When it comes to investing in commercial real estate properties, there are various options to choose from. Investors can select the best assets to complement their portfolio, from multi-family homes to office buildings. In fact, when most people discuss commercial real estate, they often refer to office, multi-family, retail, hospitality, and land development opportunities.
One of these potential investment opportunities also includes industrial real estate. This is a massive industry that many investors may not be familiar with or fully understand. However, in the past few years, industrial properties have become increasingly popular as an option for commercial real estate investors.
Demand for specific types of industrial properties has reached all-time highs, driven in part by the need for warehouses in last-mile locations – storage and distribution centers near consumers who purchase goods online. They offer the potential for stable and profitable investments, as well as opportunities to grow investment portfolios.
Industrial real estate generally refers to commercial properties with large, open floor plans. The buildings typically have flat floors, high ceilings, and easily accessible loading docks that allow for easy loading, unloading, and storage. Cities often require properties to be explicitly zoned for this purpose.
Generally, there are three major types of industrial properties: warehouses, manufacturing plants, and storage facilities. While there are many other types, these are the three main categories. Each type of industrial real estate has its own unique characteristics and benefits.
Given the current robust state of multi-tenant industrial real estate and the reported high demand, investors can potentially gain advantages by incorporating industrial properties into their portfolios. Moreover, the diverse range of property types offers investors the opportunity to identify assets that align with their specific financial objectives. Below are some further reasons to consider investing in industrial real estate.
Greater Diversity: Typically, in commercial real estate, a property that falls into a particular category has a specific purpose. Office spaces, for example, cannot double as a multi-family property or a storefront unless they are changed or turned into flex spaces with that purpose in mind.
With industrial properties, however, there are multiple potential uses that give an asset greater ability to fluctuate with changing market demand. For example, if demand is low for warehouses in an area but high for storage facilities, industrial property is flexible enough to be advertised for either. Additionally, one industrial property can have multiple uses, which makes it appealing to a broader range of businesses.
High Demand: Due to their adaptability, industrial properties tend to sit vacant for far less time on average than other types of commercial real estate. Demand for these types of properties remains high because every product must pass through an industrial property in one capacity or another. These properties are indispensable. The recent boost in e-commerce has also helped maintain demand for these properties.
Higher Rental Yields: Perhaps one of the biggest reasons to invest in industrial real estate is the potential for higher rental yields. Industrial assets may provide more passive income than residential real estate. In fact, the rental yield is often significantly higher than the average rental yield for residential and office properties.
The rental yield is higher since industrial real estate is often leased on a triple-net basis. This means the tenant is responsible for paying property taxes, insurance, and maintenance fees on top of their monthly rent. As the property owner, the investor is only responsible for paying the mortgage and common area maintenance fees. This allows for potentially higher returns on the investment.
Longer Rental Terms and Income Opportunities :In addition to potentially higher rental yields, industrial real estate offers longer lease terms compared to other commercial properties. Due to the logistics and difficulty of moving an industrial business from one property to another, industrial leases tend to renew rather than absorbing the cost of relocating. Average lease terms for industrial spaces can range from 3 to 5 years. This allows for approximately one third of the tenants leases to renew each year with an incremental rent increase.
The 3 to 5 year lease terms tend to offer stability, predictability and the ability to adjust rents to market demand on a consistent basis to the investment. This is important for investors to be aware of as they make decisions on ways that may have a consistent income stream for many years.
Lower Maintenance Costs: Owning a commercial property does come with its fair share of overhead. Upgrades, repairs, and renovations will be necessary during an investor’s ownership period. These can become costly and time-consuming.
With industrial properties, the maintenance required is far less than in other commercial property sectors. Because most industrial properties are large, open areas with poured concrete floors and high, exposed ceilings, the need for additional high-end features and other expenses is reduced or eliminated.
In addition, most leases are triple net, meaning any repairs or improvements fall on the tenant to complete. Owners will also not need to renovate as often since there is less tenant turnover.
Less Risk of Market Saturation: It is far less likely, though not impossible, that industrial properties will face the issue of oversupply – the overabundance of available properties compared to market demand. This is due to many reasons previously listed, including high demand and low tenant turnover. Business trends also continue to drive growth in the industrial property sector, especially warehouses and larger storage spaces. Dramatic increases in online shopping also continue to drive demand, which is expected to remain steady.
Like any commercial property investment, there are some risks associated with investing in these assets. Though rarer than with other commercial assets, there is always a risk of long-term vacancies. When companies go out of business or relocate to another area, they can leave the property empty for some time until a new tenant comes along. The e-commerce industry is currently experiencing rapid growth, which has led some investors to raise concerns over the potential for an oversupply of warehouses and storage facilities in the future. It is not as likely that this will occur in the multi-tenant industrial property space, particularly, in highly diversified strong economic areas, because the cost is too high to build single story industrial business parks in metropolitan areas.
Interest rates have also been rising in recent years, and this trend is expected to continue. This may make it more difficult for businesses to afford industrial real estate spaces and could lead to a potential decrease in demand.
Lenders are typically more conservative when it comes to financing industrial real estate. This is because this type of property may be more difficult to sell if the borrower defaults on the loan. As a result, there is often less availability of leverage when investing in industrial spaces.
For investors looking to get started in Multi-Tenant industrial investments, it is crucial to understand the market. A private equity firm can help accredited investors enter the industrial real estate market and add this asset to their portfolios.
Since 2013, Avistone has been offering investors nationwide the opportunity to enter the commercial real estate market through various funds. We are a commercial real estate investment firm specializing in acquiring and operating multi-tenant industrial and hotel properties. Since our founding, we have acquired and managed more than 4 million square feet of multi-tenant flex industrial properties in California, Georgia, Ohio, Virginia, Texas, and Florida. Our executive management team has over
160 100 years of combined experience in acquisitions, dispositions, operations, structured finance, appraisal, land use, and asset and portfolio management.
Contact us today to learn more about our available offerings!
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