Many people are interested in an industrial property, either to purchase it as a long or short term investment, or to lease it because they want to use it for their own business. These real estate investments are classed as “commercial property” but that is a huge blanket term that doesn’t quite describe the different nuances found within it. When commercial real estate is mentioned, people inevitably think about warehouses, office buildings, and shopping centers. But there is actually so much more to it than that, and even within those three types of properties mentioned earlier, there are notable differences as well. Hence, the first thing you need to do is learn about what an industrial property actually is.
What Is an Industrial Property?
Industrial property is a subsection for the broader term “commercial property”. Meanwhile, the term “industrial property” can be further subdivided into:
1. Heavy manufacturing
This is a special use type of building and generally holds different types of large manufacturers. They are customized locations, where machinery is installed designed to be used by the occupant. Usually, these buildings have to be renovated substantially whenever a new tenant comes into the building.
2. Light assembly
These are much simpler industrial building structures than those used in heavy manufacturing. Usually, it is relatively easy to reconfigure them. They tend to be used for office spaces, product assembly, or storage for example.
3. Flex warehouse
This is a type of property that is very easy to convert as well. Usually, there is a mixture of office space and industrial space together.
4. Bulk warehouse
This is usually a very large type of property, usually between 50,000 and 1,000,000 square feet. In many cases, these properties are employed for companies to be able to perform regional distribution. They also have to be easily accessed by trucks when these come in or out of the highway systems.
How Does Investing in Industrial Property Work?
Obviously, investing in an industrial property is not something you do on a whim. It is very important that you have a team of trusted advisors with you to help you out in this endeavor. It is a known fact that a lot of people have benefited tremendously financially from investing in industrial property, so much so, in fact, that there are now financial property groups who focus specifically on this type of property in an effort to help others get the necessary return on investment.
What matters, if you do want to invest in industrial real estate for sale or lease, is that you have some excellent strategies in place and take an opportunistic approach to real estate. You have to think long term: what will the property be worth, how will you use it, what is going to happen to it? Those are all incredibly important questions that you must answer if you want your investment to be rewarding.
Your investment has to be first and foremost on your mind. If you want to lease a property, then you are investing in whatever business you will be running inside the property, and you need to make sure you get good value for money, and the flexibility to grow or narrow down as and when required. If you want to buy an industrial property, then you will probably rent the property out, in which case you have to think about how it will be used, whether you can meet the associated costs, when you want to sell it, for what profit margin, and so on. When you decide that the time is right to invest in an industrial property, you need to get a team of professionals on board to ensure that you will reach your personal expectations, or even exceed them.
The Pros and Cons of Industrial Property Investment
Investing in industrial property is exciting and has the potential to be incredibly lucrative. But it has risks associated with it as well. You have to know all the pros and cons (nothing is a given in investing, and that is your first risk). Each type of real estate investment has its own particular advantages and disadvantages. It is very important to become aware of these, as it is advisable not to make any kind of investment without first knowing the associated risks. In terms of industrial property investments, which are usually limited to single tenants, the pros include:
- The fact that you have a huge choice in terms of types of properties. These include depots, distribution centers, warehouses, factories, and more.
- The fact that you won’t need as big of an investment as you would for an office building or a retail building, for instance.
- The fact that the leases you will be able to hold on an industrial property tend to be longer and more lucrative.
There are the cons:
- The fact that a lot of industrial properties are very specialized. This means that your market for those who want to lease is much smaller as well.
- The fact that if you want to convert the unit from one use to a different type, this can be expensive and difficult.
- The fact that you tend to have only one tenant, which means that you either get rental income, or you don’t. If your tenant leaves, you will have no income at all until you find another one.
Industrial Real Estate for Sale or Lease – How to Invest
In times of economic hardships, industrial properties often become very interesting to many investors. Many businesses have to abandon the properties they have bought or leased, developments are left unfinished and have barbed wires surrounding them, factories gather cobwebs, and more. Real estate is always the first and hardest hit sector in an economic downturn, but it provides a huge opportunity for investors.
At the same time, it also shows just how cautious investors have to be when it comes to industrial property. Prices were incredibly low between 2008 and 2009, for instance, but unless you can lease your industrial property out, it will only cost you money, no matter how cheap the purchase price was. That is, until the economy begins to improve again, and that’s the time you will be able to benefit from your investment. You need to know, therefore, what opportunities are out there and how to make them work for you. As with the entire economy, real estate goes through ups and downs. We have recently had a major downturn, and things are going up again. But that also means that things will soon start to drop again, and you have to be ready and prepared for that.
Trends in Industrial Real Estate for Sale
Industrial real estate tends to follow the trends of commercial real estate as a whole. In other words, if office blocks and retail blocks are doing well, then industrial properties will usually do equally well. But to understand the industrial real estate market, you first have to be able to define it. In fact, it could mean anything from purchasing an empty warehouse to negotiating a franchise deal with a FedEx office, for instance.
If you are considering this type of purchase as an investment, rather than as a lease for personal use, you have to be realistic. The main thing you have to understand is that these purchases are large, both in terms of cost and in terms of size, particularly compared to a residential property investment. And you also have to think about the length of your ownership, or leasing. For instance, the sovereign wealth fund on Norway recently invested in 25% of London’s Regent Street, on its main shopping centers, with a lease of 150 years!
In order to really get high quality assets, which are assets in good locations, with the right access facilities and perfect structural integrity, you are likely to have to spend millions. That said, the industrial sector is growing tremendously. The industrial property real estate sector has grown by several billion dollars in just a year, which is often more than a doubling of what it was during the financial crash. And, if financial reports and experts are to be believed, next year is going to be even better for the sector as a whole.
Industrial Property for Lease or Sale – Entering the Market
Entering the industrial real estate market, be that lease or buy, is hard. The money needed to purchase such a property in full exceeds what most people are able to do. However, this is why a lot of people work together with real estate investment trusts (REITs) instead, effectively owning certain parts of industrial buildings. This can be a very lucrative arrangement, because you don’t actually have to hold responsibility for any of the management of the property. The REIT is responsible for everything, you just provide your money to them and reap the rewards when you leave. REITs also offer very tax efficient structures, giving you a share of the rent at the end of an pre-agreed time period.
What we see today is that the property market is changing once again. There is suddenly a far larger range of industrial properties available, and demand is equally high. As a result, there are now also numerous specialized REITs that invest solely in a certain type of property, for instance. Traditionally, REITs would invest in any property they would be able to, from residential to commercial, but this is now changing.
This, in turn, provides a great opportunity for the savvy investor. When you invest in something together with others, your instantly solve the issue of liquidity. You do not buy the entire asset, but rather units within it. Units can be defined in different ways, but are usually a section of the total surface of the space that is available. The more you invest, the more units you will be able to hold. The downside of investing in this way is that there are regulations. You will usually not, for instance, be able to leave the agreement whenever you see fit, but rather you will have to sign a contract stating that you will remain involved in the investment for a certain number of years. This, in turn, means that you may miss out on a real boom in prices and end up free from the agreement at a time when property prices are very low.
Other options do also exist, particularly for those with more money. Oftentimes, groups of 20 or so investors will come together and make a “gentleman’s” agreement to invest in a certain property. In this case, a group of actual people purchases a whole building. Those who want to leave will usually be responsible for finding someone to take their place, rather than forcing the entire group to sell their shares and get rid of the property as a whole. In many cases, investing in this way means that money is borrowed against the property, thereby enhancing the potential for returns. However, as with any investment, this is a potential only and therefore carriers great risks with it. That said, the investment limit tends to be just between $50,000 and $100,000, which means it is reasonably affordable for someone who does want to make a potentially beneficial investment.
The last financial crisis happened to a great extent because speculators went to domestic banks to borrow money. Then, when the credit crunch actually happened between 2008 and 2009, investors had to deal with both rapidly declining property prices and failing banks. This is something to always keep in mind when considering making a property investment of any kind.
Industrial Property for Rent or Sale – Factors Affecting ROI
When you invest in an industrial property that you rent out or sell later on, the first thing you do is diversify your portfolio. The return on investment may be interesting, but the fact that you can go beyond stocks, bonds, and equity is even better. Of course, what will matter mostly to you is the potential return. This is actually down to three different factors:
- How much income do you actually get by renting out the property? This varies greatly depending on the sector your property is in. For instance, in certain highly desirable locations, there has been a growth in the level of income over the past few years. In more rural locations, this would be much less. Plus, industrial properties are changing face as a result of online shopping, with fewer stores requiring supplies and distribution.
- How much your income can grow when the rents start to increase?
- How much is the building actually worth, or what is its capital value? This should, if you made a good investment, grow over time.
Industrial Building for Sale or Rent – The Risks of Investing
It is a know fact that real estate investment goes through cycles. Right now, prices have risen dramatically, and continue to rise even further. For some, this means the time for investing isn’t now, as they will struggle to get the money together and they worry that they will not see a return. For others, who think more long term, now is the peak of the climb, which means it can only go down from here only to go up even more at the next climb, leading to a substantial return on investment, only after a longer period of time.
The reality is that, right now, it is very difficult to really determine the value of an investment in industrial property and real estate. This is because the overall demographics of both social societies and the world of business is changing. People shop online, robots create the majority of our consumables, trucks have to meet stringent environmental requirements, and asbestos abatement is costing companies thousands. But this period of unrest and turmoil will go somewhere. You need to decide whether that somewhere is a place that you want to take it to, and that you believe will improve your overall financial situation in the lung run.
Do the Benefits Outweigh the Risks?
Ultimately, investing in industrial real estate for sale or rent, is a positive thing even if it is just because you want to diversify your investment portfolio. This is why so many financial advisors now recommend it, particularly to those who can sign up to a REIT. That said, you have to be realistic about the potential risks as well. All investments have the potential to be risky, and you have to be prepared for them. If you have an excellent team of professionals on board to help you, however, you will be far more likely to have a successful investment.
To cover yourself and to make sure that you have the right knowledge, information, and expertise on your side, you need to hire an accountant (for the financial side of the transaction), a lawyer (for the legal side), a mortgage broker (to help you pay for your property), and a real estate agent (to help you find the perfect property). And once you have a property in mind, you are likely to have to bring in further professionals, including insurance agents, environmental health officers, and construction workers. Put together, as a team, you should be able to find the right industrial real estate property for your needs.