What is Industrial Real Estate and How Does It Work?
It is essential to support the global economy with industrial real estate. These properties are crucial for producing, storing, and distributing goods and other products needed by the global economy. The key to ensuring that the global economy runs smoothly is high-quality, well-located industrial real estate property. Read on to answer the question, "what is industrial real estate?"
Difference between Industrial, Retail, and Commercial Real Estate
Both industrial and retail can be considered "commercial reality" (instead of "residential realty"). Commercial property refers only to buildings or land designed to generate profit. Therefore, industrial and retail are both subcategories.
Industrial property refers to a property that is used for manufacturing. It can be considered either a facility or a plant. This property is generally zoned for light-, medium- or heavy industry. This includes warehouses and distribution centers as well garages.
Retail property can be defined as commercially zoned land used exclusively for business purposes.
Businesses that rent commercial real estate typically lease the space. A landlord usually owns the property and collects rent from any company that uses it.
What is industrial realty?
Industrial real estate includes properties used to develop, manufacture, or produce goods and products. For example, logistics real estate supports the movement, storage, and movement of goods. These buildings don't have the same glamour as residential real estate property or commercial real estate property types, such as multi-family communities with well-tended gardens, glimmering skyscrapers, and crowd-drawing shops. But industrial real estate properties are crucial because they serve as the heart of the industrial economy.
Types of Industrial Buildings
Industrial real estate property includes a wide variety of properties, including:
- Use Flex/office space to design and research new products.
- Light manufacturing plants manufacture a range of products for consumers and businesses.
- Food manufacturing facilities make and process food for grocery stores and restaurants.
- Temperature-controlled (e.g., cold-storage) facilities store and distribute food and beverage products to restaurants and grocery stores.
- Grow facilities that produce medical cannabis for the healthcare market.
- Warehouses, fulfillment, and sortation centers are critical for distributing goods to businesses and retail stores and supporting the operation and growth of eCommerce companies.
In the meantime, just like other types of real estate property, there are three kinds of industrial buildings.
- Class A: These properties offer the best amenities, the newest, in the best locations, and the highest quality tenants. You can find Class A industrial property near interstates that support e-commerce giants or in state-of-the-art food manufacturing facilities.
- Class B: Class B buildings may be older or less desirable than others, have fewer amenities, are located in secondary and third-tier real estate markets, or are leased out to lower-quality tenants.
- Class C: is the most vulnerable property. These properties can be renovated to raise their quality to A or better or redeveloped into another property type, such as residential real-estate or self-storage.
Industrial realty lease terms vary depending on property type and quality. For instance, triple net leases are standard for purpose-built, state-of-the-art industrial manufacturing plants. Initial terms can be extended up to 25-years. Leasing terms for logistics properties are typically three to ten years, depending on where they're located and what kind of property they are.
Investing in Industrial Properties
There are several ways that investors can add industrial realty to their portfolios with industrial investments.
- Buy vacant land and build an industrial facility.
- Purchase an industrial property through another real estate investor.
- Investing is possible in a real estate investment fund that focuses on industrial properties.
- Participating as an indicator of industrial real estate property on a crowdfunding platform.
- Buy an Industrial Real Estate Investment Trust (REIT) from a brokerage account.
These options are available in a variety of sizes and durations. However, ground-up industrial development can be risky and costly for a beginner investor. In addition, the investor may lose their entire investment if they fail to find a tenant or run into permits issues.
Investors will earn a greater return on their investment when a project is successful. They may also be able to make a quick buck by selling a fully entitled, tenant-secured industrial development to another investor. Real estate funds and crowdfunding syndications typically require ten-year-long investors with ten-year-long holdings and lower initial investment costs -- between $25,000 & $100,000.
You have the most flexibility with industrial REITs. Investors in industrial properties require one share of the shares, often for less than $100. In addition, investors have the option to sell their shares at any point in time. REIT investing offers another advantage: it allows investors to have a portfolio of industrial assets across the entire industrial real estate sector or just one type or region of industrial property.
Some examples of industrial REITs are:
- Americold Realty Trust (NYSE: COLD): a REIT focused on operating temperature-controlled warehouses vital for distributing food and beverages to grocery stores and restaurants.
- Innovative Industrial Properties (NYSE; IIPR): A REIT focusing on properties used in the cultivation, processing, manufacture, storage space, and sale of cannabis products.
- Prologis (NYSE/PLD): A global industrial REIT focusing on modern logistics properties that satisfy the warehouse- and distribution real estate requirements of business-to-business and retail/online fulfillment clients.
- PS Business Parks (NYSE: PSB): is an industrial REIT focusing on multi-tenant commercial, office space, and flex space. It's an office/warehouse combo with multiple uses such as office, assembly and showroom, laboratory, light fabrication, and warehouse.
- Rexford Industrial (NYSE: REXR): A REIT that owns industrial properties only in Southern California and not a portfolio with a worldwide distribution like Prologis.
- STAG Industrial (NYSE. STAG): a REIT with diversified assets, owns properties throughout the U.S. Industrial Real Estate Market, including warehouse and light manufacturing.
You can invest in industrial real estate property with REITs using various methods, as shown by the above list.
What are the advantages and disadvantages of industrial real estate?
Investing in industrial real estate has many benefits.
- A significant demand: Some believe the U.S. might need more than 1,000,000 square footage of warehouse space to keep up with e-commerce's rapid growth. This outlook suggests more expansion/development opportunities for investors.
- The terms of industrial leases tend to be longer. They can range from three to ten to twenty-five years. However, residential property leases are for an entire year. Self-storage properties are monthly. These properties generate steady income over many years.
- Lower maintenance: Industrial properties do not require as much upkeep. Tenants are responsible for maintaining most triple net leases. A shorter lease term also means that the industrial building owner won't need to preserve the buildings as often due to lower tenant turnover.
However, there are some downsides to these properties, such as:
- Tenant risk: Many industrial buildings only have one tenant. An investor will lose their ability to fulfill their debt obligations if a tenant falls into financial difficulty and cannot pay rent.
- Long-term vacancy risks: It isn't easy to find a replacement tenant for a tenant who vacated a purpose-built facility such as a factory building. To make the property suitable for tenants, the owner may have to invest substantial capital.
- Oversupply risk: Real estate investors have built many properties based on speculation in anticipation of future warehouse space demand. If they build too much and the market becomes less supportive, it could negatively impact occupancy and rental rates and reduce property value.
It can be an excellent investment to invest in industrial realty.
Compared to commercial real estate investing, industrial properties aren't glamorous, but they're essential for the economy. In addition, tenants often sign long-term contracts that provide stable cash flow to investors. As a result, real estate investors shouldn't overlook this vital property type because of its potential growth.