Industry, industrialization, industrial strength: these words share a common root and meaning. But what exactly is industrial real estate and how does it fit into the larger profile of industrial activities? Industrial real estate is more than just a piece of property; it is an investment option that holds immense potential for growth and profits. In this guide, we will explore the world of industrial real estate and uncover the benefits and risks associated with investing in these properties.
A Table Of Contents On Industrial Real Estate
To fully understand industrial real estate, it is important to delve into various aspects of this sector. Here is an overview of what we will cover in this guide:
- What Is Industrial Real Estate?
- Types Of Industrial Real Estate Properties
- The Value Of Investing In Industrial Property
- The Risks Of Industrial Property Investing
- FAQs On Industrial Property Investing
- The Reality Of Industrial Property Investing
What Is Industrial Real Estate?
Industrial real estate encompasses properties, including both land and buildings, where industrial activities take place. These activities range from assembly, manufacturing, research, distribution, logistics, production, storage, warehousing, and more. Zoning requirements set by cities ensure that industrial properties are located in areas where they can operate without causing disruption to residents and other businesses.
The industrial sector is vast, with many subdivisions and types of properties. It is important to note that this guide may not cover every industrial real estate property type, but it will provide a comprehensive overview.
Types Of Industrial Real Estate Properties
Industrial real estate properties consist of land and buildings dedicated to industrial activities. Let's take a closer look at the primary categories of industrial properties:
#1: Heavy Manufacturing
Heavy manufacturing properties require specialized equipment and machinery to manufacture products. These facilities are often spacious, with loading docks, large stockyards, and on-site power supplies.
#2: Light Manufacturing
The majority of manufacturers fall under the category of light manufacturing. These properties involve the creation of goods and products through less capital-intensive means. Portable equipment allows for easy rearrangement and reconfiguration as needed.
#3: Warehouses
Distribution and general warehouses also fall under the industrial property umbrella. Distribution warehouses focus on shipping goods, while general warehouses store products that are not rapidly processed and shipped.
#4: Flex Spaces
Many industrial properties are developed into flex spaces. These spaces can be used in different ways by different tenants. Typically, flex spaces have a 70:30 ratio of warehouse-to-office space, making them flexible and attractive to a wide range of tenants.
#5: Research Buildings
Research and development properties combine industrial and commercial office spaces. These properties often feature a mix of office, warehouse, and manufacturing space. Tenants in research buildings are usually involved in technology-based research and development, but these properties have a variety of potential uses.
#6: Data Centers
Specialized buildings equipped with computer servers, telecom functionality, and cloud storage options are becoming increasingly common. Data centers are essential for keeping companies connected, and their expansion presents opportunities for investors in the region.
The Value Of Investing In Industrial Property
Investing in industrial properties offers a range of benefits. Let's explore the value that industrial property investment brings:
High Demand
Industrial properties have lower vacancy rates compared to other commercial real estate types. These properties are adaptable and accessible, making them attractive to tenants with unique needs.
Flexible Spaces
Most industrial properties offer flexibility in usage. From warehouses to data centers to showrooms, a single space can be adapted to different layouts. This adaptability allows investors to respond to market changes and trends, ensuring the property remains in demand.
Better Yields
Industrial properties often yield higher returns on investment compared to retail and office spaces. With returns of up to 7.5%, industrial spaces outperform other commercial sectors.
Long Lease Periods
Industrial property leases are often long-term contracts. Tenants investing in large warehouses or manufacturing facilities are unlikely to vacate the premises easily, ensuring stable long-term income for investors.
Reduced Maintenance Costs
Industrial properties often have lower maintenance costs compared to retail spaces of similar size. With simple layouts, concrete floors, and high ceilings, these properties are easy to maintain.
The Risks Of Industrial Property Investing
While industrial property investing offers numerous opportunities, it is not without its risks. Here are some primary risks associated with investing in industrial properties:
Vacancy Risk
Though industrial properties have lower vacancy rates than other commercial property types, there is still a risk of vacancies. Finding tenants to fill these vacancies can take time, so investors should be prepared to cover these periods.
The Cost Of Investment
Investing in commercial properties is generally considered riskier than residential investments. This means higher interest rates on loans and additional banking fees for commercial property deals.
Constant Change
The industrial sector is dynamic and constantly evolving, driven by companies and technology advancements. Market trends and changes in industry standards can necessitate renovations to remain competitive and meet tenant demands.
The Wrong Investment Type
Investing in industrial properties requires a unique set of skills and considerations. It is essential to evaluate properties and choose investments that align with your long-term business goals. Each investment approach has its own requirements and responsibilities, so it's crucial to choose wisely.
Keep Learning, Keep Growing
Real estate investment, whether in commercial or industrial properties, requires continuous learning. Staying up-to-date with the latest trends and news in the real estate industry is paramount. By signing up for RentPrep's newsletter, you can gain valuable insights and knowledge to keep growing your business.
FAQs On Industrial Property Investing
Here are answers to some commonly asked questions about industrial property investing:
What is an example of an industrial property?
Industrial properties encompass a wide range of properties used for industrial activities. Examples include factories, data centers, research plants, logistics operation centers, storage and transportation warehouses, and more.
What is the difference between commercial and industrial property?
While both commercial and industrial properties fall under the umbrella of commercial real estate, there are differences between the two. Commercial buildings are used for commerce and business operations, such as workplaces, offices, and stores. On the other hand, industrial properties house factories, warehouses, and other buildings where manufacturing occurs.
What are other types of commercial real estate investment types?
Apart from industrial properties, there are three other primary categories of commercial real estate: offices, multifamily properties, and retail locations. Each category has its own lease length and terms, and investors often move from managing residential properties to retail or offices before considering industrial properties.
Is industrial real estate profitable?
Compared to retail and office spaces, industrial real estate properties tend to offer a higher return on investment (ROI). While there are no guarantees, industrial properties generally yield between 6-8% ROI, making them an attractive investment option.
What should I look for when investing in industrial properties?
When researching potential industrial properties, key factors to consider include location, market demand, tenant profiles, lease options, specialization, and site coverage ratio. A thorough analysis of these aspects will help identify the right investment property.
The Reality Of Industrial Property Investing
Investing in industrial properties presents unique challenges and opportunities. Whether you are venturing into commercial real estate for the first time or expanding your portfolio, industrial property investing offers various options. Remember to assess the local market, understand tenant needs, and consider the future potential of the property. With careful planning and research, industrial properties can be a lucrative investment for those willing to take the plunge.
