15 Secrets of Industrial Real Estate Investing
Updated: Oct 15, 2022
Many people will earn tremendous wealth through investing in industrial real estate—but it doesn’t come easy. Investors often spend years learning the ins and outs of the sector. A lot of the lessons learned can only come through direct, hands-on experience.
Unless you have someone who can uncover some of the industry secrets for you.
Here’s a look at 15 secrets related to industrial real estate investing. These tips will help prospective investors make better decisions about which properties to buy.
The Top Secrets of Industrial Real Estate Investing
1. Not all “Deals” come to market. Many investors and buyers wait for the right property to come to the market. However, many deals are done off-market, without most buyers knowing about it. It’s important for buyer to be proactive and work with a broker who looks beyond what’s on the market and bring off-market opportunities.
2. The barriers to entry are rising. The industrial sector has experienced a tremendous influx of institutional capital which in turn, has compressed cap rates and driven prices to all-time highs. People who wait to buy industrial property may eventually find themselves priced out altogether.
3. Sales prices have nearly doubled in the past 5 years. In 2017, industrial properties were selling for less than $100 per square foot, on average. Today, those same buildings are selling for more than double. In some cases, properties are selling for upwards of $250 per square foot. The uptick in valuation is virtually unheard of in the sector—and one of the many reasons investors want to add industrial to their portfolios.
4. Prices vary based on the specific type of industrial asset. People often use generalized terms and market rates for industrial property (like we did above), but in reality, specialized industrial assets often trade for far more than the average prices quoted. For example, it’s much more expensive to build or fit out a cold storage facility than it is a shell warehouse facility.
5. Industrial condos can be a good foot in the door. Those who are looking to buy their first industrial property may want to consider buying an industrial condo in an industrial park. Industrial condos will often sell for less than $1 million, a hurdle that many individual investors can overcome vs. buying a larger property or multi-tenant building.
6. Market cap rates are just a guide. People will often quote market cap rates for industrial property. For example, the average cap rate for net leased industrial property was 5.8 percent last year. That can vary widely from one market to another, even from one asset to another. Every building is unique and has its own factors that influence its cap rate. Cap rates are largely a function of the asset’s net operating income, and therefore, investors should evaluate each opportunity based on its specific properties.
7. Financing industrial properties can be a challenge. Most large, national banks will not finance an industrial property unless that buyer has prior industry experience. Instead, these buyers will want to connect with smaller relationship lenders that are based in the same geography as the property. Those who plan to owner-occupy the property with their industrial business will also want to consider SBA financing.
8. Serious buyers must be willing to be aggressive. Given the steep competition for industrial properties, those who want their offers to be accepted must be aggressive. This includes not asking for too many concessions and always having a lender pre-approval in hand. Doing so will show the sellers that you are ready and willing to move quickly, and in real estate, time is of the essence.
9. Amenities matter at industrial properties, too. Most people assume that amenities only apply to residential or commercial property. This is a huge misconception. In fact, amenitized industrial properties are more popular than ever. This includes ample parking, modernized loading docks, sophisticated fire/life safety systems, advanced security systems and yard area that can be leased for outdoor storage.
10. NNN leases make owning industrial property relatively hands-off. Unlike other property types, most industrial owners utilize triple-net leases. NNN leases pass on all operational and walls-in building expenses to the tenant. This includes taxes, insurance, interior improvements and more. In turn, industrial property owners have low risk and relatively low exposure because all major costs are passed through to the tenants.
11. Supply chain issues are boosting demand for industrial property. Global supply chain disruptions are boosting industrial in two ways. First, it has made it harder to build new industrial facilities. This has led to higher rents and lower vacancy rates at existing facilities. Meanwhile, businesses are looking to stockpile inventory to get ahead of the shortages. Most look to industrial warehouse space to satisfy those needs.
12. Industrial property is recession resilient. Companies need industrial space to run their businesses. They cannot operate their businesses out of their homes like office workers can. They cannot necessarily move to lower cost areas like multifamily renters can. They typically need to maintain proximity to customers, which necessitates staying in place. Moreover, high relocation costs tend to create “sticky” tenants even amid a downturn.
13. Autonomous vehicles may change where industrial properties are built. Today, last-mile distribution facilities are located near major employment and population centers. Urban warehouses are expensive, but necessary. That may change in the future. The advent of autonomous vehicles—especially autonomous tractor-trailers—may push industrial properties further from the urban core where the cost of land is lower.
14. Retail’s downward trend creates an opportunity for industrial. Big box retail was suffering well before Covid hit. There is an interesting opportunity to convert these buildings to industrial warehouses—especially if used for last-mile facilities. That’s because these properties tend to be well-located, highly visible, feature ample parking, and have good access to main roads or freeways. These sites should be on every industrial buyer’s radar.
15. Not all cities are business friendly. Before embarking on an industrial development venture, be sure to understand local politics. Most municipalities will say that they are pro-business, but when it comes time to zoning and permitting a project, developers may experience otherwise. Industrial often gets a “bad rap” and owners may experience pushback at the local level. Prior to purchasing a development site, be sure that site is zoned for industrial use already. This will help reduce the building timeline.
Are you interested in learning more about industrial real estate? Contact us today. We represent buyers who are looking to add industrial assets to their portfolios.
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.
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