From manufacturing to shipping, distribution and beyond, industrial real estate has long been a core driver behind many firms’ investment strategies. Fueled by the rising demand for e-commerce fulfillment channels, the recent shift in focus from retail to industrial brought an even brighter spotlight on this property class. What industrial might lack in its aesthetic, it more than makes up for as a reliable, future-proof investment–and one that’s currently reveling in demand. Read on to learn more about investing in industrial real estate.
What Is Industrial Real Estate?
Industrial real estate encompasses any buildings that support or facilitate manufacturing, assembly, warehousing, research, storage and distribution. While not a daily destination for most people, industrial buildings play a role in the lives of all consumers. Industrial real estate is a crucial component of the logistics infrastructure that allows businesses to create, ship and receive goods.
Though they may lack the visual appeal of other asset classes, like multifamily, industrial real estate is a practical investment that’s increasingly central to today’s economy.
How E-Commerce Is Driving Demand for Industrial Real Estate Investments
When the pandemic prevented the public from shopping at brick and mortar stores, people turned to eCommerce websites like Amazon, which were already growing in popularity. For many consumers across wide-ranging categories, eCommerce has become the norm thanks to fast shipping, simplicity and convenience.
According to eMarketer, U.S. consumers will spend $933.3 billion on eCommerce in 2021, which is a 17.9% year-over-year increase that accounts for 15.3% of total retail sales. Similarly, CBRE reported that eCommerce growth increased from 14.8% in Q1 to 44.5% in Q2, indicating that this surge will continue even following the lockdown. Distribution, sorting and final mile delivery facilities have only grown more important as a result.
Demand for industrial real estate has surged as firms vie for opportunities to invest in the infrastructure powering eCommerce.
Breaking Down the Types of Industrial Real Estate
Under the umbrella of the industrial real estate property class, there are several different types of properties:
- Land: Undeveloped land that can either be developed into a building or used for storage
- Warehouses: Buildings that function as storage facilities, distribution centers, and final mile delivery centers
- Light Industrial Manufacturing: Manufacturing facilities for production
- Heavy Industrial Manufacturing: Manufacturing facilities for production of both goods and parts, which are generally tailored to tenant needs and, as a result, not easily fillable
- Flex Space: Any industrial facility that serves more than one purpose, often the office of a manufacturing company
Understanding The Industrial Real Estate Classes
Like other property classes, industrial real estate can be subdivided into three different classes: Class A, Class B and Class C. This distinction is based not on the type of property, but the property’s condition, location and profitability. Investors with differing strategies may choose to prioritize buildings in different conditions.
- Class A Industrial Real Estate: Class A buildings are recently finished properties made with high-quality materials and include top-notch amenities like tall ceilings, best-in-class utilities, and other distinguishing features. As a result, Class A buildings tend to attract high-income tenants. Vacancies rarely become an issue and, barring unforeseen circumstances, Class A properties generally don’t require frequent maintenance or additional capital. These buildings tend to maintain low cap rates as low-risk investments.
- Class B Industrial Real Estate: Though they lack the polish and state-of-the-art amenities of Class A buildings, Class B buildings are generally in great condition. By definition, Class B buildings are at least a few years old, with minor maintenance needs. With modifications, investors can improve Class B buildings to the threshold of Class A. As Class B buildings present higher risk than those in Class A, cap rates are slightly higher, as are the chances for vacancies. Nonetheless, investors can normally generate cash flow shortly after purchasing them.
- Class C Industrial Real Estate: Sitting at the lowest end of the spectrum, Class C buildings are normally at least 20 years old. They generally carry relatively significant maintenance issues, and are located in less-than-ideal areas. Of the three classes, Class C generates the lowest cash flow and holds the highest cap rates. However, opportunistic investment management firms may resolve to improve a Class C building as a value-add opportunity.
Pros and Cons of Industrial Real Estate
Compared to other asset classes, what are the pros and cons of investing in industrial real estate?
Pros:
- Asset types variety: From warehouses to manufacturing facilities, there are a variety of different asset types to invest in.
- Favorable lease length: Industrial leases typically favor investors by including long terms, creating a stable revenue stream. Additionally, tenants that invest in customizing the space to their production or storage needs won’t leave easily.
- Minimal upkeep: Industrial real estate leases tend to shift the burden of maintenance to tenants, leaving investors with minimal upkeep costs.
- High demand: Due to the ongoing eCommerce surge, industrial buildings continue to be high-potential investments for shipping logistics purposes.
Cons:
- Difficulty finding replacement tenants: Some industrial spaces are tailored to highly specific tenant needs, which makes it difficult for landlords to fill these spaces if tenants leave.
- Single-tenant income: Many industrial real estate spaces can only be occupied by one tenant, putting landlords in a potentially precarious financial position if that tenant leaves the property.
- Competitive landscape: As a result of industrial real estate’s surge in popularity, these opportunities are highly competitive. Investment management firms may need to move quickly to beat competitors on new opportunities.
Expedite and Add Visibility to Your Industrial Real Estate Investing Process
As the economy continues favoring industrial real estate investments, firms that can effectively source, review and execute on new deals the fastest will win the most lucrative opportunities.
Download a free copy of our white paper, 7 Ways to Augment Your Existing Commercial Real Estate Pipeline Process, to learn how you can expedite and add visibility to your investment process–without fundamentally altering it.
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