Online shopping (e-commerce) and a manufacturing boom have been driving up the demand for industrial properties for several years. But certainly in the last two years the need for product storage and shipping distribution space has exploded!
If you’re a savvy commercial real estate investor, you’ve likely been keeping an eye on this trend. But have you acted on it yet?
Industrial real estate is a different animal than, say, office or retail spaces. But many of the same principles apply when investing in those properties. Below, we’ve listed just seven tips that will help you invest in industrial real estate like a pro. But first:
What is Industrial Real Estate?
Industrial real estate typically describes properties where goods are made, stored, and/or shipped. There are at least eight industrial building types, divided into three main categories: manufacturing, storage and distribution, and flex space. However, buildings can function as more than one type, depending on the needs of the business inhabiting the space.
Industrial properties are relatively less expensive to own and operate than properties in other commercial real estate sectors. This means investors can acquire and maintain larger assets with lower ongoing capital costs.
Tip 1: Value-Add Properties are Great if You Can Bring Them Up to Standard
“Value-add properties” are those that are possibly outdated or neglected, but definitely in need of renovations. These more affordable spaces can be very profitable in the long run for buy/hold or buy/sell investment strategies. But only if you are able to bring them up to current market standards. Consider consulting with a general contractor before purchasing such spaces to make sure the return on such improvements is worth the costs.
Tip 2: Finding the Right Tenants is Key
Industrial warehouses are oftentimes single-tenant properties with long-term leases. This is great news for you as an investor because it means less churn between tenants and thus, more stable income. However, that’s only if you find a good tenant to begin with. As with any commercial investment, the right tenants are worth their weight in gold. If you find a successful tenant with good growth potential, it will pay (literally) to offer them the best amenities and layout for their needs. Which brings us to the next tip:
Tip 3: Understand Which Amenities are In Demand
It’s easy to picture “warehouse space” as one thing. But businesses in different industries require different things from their industrial spaces. For instance, manufacturers may require loading docks for trucks and clear heights of at least 10 feet. In contrast, cold storage facilities must be equipped with freezers and require seals on their docks and insulated overhead doors to keep the products cold. And flex space buildings like data centers require special wiring and cooling systems, as well as reinforced floors to hold the weight of the equipment. Understanding the businesses thriving in your market, as well as shifts in industry needs, is key to staying ahead of the competition.
Tip 4: Know Your Lease Terms
Industrial tenants sign leases typically ranging from 3–10 years. But leases of 20 years or more are not unheard of. With such a significant time investment, it’s important to understand the terms of your lease. In a full-service lease, tenants pay a flat rent amount from which all property maintenance and taxes are pulled. In a net lease, the tenant pays a base rent as well as a portion of property expenses based on the size of their space in relation to the whole property. Lastly, a triple-net lease works the same way as a net lease, but tenants pay a prorated share of all the landlord’s expenses based on the size of the spaces they’re renting.
Tip 5: Don’t Discount Land
Developing raw land into single- or multiple-tenant industrial properties also offers a lot of opportunity for profit. Of course, you will want to do a market analysis for the specific land at hand. But with the low vacancy rates we’ve seen for industrial spaces in recent years, it’s likely there will be demand. Again, consult with a general contractor to make sure the area is suitable for the kind of industrial building(s) you want to develop. And it doesn’t hurt to know what amenities are most in demand in your area.
Tip 6: Understand the Risks
There are many pros to investing in industrial real estate. But a good investor understands that they must always be weighed against the cons. Yes, industrial spaces are typically managed by long-term leases for single tenants. But what happens if that single tenant disappears? There are financial risks to relying on one tenant to cover your expenses. And vacant properties create long-term risks if a new suitable tenant cannot be found with the same building needs.
Tip 7: There are Other Ways to Invest
Owning and managing a building outright is just one way to invest in industrial real estate. If you would prefer a more passive investment, instead consider real estate investment trusts, REIT funds, or stocks. In some cases, REITs deliver higher rates of return to investors than if you had bought your own properties.
Ready to Invest in Industrial Real Estate?
Every city has zoning ordinances that take into account industrial properties. That makes industrial real estate a different commercial real estate specialty than office or retail sectors. Having an agent well versed in industrial real estate is key to securing the right space for the right price. Your NAI Beverly-Hanks real estate agent is by your side to help you every step of the way.
NAI Beverly-Hanks continually strives to be the best in the business and provide you with the expertise you need. Contact us today to speak with an NAI Beverly-Hanks agent about investing in the perfect industrial spaces for your commercial investment goals.