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Value-add: Outdated or neglected industrial properties may offer great rewards for the investor who decides to go this route.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!
© 2023 Avistone, LLC. All rights reserved.
Communications from Avistone, LLC or its affiliates (referred to together as "Avistone"), whether it is transmitted through its website or any other marketing platform used by Avistone (collectively termed "Avistone Communications") must not be interpreted or meant to be taken as recommendations or endorsements to purchase, sell, or hold any securities. Furthermore, Avistone Communications should not be considered as advice related to investment, taxation, finance, accounting, legal matters, regulations, or compliance.
The content provided herein and through Avistone Communications must be reviewed in conjunction with related private placement memorandums and other offering documents to comprehensively understand the risks associated with the securities to which it pertains. Participation in private placements necessitates substantial and sustained financial commitments, the capacity to withstand a complete loss of the investment, and minimal liquidity requirements. Avistone’s website and Avistone Communications imparts preliminary and generalized insights regarding the Investments, intended solely for initial reference purposes. It does not encapsulate or consolidate the entirety of applicable information. The information within is subject to qualification by and subject to more intricate details as presented in the relevant offering materials. Avistone is not registered as a broker-dealer. Avistone disclaims any assertion or warranty to any potential investor regarding the legality of an investment in any Avistone Investments.
Investments in securities or real property involve inherent risks and are exclusively available to accredited investors, as defined in the Securities Act of 1933, who comprehend and willingly assume the elevated risks associated with private investments. These risks encompass, but are not confined to, market fluctuations, credit vulnerabilities, interest rate exposure, and the prospect of partial or total loss of invested capital. Prior to investment, one should: (1) conduct an independent investigation and assessment; (2) meticulously evaluate the investment along with all concomitant fees, expenditures, uncertainties, and risks, including those stipulated in the offering materials; and (3) consult with individual investment, tax, financial, and legal consultants.
The content presented in Avistone Communications is neither intended as a recommendation nor a form of investment counsel, nor does it signify an entreaty to procure, vend, or retain a security or investment strategy, and it is not imparted in a fiduciary capacity. The information provided does not factor in the specific goals or circumstances of any given investor or propose any particular course of action. The information reflects Avistone’s interpretation of the prevailing market milieu. The viability of achieving the objectives of any Avistone fund or investment, or averting substantial losses, cannot be ensured. Investment determinations must be formulated on the basis of an investor’s individual goals and circumstances, and in collaboration with their financial professionals. Historical performance is not indicative of future outcomes. All research and supplementary information supplied through Avistone Communications is crafted exclusively for informational purposes, and Avistone assumes no accountability for any inaccuracies or omissions within the content of this website or any linked resources.
All approximated financial and investment benchmarks, inclusive of forecasted internal rate of returns (IRR), yields, multiples, and investment holding period returns, as displayed on Avistone Communications, stand as conjectural projects of performance exclusively, are hypothetical in nature, are not to be regard as actual investment outcomes, and do not present guarantees of future results. Such approximated benchmarks are invariably accompanied by intrinsic risks, encompassing but not restricted to market volatility, operational ambiguities, and limited liquidity, and do not signify or assure the real outcomes of any transaction; and no assertion is made that any transaction will, or is likely to, attain results or profits akin to those depicted. Moreover, additional financial metrics and calculations shown on Avistone Communications (including amounts of principal and interest repaid) have not undergone independent verification or audit and may diverge from the actual financial metrics and calculations realized for any investment. The investment data contained herein is sourced from entities Avistone believes to be reliable, yet no assertions or warranties are made as to the accuracy or comprehensiveness of said information, and no responsibility is accepted for the same.
Avistone’s historical track record showing past performance is no guarantee of future results. The performance of Avistone’s prior projects have not been audited by any third party. Not all investors received precisely the same returns due to differences in their respective commitment dates for individual property offerings. Full-Cycle Track Record average metrics are based on weighted averages that treat investment dollars equally and are calculated after summing the results of all Avistone full-cycle investments, weighted by the respective capitalization amount for each Full Cycle Investment.
Investments in private placements are speculative and involve a significant quantum of risk, and those investors whose financial situation cannot withstand a complete loss of their investment should abstain from investing. Moreover, investors may receive securities with limited liquidity and/or constraints on transferability, subject to specified holding duration prerequisites and/or concerns about liquidity. Investments in private placements inherently entail a high degree of illiquidity, and investors with an inability to retain an investment over the long term (at least 5-7 years) should refrain from investing. Real estate and alternative investments should only constitute a component of a broader investment portfolio.
Private placement investments are not equivalent to bank deposits (and consequently lack FDIC insurance coverage or safeguarding by any other federal government agency), are illiquid, are not endorsed by Avistone or any other entity, and may depreciate in value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or endorsed any investment, or authenticated the accuracy or exhaustiveness of any information or materials furnished via Avistone Communications. Investors must be financially prepared to absorb the complete loss of their investment.
Materials or data emanating from third-party media external to this domain or Avistone Communications may address or refer to Avistone or correspond to information contained herein, however, Avistone does not extend endorsement or accountability for such content. Hyperlinks to external sites or reproduction of content from third-party sources do not denote an endorsement or approval by Avistone of the content thus linked or reproduced.