Learning About Industrial Real Estate Investments

What Is Industrial Real Estate?

Both land and buildings that accommodate industrial activities such as construction, manufacturing, assembly, warehousing, testing, storage, and distribution are referred to as industrial real estate.

Every city has identified areas for industrial properties, which are depicted on a zoning map and define where these spaces should be built and operated so that the operation on these sites does not affect businesses or residences that may be located nearby.

These zoning ordinances become even more precise, specifying the industrial practices are permitted and which are prohibited. The industrial sector is necessarily very wide-ranging, and since this definition encompasses a broad range of properties, it's important to understand the distinctions between each form of industrial property before deciding where to invest.

How Is Industrial Real Estate Classified?

A number of factors associated with the property that you purchase may affect your return on investment, but recognizing the variations in the standard classification scheme can help you narrow your focus as you move forward in the search process.

Any commercial structure will be assigned a class grade, such as Class A, Class B, or Class C. These labels are not necessarily based on a set of industry standards, so they are better used to compare like assets within a given market. Consideration of asset class can be helpful can help approach the search for an industrial investment as some are better suited for capital appreciation, whereas others are better suited for capital preservation.

Class A Industrial

The newest and highest-quality structures on the market typically fall into the Class A designation. Modern industrial assets are constructed from high-quality materials and include features such as high ceilings and top-of-the-line mechanical and utility systems.

Since Class A spaces are considered "Top of the Line," they tend to attract high-earning tenants, while experiencing low vacancy rates. These best-in-class industrial properties give investors peace of mind that there are very few issues that will necessitate them investing more in their asset.

Class A assets can be expected to be more expensive and should bring lower CAP rates, particularly if they are fully stabilized. As such, while not offering as much for investors in terms of potential gains, they secure excellent tenants, posing much less risk, so they can be a good way to retain capital or passively invest.

Class B Industrial

Investors looking for “value add opportunities” will often turn to class B properties, as they can often be turned into A or B+ class buildings by upgrades and improvements. Often well-maintained, Class B properties are typically older structures, but they may also be newer structures without any of the frills.

Since these assets are seen as a higher risk by investors due to possible vacancy problems, it is often easier to find an appealing offer in this tier of Class B industrial properties.

For investors seeking a cash-flowing land play, Class B properties in a suitable area can be a perfect choice for an investor looking to generate immediate cash flow and sit on their asset as the land appreciates. This strategy can be particularly effective in areas that an investor expects to be rezoned as multifamily or mixed-use at some point in the future.

Class C Industrial

Often situated in less desirable locations, buildings in the Class C category are typically 20 years or older and may have many deferred maintenance problems. Since they usually have the lowest rental rates on the market, the opportunities for passive investment returns on the part of the investor are limited.

Investors in Class C industrial properties can sometimes transform them into higher value assets after substantial upgrades and renovations, thereby generating significant upside if approached correctly.

Class C properties can also be excellent opportunities for owner/user businesses, contributing equity back to the company as improvements help the business operate more effectively while also adding to the value of the property.

Types of Industrial Estate

Industrial properties do not always fit neatly into a single box and many are repurposed based on the needs of a particular tenant, so understanding the basics of each one can help you figure out what kinds of tenants you'll be able to find if you buy an industrial property.

There can be any number of potential types of users for industrial properties, as well as different types of structures associated with each of these users, so it's important to get to know them all so you can figure out who will be renting them.

Industrial Land

In its most simple sense, industrial land is land that is zoned industrially but does not have any permanent structures on its premises.

An industrial company’s operations may not necessarily require a building in order to provide the necessary functions. Parking of equipment, storage of gravel or landscaping supplies, and other surface operations may all be appropriate for industrial land

Purchasing industrial land also allows you to build a structure from the ground up. Since vacancy rates in the industrial sector of commercial real estate have been consistently low, constructing a structure on your industrial site has a much higher probability of achieving strong long-term occupancy rates compared to other commercial real estate projects.

An investor with industrial land may also advertise a build to fit opportunity, in which the landowner pays the initial construction costs of a building that meets the tenant's particular specifications and then rents the property to the tenant after the project is completed.

Owners of industrial land may have multiple options to achieve the best use of their land, particularly in this highly competitive market, so it is always important to take the time to adequately assess the local demand.

Industrial Build-To-Suit

You may have seen a “build to suit” sign on a piece of property before. A build to fit is a form of advertising that is placed in front of companies that are looking for space to expand. A build-to-suit arrangement is one in which a landowner pays for the construction of a structure to the tenant's specifications. The building is pre-leased and, once delivered, the tenant occupies the building and the lease term begins.

For industrial landowners, build-to-suit options can be advantageous because they eliminate concerns about vacancy rates and ensure a high-quality, long-term tenant is in place. In other words, rather than constructing a speculative structure, someone is paying you to add value to your existing structure. This is not to say that speculative structures can not be a great way to increase the value of your industrial property. This, again, goes back to the importance of properly evaluating local demand, as speculative building can be extremely lucrative when you effectively identify and fill a gap in the local market.

Bulk Warehouse

With sizes ranging from fifty thousand to one million square feet, bulk warehouse assets are the largest industrial commodity. These properties are typically used for regional delivery of goods and it is important that the site is easily accessible for trucks entering and leaving traffic arteries.

The majority of bulk warehouses are located outside of metro areas due to their enormous footprints, but some larger corporations, such as Amazon, are approaching the need to reduce their footprint by building highly automated, multi-story industrial warehouses.

Bulk warehouse tenants do sometimes ship products directly to customers, although these warehouses are mostly used to store bulk goods and serve as the primary supply chain for a variety of retailers and distributors.

Tenants of bulk warehouses do sometimes ship good directly to consumers, but more often these warehouses are largely purposed for bulk goods to be stored and act as the main supply chain for a multitude of retailers and distributers.

Flex Warehouse

Flex Warehouse, as the name implies, is a flexible industrial product that may easily accommodate a wide range of uses. These warehouses usually have at least some portion of office space connected to the warehouse and can widely range in size to fit your small mom and pop plumber to regional granite distributors and more.

Flex warehouses exist in rural areas as well as densely populated urban areas. In urban areas, this type of industrial real estate is often referred to as “infill industrial.”

Infill industrial is a great avenue for CRE investors to get their feet wet in industrial real estate because these types of properties are so highly sought after by tenants and are able to accommodate a wide variety of users.

Heavy Manufacturing

Heavy manufacturing space is often isolated within the most intense industrialized areas of municipalities due to its use of heavy machinery, chemicals, and power necessities. Think of General Motors and DuPont as tenants for this type of industrial product.

These types of properties are most often owned by larger national companies or local owner users because heavy industrial properties are often very customized for the current user and their specific requirements.

Tenants tend to occupy these sites for very long terms (sometimes decades-long) because it is very inconvenient to relocate such a large operation, so if you find an opportunity to own a heavy manufacturing plant with a tenant already in place, it would definitely be an opportunity to investigate.

Light Assembly

Light assembly industrial has a fair amount of crossover with flex space, but unlike heavy manufacturing, light assembly space isn’t typically utilized to manufacture materials, simply to assemble them and ship them out to distribution centers.

Like flex space, light assembly can also be used for storage and office space (call centers, data centers).

Cold Storage

Cold storage and refrigeration warehousing is exactly what it sounds like: refrigerated warehousing intended to store perishable food and products.

They are often used as distribution centers for chain groceries and require HVAC systems and insulation setups that are able to support and maintain temperatures ranging between 34 degrees to -10 degrees.

With the rise in consumer demand for fresher food and grocery delivery, cold storage has increased significantly since 2000. As grocery delivery grows as widespread convenience, grocers are exploring how to become more efficient in their delivery services.

Same-day delivery service has been implemented in select cities and this trend is not going away anytime soon. Over the next several years, this level of timely service should continue to spread to other metropolitan areas.

Similar to heavy manufacturing sites, these spaces are build out intensive and tenant retention can be very high.

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Data Centers

Data Centers can be extremely complex properties with unique infrastructure demands. They are commonly located in strategic locations based on tenant requirements and access to network and power requirements. The buildings tend to be outfitted with computer systems and networking equipment clustered for the purpose of storing, processing, transmitting, or allowing access to vast volumes of data.

The purpose of data centers is to redundantly support essential technology services including data storage, backup and recovery, data management, and networking. These facilities manage Web pages, e-mail, and instant messaging (IM) systems, provide cloud storage and software, and facilitate e-commerce transactions, among other tasks that necessitate computer processing. Whether they’re setting up their own data center, co-locating equipment, or outsourcing to a third party, nearly every business is making use of these services on some level in today’s tech-centric world.

Infrastructure is crucial for these facilities, so data centers must be located on or near major communication trunk lines, with access to a massive, redundant power supply. The flooring system must be designed is also needed to withstand the weight of computer and electrical systems, but also to support complex wiring and cooling requirements of these unique systems. Fire suppression and HVAC systems must also be designed specifically for the requirements of data centers.

The electric and power systems that operate these buildings are highly complex and expensive due to the vast amount of high-tech, sophisticated equipment that these centers use, making new construction of these sites very expensive. Moreover, the nature of the systems in place demand full redundancy with backup generators that can support the facility in the event power is offline for an extended period.

Industrial Showroom

Industrial showrooms are another type of hybrid industrial asset, predominantly a warehouse facility with components designed for showcasing goods. This allows manufacturers to present their goods in a more retail setting while having shipping and distribution, too. Industrial showrooms are often located along interstates, providing high visibility and easy accessibility for customers.

This type of asset can be appealing to manufacturers of big-ticket items such as large construction machinery or small businesses that produce custom products find these sites appealing because they can show off their products and process direct to buyers while consolidating sales and warehousing operations.

Research And Development

Like other types of industrial real estate, research and development sites can serve a wide range of users. These sites may also be classified as flex space because they are a mix of office, warehouse, and manufacturing space. These types of facilities are generally marketed to biotech, pharmaceutical, electronics and similar industries, although there are really very few limitations.

These properties may require substantial customization based on the requirements of a specific user, including very specific electrical layouts, custom plumbing and ventilation. It is not uncommon for them to be co-located in industrial parks or campuses with similar businesses.

The Market for Industrial Real Estate

The value of industrial real estate has been increasing for decades, however, recent advances in technology, such as the increased capability of robotics in manufacturing and the growth of 3-D printing, jobs that once depended on manual labor are now being turned over to automated systems. Altering the labor requirements in this manner has, in turn, dramatically altered the site considerations for large companies and substantially increased demand for industrial real estate. Businesses that had moved manufacturing operations overseas are finding that, as requirements for human labor in manufacturing plants is declining, they can reallocate operations back to the United States and actually manufacture their products at a lower cost.

Returning their return their manufacturing activities to the United States also has the benefit of insulating companies from uncertainty with respect to trade agreements, foreign policy, and intellectual property.

E-Commerce

Almost every major retailer now has an online presence. As technology advances, more of these large corporations are cutting out the middleman and managing their operations in-house, resulting in increased demand for industrial space.

The broad umbrella of “e-commerce” continues to escalate at a time when conventional brick-and-mortar retail struggles to maintain its customer base. Amazon and Wal-Mart are even competing for dominance by shipping products directly to customers in certain metropolitan areas within just a few hours.

Factors to Consider When Evaluating Industrial Real Estate

Quantify Space Needs

You must first determine how many square feet you will need and how much you will be able to afford.

The building(s) should be large enough to accommodate all of your equipment and inventory, and you should consider long-term space requirements so you can accommodate business expansion.

Understand Clear Height Requirements

Clear height, the empty space between the floor and ceiling of the building, will play a very important role in figuring out how much space your business requires. Equipment requirements may necessitate a minimum clear height, while taller ceilings may also allow product to be stored vertically, reducing square foot requirements and helping to keep total costs down.

Keeping Everything Running

The power supply to the building should not be overlooked, as it must be sufficient to meet the requirements of the proposed operation. Three-phase electricity is often a standard requirement for industrial operations, so check to see if your building is already outfitted or if it is available.

Meeting Your Shipping And Receiving Needs

The loading and unloading of inventory and materials must be considered early in the process. Is a loading dock required? These are standard in many industrial spaces, although some will still have grade level doors, which can present significant operational issues for some companies but maybe not for others. Whileoading docks are critical to the operations of many industrial companies, if you don't need one, you may find more available industrial property for purchase or lease or, at the very least , enjoy a better negotiating position.

Be Aware of Heating And Cooling Requirements

There is often a loss of heat when you open doors to load or unload material.

Radiant tube heating systems are preferred by many industrial businesses, rather than traditional forced air systems, because they heat surfaces in the building rather than just the air itself. This tends to offer higher efficiency and lower costs over the long term. Older units should be carefully evaluated to ensure not only that they are functioning properly, but also that maintenance has been consistently performed on the units.

It's crucial to ask questions about these systems to make sure they're working properly and have been maintained on a regular basis (especially with older units).

Identify Clear Span Needs

Forklifts and other heavy machinery that may be operating in the space must be able to move freely, so it is critical to understand their movement within the space and how columns might restrict their travel. The design and construction of some buildings can force tighter column spacing, so adequate forethought is necessary to ensure that the floor plan satisfies business requirements.

The Importance of Location

We could write an entire book on the importance of site selection – and it is as important for industrial property as it is for any other real estate.

For many industrial operations, being next to the highway and providing good access to urban areas is critical, but your operations might be better suited next to a railway, a waterway, or in a more remote location. For others, access to labor, technology infrastructure, or customers may be the overriding factor in locating a facility.

However, if large trucks will need to access your location, it's important to think about how they'll get there from major traffic arteries. Sites can vary significantly in terms of access and it is difficult to overcome poorly designed entrances and exits, so make sure the access works for your operations or can be modified to do so.

Quantify Parking Requirements

Who will be working for you, where are they coming from, and how will they get there? Public transportation may be an option for your employees, but if not, parking spaces will be required for their commute. Many industrial facilities have ample parking, however those located closer to downtown will place more of a premium on outdoor space.

Prepare for the Unexpected

In the case of a natural disaster, or even an industrial accident, you'll want to make your planning includes safe refuge for your employees. A tornado may come out of nowhere, or the recent leak of liquid nitrogen at a chicken processing plant in Georgia, and many industrial properties are not adequately prepared for events such as this. Industrial owners and managers are now taking this into account and erecting emergency shelters on site for their employees to seek refuge in the case of one of these occurrences.

Industrial Real Estate : Your Next Steps

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