Is Industrial Real Estate the Future for CRE Investors?

David Cohn
Jun 28, 2021
CRE Investment

The pandemic has revealed that industrial properties are solid investments. Social distancing and other health protocols have been less disruptive to industrial operations than other commercial real estate segments.

And it’s easy to see why. After all, industrial, commercial properties are crucial to running the global economy. They are essential venues for the production, storage, and distribution of goods and products domestically and internationally.

This is why high-quality and well-located industrial properties have become more attractive to commercial property investors.

That said, it is important to choose properties with the necessary logistical supports, including roads, interstate access, highways, and access to rail services, airports, and ports. Are you thinking of investing in this segment?

In this blog, we’ll talk about what you need to know before moving forward.

What qualifies as industrial real estate?

Industrial properties refer to commercial real estate that is used for developing, manufacturing, and producing products. This segment also includes logistics real estate (such as distribution centers) that support the storage and movement of goods.

While they are not as glitzy as other types of commercial real estate, such as fancy shopping centers or luxurious skyscrapers, industrial properties are vital. They tend to remain profitable no matter what the state of the economy.

There are many different types of industrial commercial properties, including the following:

  • Warehouses, sorting centers, fulfillment hubs, and last-mile delivery hubs for distributing goods to businesses and retail stores or for supporting e-commerce operations
  • Cold storage and other temperature control facilities for the storage and distribution of food and beverages to grocery stores and restaurants
  • ‘Growing’ the facilities for medical cannabis and other such products for the healthcare industry
  • Food manufacturing facilities used for processing food and beverages for grocery stores and restaurants
  • Light manufacturing facilities that produce a wide range of products for retail customers
  • Flex spaces used for designing and researching new products

How to start investing in commercial industrial properties

More than ever, investors interested in industrial real estate can access many strategies for adding this asset type to their portfolios. For example, you can:

  • Buy an industrial property from another investor
  • Acquire a property from an operator in a sale-leaseback transaction
  • Purchase land and build an industrial facility on it
  • Buy shares of industrial real estate investment trusts
  • Join crowdfunding platforms and participate in syndication deals involving industrial real estate

What are the advantages and disadvantages of buying industrial real estate?

There are many pros to putting money in industrial commercial properties, including the following:

Significant demand

Many experts expect the US to need at least one billion square feet of additional industrial space—particularly warehouses—by 2025.

This is because e-commerce companies are scaling up as more people shop online. This outlook means more development and expansion opportunities for commercial property investors.

Less maintenance

Unlike ‘fancy’ commercial properties, industrial real estate does not require a lot of upkeep. You can’t say the same about other property types that always seem to have problems—from molds to leaking roofs.

It’s also worth noting that most industrial leases are triple net—which means that it’s that tenant’s responsibility to maintain the premises. And because tenant turnover tends to be low in the industrial sector, owners don’t need to renovate the property as often.

Longer lease terms

Think about it: Residential leases usually last only a year. Self-storage properties are rented month-to-month.

Meanwhile, industrial leases last at least three years, average at 10 years, and can go up to 25 years. Investors put their money in industrial properties when they want to generate a stable and reliable income for a long time.

Easy liquidation

No matter how the economy is doing, there’s always considerable demand for large industrial use properties among businesses that are starting out or looking to expand their operations. Should you ever decide to sell your property, later on, you probably won’t have a hard time getting a good offer quickly.

Long term cash flow

Tenants of industrial properties tend to lock in longer leases because they want to keep their operations running smoothly. Put yourself in their shoes.

If you are a distribution center for Amazon and intend to use the property to maintain inventory and to store your products, how frequently would you really want to relocate?

This is one of the biggest reasons why warehouses and other similar industrial property types ensure long-term cash flow. Of course, like any other commercial property investment, industrial real estate also has its downsides.

Here are some things to watch out for:

Risk of oversupply

There’s a huge future demand expected for warehouses, so many commercial real estate players are building properties speculatively. This may cause an oversupply and soften the market, which could significantly decrease occupancy and rental rates while potentially reducing industrial property values.

Risk of long-term vacancy

Suppose a tenant leaves your industrial facility after having made significant purpose-built changes to it. In that case, it’s not going to be easy to find another tenant that can use it exactly as it is. You might need to put in some capital to renovate the property and make it suitable for another tenant.

Tenant risk

Most industrial buildings house has only one tenant. if that tenant can’t pay rent because of financial troubles and other such reasons, you may find it hard to meet your debt obligations (if you don’t plan on the industrial property outright).

Should you invest in industrial properties?

There is no right or wrong answer; it really depends on your business plan going forward. A Deloitte report says that industrial real estate posted strong growth from 2015 to 2019 and showed no signs of slowing down.

But the current pandemic—even though it appears to be kinder to industrial properties—remains a real threat. There’s no telling if this segment can sustain the continued upswing or at least maintain its viability.

If you’re interested in putting money in industrial properties, be sure that you understand the types of facilities that tenants in your market need.

Your goal should be to invest in a facility that has a lower risk of becoming nonfunctional aged-out in just a few years (unless you have a clear plan on how to reposition it).

It’s also important to determine the forward-going value of the land on which the industrial building sits. Research is crucial. Take the time to plan and evaluate, and then reevaluate.

Speak with a commercial financing expert early on to get a better picture of how to best fund the industrial property project you have in mind.