When most people think of real estate, what comes to mind are homes, offices, or retail stores. Fewer people have a clear idea of what industrial commercial real estate entails. While it might call to mind factories or other assembly plants, industrial businesses can expand much further than factories to include the shipping industry and others.
Industrial real estate is one of three main categories in the commercial property market. One of the asset classes, multi-tenant industrial properties are some of the most versatile and specialist types of all. Anybody interested in commercial real estate investment should know more about the possibilities that this type has to offer.
In short, multi-tenant industrial real estate provides properties for non-public commercial use. These are not always open to clients and are often where companies store their inventory or manufacture their goods. The specific uses for this type of real estate are widely varied, ranging from mechanical engineering to scientific research or fulfillment deliveries.
Retail and office properties are the most well-known commercial real estate assets. In part because they are public-facing, meaning the general public regularly visits and interacts with the building. Unlike these properties, however, industrial real estate is not necessarily open to the public.
Industrial assets mainly engage with companies and large enterprises that use their facilities for manufacturing, shipping, and storing their products. This type tends to also be set apart from other commercial properties, often in a specific industrial section of a city or area. Another key difference is that industrial assets can incorporate pharmaceutical-grade and temperature-controlled facilities as well as automated high-bay warehouses.
Every commercial building comes with a class grade attached to it. Buildings are often labeled Class A, B, or Class C. When investing in industrial properties, it is important to consider which class best suits your needs and investment goals.
Class A: This type of industrial property is often the newest and highest-quality structure available in the real estate market. Most structures built today are made of materials produced to meet evolving standards in the construction industry. These properties also typically house high-income earning tenants, such as large companies, with low vacancy rates.
Class B: This class typically refers to slightly older buildings but may also refer to new construction that does not feature top-of-the-line amenities. Rental income for this type is usually lower than Class A. The potential for value-add opportunities attracts investors to this type, meaning these properties can be transformed or upgraded to become Class A properties.
Finding a deal on Class B properties is often much more accessible, especially because some investors view these as higher-risk assets. For those investors willing to put in the work, Class B assets can be great for their portfolio.
Class C: The final class is ‘C.’ This refers to buildings 20 years or older, often needing multiple maintenance issues addressed, and sometimes located in less desirable markets. A significant drawback is that rental rates for this type of property are lower than the other two, which makes passive income opportunities more difficult. For any investor willing to put in the time, money, and creativity to revitalize the property, though, this can be an excellent opportunity to increase its earning potential.
In addition to these classes, the industrial sector can be further broken down into categories based on function. These include food-grade manufacturing, engineering and fabrication, transport, and third-party logistics.
One of the biggest reasons to invest in multi-tenant industrial flex properties is that this asset class tends to have businesses that require employees to be on-site as evidenced by the steady tenant level through the COVID-19 pandemic. Unlike other assets that faltered after the closures and stay-at-home orders around the globe, the industrial class remained steady due to a sizable increase in e-commerce and trade. Companies found they needed the space to hold and distribute retail goods to meet customer demand.
Along with this sector’s resilience so far in the face of lockdowns and border closures, certainty and security have historically been other attractive benefits to investors, especially when it comes to potential future values. Typically, industrial properties offer low vacancy rates nationally. Significant government spending on infrastructure is also historically highly correlated with industrial property values. In the past, this type had a layover period, otherwise known as a time of vacancy between one tenant leaving and another arriving on the property. Recently, this trend seems to have shifted in favor of demand, with demand in some markets outstripping the local supply.
Investors in industrial assets may also enjoy significant capital growth over several decades if that is a part of their long-term financial plan. This is particularly true in areas considered highly likely to grow or experience change in the coming years. Areas like the Sunbelt have historically featured up-and-coming cities with the potential for better returns and investment opportunities overall.
No investment is free of risk. Even the most stable are prone to a bit of risk, though they are considered more reliable. Like investing in commercial real estate, industrial properties face the same potential problems and obstacles that could lead to a failed investment.
Still, these may be good assets for investors looking to diversify their portfolios or expand further into the commercial real estate market. While some industrial properties come with a higher bar to entry, many can join through a collective investment venture, such as through a private equity firm, fund, or REIT.
As a real estate investment firm, we specialize in acquiring and operating multi-tenant industrial properties. Since our founding in 2013, we have managed more than 4 million square feet of multi-tenant flex industrial properties in various states.
Our executive management team has over 100 years of combined experience in acquisitions, dispositions, operations, structured finance, appraisal, land use, and asset and portfolio management. We have the unique ability to integrate extensive capital market knowledge with a more “boots on the ground” approach to acquire and operate various properties.
We offer our investors attractive potential yields and potential total returns for relatively low risks. If you want to join one of our funds or work with us, contact us today!
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