What to Know Before Making Your 1st Industrial Property Investment
What Should You Know Before Investing in Industrial Real Estate?
Important considerations for investors looking to acquire or develop their first industrial property asset.
Modern Distribution Space Is What’s in Demand
Industrial properties are not all alike, and there is variation in the demand for different types. Most industrial users currently seek modern, quality distribution space. The biggest shortages across the U.S. are in distribution and fulfillment spaces. Even here, there is variation, and many have their own unique features. For example, cold storage facilities, have seen tremendous growth since 2020. The more specific the requirements, the more expensive, and the maintenance and management more unique.
Industrial research labs, pharmaceutical storage facilities, and other specialized buildings are in high demand, but may be more expensive to invest in. For first-time industrial investors, general distribution space is safer and more easily acquired.
An Industrial Property’s Location Is Most Important
The location of any real estate asset is the greatest determinant of its success or failure. The industrial property sector has very different demands of its location than most other commercial property types. An office building or a shopping mall will have vastly different goals for its ideal placement. Proximity and ease of access to major transportation corridors is a key factor. Given the volume of trucks coming and going from most distribution hubs, properties offering unobstructed ways for semis to get from a highway to the building’s loading areas are essential.
Which Interior Features of Industrial Buildings Are the Most Important?
Column spacing, clear heights, electrical supply, or floor thickness are all important factors to consider, but there are three main aspects to determining whether or not an industrial facility is a good investment.
Clear Heights Are Key for Distribution Centers
Clear heights describe how much clearance a structure has, measured from the floor to the lowest part extending from the ceiling, like a sprinkler or lighting system. This metric is essential in understanding how much inventory can be stored within a distribution center. For this reason, industrial real estate has begun increasingly measuring building size in cubic footage, not square footage. Most of the latest industrial real estate often boasts heights of up to 40 feet or more. Investing in an industrial asset with ample clear heights ensures that it will stay in demand in future years.
Loading Docks Define Strong Industrial Investments
Loading docks are obviously of critical importance to a logistics property, as they are essential in loading and unloading products. Understanding the demand in your market is critical to ensuring your potential investment has what it needs to meet your tenants’ needs.
The number of loading doors and the configuration and setup of those doors is very important. Having loading doors with accessory dock equipment, like bumpers and levelers, helps streamline loading operations in a safe way. Most industrial properties also have a number of drive-in doors, which are large, grade-level doors that vehicles like vans, forklifts, and cars can enter.
Column Spacing’s Role in an Industrial Property
Inefficient column spacing reduces the efficiency of operations at most distribution and logistics buildings. This limits movement of forklifts and other loading equipment, and can impact the configuration of warehouses’ shelves and other storage racks and reduce the property’s usable square footage.
Most Important Exterior Considerations for Industrial Investing
There are many characteristics outside a building that can be just as critical to determining if a property is a strong investment.
Truck Courts Are Critical to Distribution Operations
A truck court is the area trucks utilize when backing up to and pulling away from an industrial property, and it is critically important for a logistics property. If a building doesn’t have a sufficiently large truck court, this can slow down a tenant’s operations. If a truck must make multiple turns and reposition itself a number of times to align with a loading dock, that costs time and is also dangerous.
Trailer Parking’s Importance for Large Logistics Centers
A key consideration for any major logistics center is trailer parking. While there’s for car parking spaces, if a property will have heavy traffic, it is ideal to ensure there are stalls for trailers to park for either short- or long-term stays. Having secure yards also is highly beneficial, especially when storage is needed.
Other Exterior and Interior Considerations for Industrial Investments
If some of the above items are missing from a potential warehouse, this doesn’t mean it’s a bad investment. Barring clear heights and column spacing issues, which are not able to be modified, they can represent a significant value-add opportunity for an industrial real estate investor. Buying an asset at a much lower price that requires remodeling can yield a sizeable return for the sweat equity. Market demands, and the limited availability of land for development in some markets can lead to higher returns with some of these older properties.
Industrial Acquisition Financing Options
Since industrial property values are increasing at a rapid rate, more and more lenders are catering to the industrial sector, owing to consistently strong returns on virtually all assets in most markets. The best financing options will depend on your specific needs and financial situation. Many more types of financing, for both large and small amounts, are now available.
Types of financing include:
- Conventional loans
- SBA loans
- Bridge loans
- Mezzanine loans
- Equity financing
- Crowdfunding
What are the advantages of investing in industrial real estate?
Investing in industrial real estate can offer a variety of advantages, including the potential for a strong return on investment. Additionally, industrial real estate investments can offer tax benefits, such as accelerated depreciation and mortgage interest deductions.
What are the risks associated with investing in industrial real estate?
Investing in industrial real estate carries the same risks as investing in any other type of commercial real estate. These risks include tenant default, longer lease terms, and slower leasing velocity. Additionally, industrial real estate investments may require significant value-add opportunities, like remodeling a dated industrial facility or bringing it up to speed with modern amenities, to earn a strong return on investment.
What are the tax implications of investing in industrial real estate?
Investing in industrial real estate can have a variety of tax implications, depending on the type of investment and the structure of the investment. Generally, industrial real estate investments are subject to income taxes, capital gains taxes, and depreciation recapture taxes. Income taxes are paid on rental income, capital gains taxes are paid on the sale of the property, and depreciation recapture taxes are paid on the difference between the sale price and the depreciated value of the property.