Commercial real estate VS Residential
Commercial real estate can be defined in many ways, but simply put, it is any type of property primarily owned to generate income. In contrast, residential property is owned primarily for occupancy. For example, a single-family house would be considered residential real estate, even if the owner is renting it out and therefore generating income from it. Real estate is not considered ‘commercial’ real estate until it reaches a certain scale. For instance, office buildings, warehouses that store shipping goods, and apartment buildings (i.e., multi-family properties) are examples of commercial real estate. Office, hotels, and retail shopping centers are also considered commercial property.
Types of Industrial Commercial Real Estate
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.
- Distribution/warehouse
- Manufacturing
- Flex/Office/Light Manufacturing
- Industrial Outdoor Storage
- Refrigerated Storage
- Railway/3-4 Phase 480V power/ other specialty
Investing in Industrial and Warehouse Real Estate
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.
Impact of Growth of E-Commerce on rest of industry
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.
Actual Investor Returns from Industrial Real Estate Investments
The process for determining which asset class or submarket to invest in is always the same, although investment goals and results will differ. I will recommend industrial to an investor who wants a stable place to earn five to eleven percent cash on cash return, and a 25 to 30 percent internal rate of return (IRR) upon exit, long leases with strong credit tenants, and rent increases over time. 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. For investors who want to complete a transaction in two years and make more money, other solutions within the commercial real estate may help them achieve those goals.
For more information on Commercial And Industrial Real Estate, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (972) 619 9903 today.
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