When most people consider investing in commercial real estate, their mind typically goes to traditional properties, such as offices or retail spaces. What they may not consider are industrial spaces. Factories, warehouses, depots, and storage facilities are just some examples of the types of properties that exist under this umbrella.
If you have recently considered investing in industrial assets, it is important to take the time to conduct careful research and be fully aware of any potential risks. Like any investment, there are benefits and risks. Taking the time to learn more about the industry and how to invest may prevent unnecessary risks to your portfolio.
Industrial real estate can be broadly defined as all land and buildings that accommodate industrial activities, including production, manufacturing, assembly, warehousing, research, storage, and distribution. Though this is a broad definition, it effectively captures the general usage of these buildings.
This sector covers an incredibly diverse range of buildings, all of which are designed to suit different needs. Examples of industrial real estate include:
These types of industrial properties have different subgroups within them, too. For example, storage facilities can include both traditional facilities where people rent out a unit to store their inventory, and cold-storage facilities often used for perishable goods. Industrial properties can also be single-tenant or multitenant. Buildings can be rented out in their entirety, such as for manufacturing, or subdivided.
This is one of many advantages that industrial real estate can offer potential investors. Leases may also be structured to balance the cost of maintaining the facility between the tenant and the property owner.
There are a few different strategies and avenues to get into investing in industrial properties. Some of the most popular of these are value-add, land development, and market value purchase.
Value-add: Outdated or neglected industrial properties may offer great rewards for the investor who decides to go this route. This type of investment consists of renovating an existing property and bringing it up to current market standards before eventually selling it and potentially making a profit off the sale.
Market value purchase: Another way to invest in industrial assets is to find a property that is already leased or ready to be leased. Investing in a property at market value is like buying any other commercial asset. Investors would benefit from checking that potential returns are at a desirable rate and that the property is in good enough shape to avoid costly repairs.
Land development: Developing an area zoned for industrial properties also has the potential for profitable returns. Due to the high demand in some markets for more warehouses and other industrial properties, investments in this market may prove to be highly profitable. This, of course, depends on the surrounding market, however. If you choose to go this route, it will benefit to ensure that the land is zoned for industrial properties and to understand what limits may be imposed, such as building size or type of industrial space.
Industrial sector properties utilize the same types of leases that many other commercial buildings do. This includes full-service, net, and triple-net leases. Each is briefly explained below.
Full-service leases mean the tenant pays a flat rent amount that the landlord then uses to pay all property-related expenses such as maintenance and taxes.
Net leases are where a tenant pays a base rent as well as a portion of one or more of the property’s expenses such as maintenance fees and property taxes.
Like a net lease, triple-net leases work the same way, but tenants also pay a pro-rated share of all the landlord’s expenses based on the size of the space they are renting. Keep in mind that triple-net and net leases usually have lower base rents than full-service to offset the fact that tenants are paying some of the landlord’s expenses.
As with any investment, especially those in property, investors benefit from taking the time to carefully research and do their due diligence. Failing to investigate the asset beforehand may increase the risk of financial burden.
Define Your Investment Criteria: The first step most investors take is to define their investment criteria. In short, this means asking yourself the motivations behind wanting to invest in an industrial property.
What are your ambitions? For example, do you want to upgrade and sell a property, or do you want an established asset? Do you want a long-term tenant? What industries are you looking to attract to the potential asset? What kinds of returns on investment do you wish to see?
Asking these and similar questions tends to facilitate the investment process since all parties involved will be fully aware of the end goals.
Future-Proof Your Investment: Begin this step by looking for assets that suit your criteria and determining which areas are most popular. Future-proofing means thinking ahead and imagining how the property will fit into the market later. Features such as strong transport links, good infrastructure, future redevelopment opportunities, and entry and exit strategies may all help in making your decision.
Areas located near key transport nodes, such as ports or railways, are critical to tenant supply chains. This also makes them more desirable to those potential tenants. Industrial assets located near residential areas tend to also be attractive to those businesses meeting the increasing demand for shorter delivery times, such as Amazon. Tenants in dense urban areas are often able to afford higher rents, too, so your return on investment may be largely contingent on the location of the asset.
Part of this process includes reviewing relevant zoning restrictions, especially when it comes to the future development potential of a site. The flexibility of a space is important when appealing to a wider potential tenant mix and reducing the risk of potential vacancies.
Secure Financing For Your Investment: Once you have found a property that meets your criteria, you need to secure financing. This can be done through commercial real estate loans, often provided by banks and other financial institutions. These loans are usually long-term and low-interest and can be used for multiple purposes. This means you can use the loan to buy a property or use it to make improvements and renovations to increase its value over time.
It is crucial to understand the needs of your tenants and businesses, too, so you can budget for whatever the asset needs to attract tenants.
Seek Good Opportunities: Being an investor also means being active in the market. There may be many good opportunities out there, but the savvy investor cannot take advantage of them if they are not well-informed. In order to take advantage of opportunities, an investor needs to keep an eye out in their desired markets, so they do not miss an asset that meets their criteria.
This does not necessarily mean you need to hire a real estate agent. You can also use online sources or private equity firms for potential investments. Regardless of how you choose to invest, having a team of trusted professionals can be a great tool to ensure your industrial property investment is as successful as it can be. Financial and real estate experts can help investors navigate the complex landscape of industrial real estate and ensure they are protected from potential risks such as legal issues and accounting.
As you seek the perfect opportunity, there are several factors that any savvy investor would benefit from keeping in mind. These include location, property, size, and the property’s condition. Good accessibility to such places as ports or railways may significantly affect how well an industrial property performs.
Ideally, the area should also show good growth potential, which can indicate the possibility of a better return on investment. Properties should also ideally be large enough to accommodate most tenants or have enough room to create separate spaces for multiple tenants. As the investor, you would also benefit from having the building inspected to ensure it is structurally sound and in good condition. This reduces the potential risk of unaccounted maintenance jobs and other repair costs.
Perform Due Diligence For Potential Profitability: Every step of the investment process benefits from some form of due diligence. This is especially true when it comes to evaluating a property’s potential profitability. Many investors like to know how much money can be made from the investment before purchasing the property so that they can better see how it fits into their financial goals and portfolios. There are a few methods you may use to determine this.
First, determine if your target market can support the investment. This means looking into what the average rent per square foot is in that region. Check whether prices are going up or down, and the average vacancy rate. You may even want to take note of how many other industrial investors are in your preferred market to understand the competition.
As mentioned earlier, it may be smart to determine if there is enough space available for your business needs. Will you be able to lease out part of the existing building without having to start from scratch? Alternatively, you might discover that you need more space than what is currently available in that market.
Another question to consider is any obstacles that may get in the way of making this investment successful. Zoning restrictions can affect the possibility of certain tenants leasing and operating within that space. Nearby companies may also compete with your tenants for resources or customers. Even construction may affect factors such as traffic flow or accessibility to the tenants’ business.
Rental history is another important factor to consider. If currently occupied by a tenant, an investor may ask for copies of their lease and other documents related to tenancy. This may help in establishing the potential profitability of the investment.
Secure Your Income: Once the property has been purchased, it needs tenants. Just as investors should do their due diligence before purchasing or investing in a property, it is also important to do the same for potential tenants. Industrial tenants sign leases that can range anywhere from three to ten years, with three to five being the average. Longer leases may provide more certainty of income, but shorter leases can also mean more tenants.
When determining the lease terms, investors benefit from considering what the average rent is in the individual property’s submarket. For example, if your property is significantly more expensive than the typical market rate, you can expect it to take much longer to secure a tenant and may have to adjust your lease rates appropriately.Alternatively, if the current rent received from tenants is significantly below market rates, this may indicate the property is underperforming and requires a more active management strategy to bring the current rent to market levels. This may also involve taking on additional leasing risk in order to maximize returns
Investing in any commercial property comes with potential benefits. When it comes to investing in the industrial sector, it shares many of the same benefits as traditional commercial real estate. Potential opportunities include investors being able to reduce or postpone the amount of income and capital gains tax due on their investments. Depreciation, deductions for mortgage interest, and other tax advantages may also potentially increase returns.
Founded in 2013, Avistone is a commercial real estate investment firm specializing in the acquisition and operation of multi-tenant industrial properties. We have acquired and managed more than 4 million square feet of flex/industrial properties located in California, Georgia, Ohio, Virginia, Texas, and Florida.
Our executive management team has more than 160 years of combined experience in acquisitions, dispositions, operations, structured finance, appraisal, land use and asset/portfolio management.
We have the unique ability to integrate extensive capital market knowledge with “boots-on-the-ground” real estate expertise to successfully acquire and operate properties that offer our investors attractive potential yields and a strong potential total return with relatively low risk. Get in touch with one of our investment experts today!
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