Buying warehouses and other industrial properties were once the stepsisters of retail and office space. Over the past five-to-seven years, however, this industrial asset made a surprising comeback with an average 10% increase year-over-year.
It appears that warehouses cannot be built fast enough to fill the demand. However, the payoff is substantial and it is hard to make them. There is stable supply and increased demand for warehouses, which is different from other CRE or NNN lease properties. So, is this the right commercial property investment?
Why Warehouses Are Suddenly Popular in the CRE
Before the pandemic, many business owners had already started to move away from physical stores and into online and omnichannel distribution due to business needs. Post-2020, online shopping is the new norm. This means that more warehouse space is needed.
Amazon expanding its delivery capabilities to allow for same-day or next-day shipping is one reason why warehouse commercial real estate has grown. Amazon warehouses and distribution centers are appearing in cities across America, as we write this. As of today, 110 U.S. fulfillment centers have been established and more are planned.
Amazon and other eCommerce fulfillment agencies account for approximately 40% of industrial property leases. That number continues to rise as brick-and-mortar companies embrace e-commerce in their business models. Due to the increasing demand for warehouse real estate and industrial spaces, tech companies are also responsible.
The Class B, D, and C Buildings that Lead the Way
The popularity of industrial assets has not led to an increase in new construction, unlike other types. Due to this, there are fewer warehouses available in prime urban and suburban locations. CRE investors are now competing for old or obsolete industrial buildings. This is where a Class B, D, or C building might be a good investment choice.
These buildings would be considered too old for lease. However, they are outperforming older facilities. Experts view these "Last Mile" warehouses as an excellent opportunity for investors who are interested in industrial properties.
Experts disagree and recommend that older warehouses be avoided. Because e-commerce companies rely on sophisticated robotic systems to process large quantities of orders every day, these older warehouses can be costly to upkeep. They might also lack taller designs, which are more efficient for space-maximizing distribution centers. These experts recommend new warehouse investing that can be easily and quickly built.
We believe it is not wise to exclude Class B, D, or C warehouses. A high proportion of warehouses available for sale will be Class C, D, or B. Amazon and other online retailers will often trade the costs of retrofitting older buildings for better, more centrally-located properties. While warehouses classified as C-class and D can be more risky investments, they often offer the best cash-on-cash returns.
How do you estimate the value of warehouse spaces?
A variety of factors are used to estimate warehouse value, including its size, whereabouts, and how the space can be used. You can calculate the value of the commercial property by comparing it to similar warehouses within the same region or city. To ensure that you get the correct measurements, most warehouse space prices are determined by square footage. Get in touch with local brokers or another business owner to find out the average cost of square feet in your area.
Next, examine the warehouse's physical condition. Is it old and less secure? Is there any special equipment inside it, or is it just a space? What types of forklifts does it accept? What lease type is available and what are the possibilities for tenants? Is there an existing tenant or is someone looking for the space? All these factors will influence the cost of the warehouse.
This is where a buyer's adviser can help. Without the right expertise, it's almost impossible to estimate the value of a warehouse or its rental potential when renting warehouse space.
It is crucial to have the ability to deliver/receive products quickly when choosing a warehouse location. E-commerce companies need a warehouse property that is close to transport and can be accessed from airports and other seaports.
Amazon's new warehouse locations were in high demand for storage. Amazon even asked investors to refrain from applying - their version "don't call me, we'll be calling you". It is important to choose the right site because shipping out products and materials can cost 60% of a company’s expenses.
Distribution companies need to be close to larger populations because that is where the majority of trucks are located, which is necessary for cross-country deliveries. But not all major population centers are prime. These areas may be less desirable due to higher traffic and higher land prices.
Depending on which lease type you choose (NNN, absolute triple-net, or gross modified), and the tenant (i.e. Amazon or an investment grade tenant), you can choose a warehouse anywhere in the country or city you reside. In most cases, you can count on a steady monthly income without any landlord responsibilities.
It is worth considering buying warehouse space, as the warehouse real estate market continues to grow. We hope that this guide has been helpful. It is important to do your research when making investments. Diversifying among different tenants and asset types helps to reduce risk, as well as offering reliable passive income with many rewards.