Exploring Industrial Real Estate: A Comprehensive Guide
Industrial real estate, or commercial real estate, is a vital component of the global economic system. Industrial properties are essential for businesses that operate in manufacturing, logistics, and distribution, among other industries. These assets are often larger in size than office space, retail space, or residential property, with many facilities spanning hundreds of thousands or even millions of square feet. Clearly, industrial real estate operates on a vast scale, so intending investors tend to have a hard time selecting the proper entry point.
To help, this blog evaluates the industry, exploring the various types of industrial real estate properties you can invest in, considerations to ensure the right investments, and numerous opportunities to explore, among others. Let's dive in!
Exploring the Different Types of Industrial Properties
Industrial real estate is a wide industry, so there are numerous types of properties to invest in as a beginner. Understanding these various options will help you identify the ideal for your real estate career, business, or agency goals. Here's a rundown of the most common industrial properties you can find today.
Data centers are facilities that house large amounts of computer servers and other networking equipment and therefore require a lot of power and cooling to keep the equipment running efficiently. These facilities are typically located in areas with reliable power sources and access to high-speed internet. They are a crucial part of the digital infrastructure, supporting the storage and processing of data for businesses, governments, and other organizations.
Cold Storage Facilities
These properties are designed for storing perishable goods, such as food, pharmaceuticals, and chemicals. They have specialized cooling and storage systems to maintain specific temperature and humidity levels. As such, cold storage facilities are mostly found close to major transportation hubs.
Built for research and development of biotechnology and pharmaceutical products, biotech facilities require specialized equipment and strict regulations for handling hazardous materials. They foster collaborations among researchers and allow access to specialized talent. As you may know, these properties are usually near major medical centers and research universities.
Heavy Industrial Properties
Heavy industrial properties are built to manufacture heavy machinery, construction materials, and other large-scale products. Therefore, typical features include large warehouses, loading docks, and high ceilings to accommodate the special production processes. They are most common in places with good transportation and distribution networks.
Light Industrial Properties
Although they're also meant for production like heavy industrial properties, light industrial buildings focus on small-scale goods and assembly of products. Their warehouses and production rooms are smaller, not to forget that they rely on less specialized equipment. Common locations for these properties are suburban areas with population centers and great transportation facilities.
Factors to Consider When Investing in Industrial Real Estate
Before you invest in any industrial real estate property, it's necessary to do due diligence. You must assess some features about the asset to ensure you're getting your investment's worth. We identify these factors below and explain how they can assist your foray into the industry.
The physical condition of a property and its age will significantly impact its value and the potential return on investment. As such, it's necessary to evaluate the overall condition of the property, including the roofing, plumbing, electrical systems, and HVAC systems. Conducting a thorough inspection of the property can help you identify any potential issues that may require repair or renovation.
A tenant's creditworthiness, industry reputation, and stability are all essential factors to evaluate. Reliable tenants ensure that you receive consistent rental income, and their reputation can help attract other high-quality tenants to the property. Additionally, you must also look into the tenant's industry and ensure that their business aligns with the property's intended use.
Property management involves various tasks, including leasing, rent collection, maintenance, and repairs. These tasks can be time-consuming, so it's advisable to hire a property management firm. A reliable property management company will ensure that your property is well-maintained and any issues are resolved promptly. Before investing, it's essential to assess the property management company's experience and reputation to ensure they can efficiently manage the property and maximize your investment returns.
Industrial real estate properties located in areas with easy accessibility to transportation networks, such as highways, ports, and airports, are more attractive to tenants. Tenants often require transportation facilities to transport their goods to different locations, and easy accessibility to transportation networks will make it easier for them. Similarly, accessibility to transportation networks will reduce transportation costs, making the property more cost-effective for tenants.
Zoning and Permitting
Zoning regulations govern use, density, and size of an industrial property, while permitting requirements regulate the development and construction process. Subsequently, you must understand these requirements before any investment. Failure to comply with these regulations could result in significant fines, delays, and even legal issues. We advise working with experienced professionals to ensure that the property complies with all zoning and permitting requirements.
Risks and Challenges in Industrial Real Estate Investment
Investing in industrial real estate is a lucrative venture for those willing to take on the accompanying risks and challenges. While potential rewards like steady cash flows and long-term tenants can be significant, you must also be aware of the potential challenges that come with owning industrial properties. Learn what these risks are and how to mitigate them below.
Economic Cycles and Market Volatility
The industrial real estate market can be impacted by economic cycles and market volatility. That's because tenants may downsize or go out of business during an economic downturn, leading to vacant properties and reduced rental income. To combat this challenge, you must stay ahead of economic trends and understand market volatility before investing in industrial real estate.
Environmental Risks and Liability
Industrial real estate investment comes with potential environmental risks and liability. For instance, properties in areas with a history of environmental contamination may require remediation, a costly process. Environmental regulations may also increase compliance costs. The only way to avoid falling for this risk is to conduct thorough diligence on assets before investing.
Tenant Risk and Management
The success of an industrial real estate investment is dependent on the quality of its tenants. Luckily, this challenge is easily resolved. Ensure to choose tenants who boast stable business models and financial stability, and you'll greatly reduce the risk of tenant defaults and vacancies. However, that's not all; effective property management will also improve tenant satisfaction and retention rates.
The introduction of e-commerce and automation has changed the industrial real estate landscape. We can't deny the benefits of this transformation, but technological disruption can also be risky. The technological products you use in your property may become obsolete within a short while, so our recommendation is to stay up-to-date with technological news and see how what's coming may affect your investment.
Industrial real estate investment is subject to various local, state, and federal regulations. These laws cover how you can use and develop the property, so knowing them is important. Should you fail to adhere to these regulations, punishments include fines and legal disputes, not to forget that it may impact the property's appeal for a while. Few tenants, if any, will take an asset under legal dispute, as they're unsure of what may happen.
Trends to Watch: Predictions for the Future of Industrial Real Estate
Industrial real estate is a dynamic industry that has undergone significant changes over the years. It's therefore compulsory to keep an eye on the latest trends and predictions for the future of the market to stay ahead of the curve. The following are the most important trends to watch out for in the foreseeable future:
Expansion of E-Commerce
E-commerce has been one of the most significant drivers of growth in industrial real estate. As online shopping continues to grow, the demand for distribution centers and fulfillment centers will only increase. According to a report by CBRE, e-commerce is expected to account for up to 30% of all U.S. retail sales by 2030. This trend is driving demand for larger and more specialized facilities that can handle the growing volume of e-commerce orders.
Sustainability and Green Buildings
Investors and tenants alike are recognizing the benefits of green buildings. They help reduce energy costs, improve worker productivity, and provide a more sustainable environment. The Urban Land Institute reported that 63% of real estate investors believe that sustainability will be more important in the next ten years. Therefore, we can expect to see more industrial properties incorporating sustainable design features and green building practices.
Automation and Robotics
According to McKinsey, automation could raise global productivity by 0.8% annually and cut down logistics costs by 30%. Clearly, the use of automation and robotics help improve efficiency, reduce costs, and enhance industrial operations safety. What's more; we can expect more industrial properties to adopt robotics and automation as the cost continues to decrease.
Shifts in Supply Chain Management
Supply chain management is undergoing significant changes, and this is affecting the industrial real estate industry. One of the biggest trends is the shift towards nearshoring, involving moving manufacturing closer to the end markets. As a result, there's higher need for smaller, more agile facilities that can quickly adapt to demand changes.
Another trend is the rise of e-fulfillment, causing an increased demand for last-mile delivery facilities. With these trends, industrial real estate investors and developers are having new opportunities to explore!
Demand for Flexibility
Recently, tenants have started looking for flexible assets that can accommodate their unique needs no matter how sudden. This trend is driving demand for more flexible leasing arrangements, such as short-term leases and co-working spaces. As the industrial real estate industry continues to evolve, we can expect to see more properties designed with flexibility and agility in mind.
Investing in industrial properties offers high income potential, long-term stability, and a diversified portfolio. It's clearly a lucrative market for both experienced and new investors. The industry has its challenges, but they're all resolvable with simple steps we've identified above. And guess what?
There's never been a better time to invest in the sector. Thanks to the growing demand for industrial real estate, particularly in the e-commerce industry, sustainable and flexible buildings, and advanced technology! So, why the delay? Take the first step today and explore the possibilities abound in industrial real estate. Remember, success in this sector is within your reach with the right strategies and mindset!
Yes, industrial real estate is potentially a great investment for first-time investors. Although it may require a higher initial investment than some other types of real estate, the potential returns can be significant. Additionally, industrial real estate tends to have long-term tenants, providing a stable income stream.
There are several financing options for industrial real estate investments, including traditional mortgages, private loans, and commercial loans. Before collecting any, ensure to shop around and compare rates and terms to find the best option for your specific investment.
Variables that can help to determine a property's value are its location, size, condition, features, and potential for income generation. We suggest consulting with an experienced industrial real estate agent or appraiser to get an accurate valuation.
A common mistake is failing to conduct thorough due diligence, including inspections, zoning and permitting requirements, and tenant quality. Another mistake is underestimating the ongoing maintenance and repair costs associated with industrial properties. It's also vital to carefully consider location, accessibility, and market trends when making investment decisions.
It's necessary to select a property management company with experience in managing industrial properties. Select a company that has a proven track record of tenant retention, cost-effective maintenance and repairs, and strong communication skills. Other factors to consider before your decision are the company's fees and contract terms.