in less desirable areas) are cheaper to buy but they may be more harshly affected by change, only making it more difficult to stay relevant and appealing.
Expert Assistance May be Required
Investing in industrial real estate is not always as straightforward or simple as other property investments. Coming up with an investment strategy that works effectively may take some professional advice since you need to work with specialist industries with lots of rules and regulations.
Many people opt to passively invest, meaning they own (fully or partially) the property but are not actively involved in the managing of it. Because the maintenance and safety levels that an industrial building requires are so complex, property managers with professional experience in the area are often called in.
Of course, that costs money, and it cuts into income profits. However, it is worth it for anyone investing in industrial real estate without any prior experience.
Industrial real estate is a diverse and exciting market for investors. Because of the variation in industrial properties, there are so many routes to consider. Real estate investment trusts can help investors who are interested to better navigate their way into the loop.
The key takeaways to remember about industrial real estate are:
- Size matters- especially if you are interested in distribution.
- The better the location, the bigger the potential.
- Flexibility is everything- you never know what type of client may be interested in leasing a property.
- Net leases are an ideal way for investors to get a return on their money without doing a lot of work.
Investing in real estate has always been a major attraction for those with the money to spend. The industrial world is different but definitely exciting.