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Industrial real estate is a broad term. It can be defined as all land and buildings which accommodate industrial activities. The industrial sector includes warehousing, as well as light manufacturing uses and heavy manufacturing uses with three-phase or four-phase power. These properties serve as essential venues for producing, storing, and distributing the goods and products the global economy needs.
A heavy manufacturing industrial building might have rail lines running through the property, multiple overhead cranes, and other types of heavy equipment, whereas a light manufacturing industrial building might just be a warehouse that holds clean, packaged goods.
To choose an industrial property type there are certain features of a building that determine how heavy of a use it can handle. Some of these features include ceiling height, clear height, dock high doors, and percentage of office space.
Understanding different property types and tenants will help an investor determine which industrial property type best suits their goals.
I will recommend industrial to an investor who wants a stable place to earn five to eleven percent cash on cash return, and 25 to 30 percent internal rate of return (IRR) *2022 numbers upon exit, long leases with strong credit tenants, and rent increases over time.
Investors looking to diversify their real estate investment portfolio should consider occupied or mostly stabilized industrial properties. These properties are typically less expensive than multi-family properties. Industrial warehouses are often single tenant properties that have long term leases, meaning investors can have a secure income stream for a long period of time.
The main difference between multi-family and industrial is the triple net vs gross lease. For multi family, you run a risk of inflation of expenses faster than your income can increase. That produce a reduction in Net Operating Income and thus reduction in value. For a NNN leased property, increases in expenses are passed to the tenant which does not affect your net operating income. NNN properties take longer to increase income (renewals, lease extensions, etc.) so it becomes a hedge against upside and downside risk.
This investment strategy doesn´t require a lot of decision making, capital improvements, or risk-taking in the interim, which is why I often recommend industrial to this type of investor.
The beauty about industrial property investing is that investors have multiple options at their disposal for how they can invest. The three most common avenues investors can own and operate industrial property are:
The industrial sector includes warehousing, as well as light manufacturing uses and heavy manufacturing uses with three-phase or four-phase power. A heavy manufacturing industrial building might have rail lines running through the property, multiple overhead cranes, and other types of heavy equipment, whereas a light manufacturing industrial building might just be a warehouse that holds clean, packaged goods.
Personally, I am an investor in commercial real estate—specifically industrial and warehouse real estate. I own a couple of buildings around Dallas/Fort Worth, and managing them has taught me a lot about what it’s like to actually be an investor and own properties. I am very bullish on this asset class, just from the macroeconomics alone. Through COVID-19, the demand for shipping and warehousing space has increased as more people have been buying and ordering goods online. I believe that the increased penetration of online shipping is going to lead to a permanent increase in demand for all types of a warehouse. Specifically, my properties focus on tenants “who build and maintain the physical world.” This can be a concrete cutting company, commercial roofers, plumbers, and anyone involved in physical utilities, etc. These tenants present a strong industry for growth and reliable rent payments.
The general thesis for industrial and warehouse is that the population is going to continue to grow, and a percentage of the population is going to continue to order and fulfill goods online with a decline of retail space. For every square foot of retail lost, three square feet of a warehouse is needed in order to compensate for it.
For anyone who agrees that the demand for online goods will continue, industrial and warehouse real estate represents an outsized return in the commercial real estate market. While most buyers won’t be purchasing or leasing to distributors such as Amazon, FedEx, etc. The increased demand from those tenants necessarily pushes other tenants into fewer choices for suitable lease spaces.