Are you considering adding industrial real estate (IRE) to your investment portfolio? If so, it’s a smart move to be looking at private real estate investing. This type of investing gives you access to an array of attractive IRE investment opportunities without the responsibilities of direct ownership and hands-on management. The risks are typically lower than investing on your own.
However, like any other investment, it’s wise to assess the pros and cons of industrial real estate investing. Don’t fall for the ugly duckling when you can land the beautiful swan when you complete the simple acts of due diligence and market research.
First, let’s take a look at the five most common types of industrial real estate.
5 Common Types of IRE
- Flex/office space: used to research and design new products.
- Light manufacturing facilities: to make a variety of products for retail consumers and businesses.
- Food manufacturing facilities: to make and process foods and beverages for restaurants and grocery stores.
- Temperature-controlled facilities: used to store and distribute food and beverage products to restaurants and grocery stores.
- Warehouses: vital for distributing goods to retail stores and businesses, as well as for supporting the operations of e-commerce companies.
Many people ask if industrial real estate is a good investment? Let’s take a look at why investing in industrial real estate can be a good move for some and why it might not be the right fit for someone else’s investment goals.
Demand is on the Rise
It’s believed that the U.S. may need more than 1 billion square feet of additional warehouse space by 2025 in order to support the fast-growing e-commerce demand. This outlook suggests that there will be more expansion and development opportunities for real estate investors.
Longer Rental Terms
Industrial leases are usually three to 10 years but can be up to 25 years. In contrast, residential leases are a year, and self-storage properties are month by month. Industrial real estate means that you deal with businesses rather than regular people. This implies longer leases, as business are not as likely to change their location as often. It’s not rare to see that industrial real estate investors rent out their property to the same business for decades at a time. This means that industrial properties tend to generate a stable and passive income for years.
One reason that industrial real estate is booming is that, in 2020, we saw online purchases grow by 46 per cent. In fact, Amazon and other e-commerce fulfillment organizations are now responsible for roughly 40% of industrial property leases. This number is on the rise, as other brick-and-mortar companies begin to include e-commerce as part of their business models. This trend has led to high demand for warehouse and distribution space all over the U.S., as many retailers are now opting for fulfillment centers over traditional retail space. Tech companies are also responsible for the increase in demand for warehouse and industrial space due to the need for more server farms to support online commerce.
Industrial properties don’t require as much upkeep as some commercial property types. Most leases are triple net, which means that maintenance is the tenant’s responsibility. With longer lease terms, an industrial building owner generally won’t need to renovate their properties as often, since there’s lower tenant turnover.
Industrial real estate offers a variety of property types, such as the ones mentioned above. Industrial buildings tend to be leased plain and empty. This allows for any business to rent the building and set up their processes and equipment with more flexibility. This is a huge contrast to residential real estate options.
While all investments have risks, industrial real estate tends to be more recession-proof than other property types. It’s important to note that the properties themselves tend to hold value or even appreciate over time.
While one consistent tenant for many years is considered a pro, there are also some downsides. For instance, if that tenant runs into financial trouble and can’t pay rent, the investor will still need to meet their debt obligations.
Long-Term Vacancy Risk
Sometimes it can be difficult to find a new tenant after a completed lease. For example, if a tenant vacates a purpose-built industrial facility, such as a manufacturing building, the owner might need to invest a significant amount of capital to make the property compatible with other tenants and their different types of businesses.
As mentioned before, the anticipated future demand for warehouse space means that many real estate investors are building only fulfillment centers. If too many of this industrial property type are constructed and the market softens, it could significantly impact occupancy and rental rates, while also reducing property values.
For investors who prefer to gain quick profits and flips, the long-term nature of industrial real estate can be a drawback.
There are fewer industrial buildings for sale than traditional homes. It therefore requires some extensive research in a specific market, or you can opt to expand into other market areas to find the right property.
The Bottom Line
While many people believe that industrial real estate isn’t as glamorous as other types, they are vital to the economy. Long-term leases supply investors with stable cash flow and support economic activity for the commercial sector. With the prediction that the industrial sector has growth potential for the coming years, real estate investors won’t want to miss out on this essential property type.
Advantages of Investing with a Private Real Estate Investment Firm
Industrial real estate investing, when done wisely, can be a smart financial decision. You need to trust your investment to professionals who:
- Study the real estate market as well as socioeconomic and demographic patterns
- Look for promising opportunities in diverse asset classes
- Keep a hand in the operation and management of the properties in which they invest to help ensure their success and growth