We’ve now covered the multi-family and multi-tenant office properties in this series exploring the pros and cons of owning/operating the five base commercial real estate asset classes (multi-family, office, industrial, retail, & alternative/specialty). Now, it’s time to discuss one of the most loved and hated…industrial. I’m not sure why it is, but it seems to me that there are few who are on the fence about their feelings toward industrial assets. For the most part, you love them or hate them.
Under the realm of “industrial” assets most would include the following property types: bulk warehouse, heavy manufacturing, light assembly, and office/ flex. Each has its own distinctly different appeal to both users and investors. However, most industrial investment properties revolve around transportation hubs. The movement of food and products throughout this country (and the world for that matter) is supported by a vast network of trucking routes, rail and shipping lines. Ports and regional freight intermodal stations are surrounded by real estate facilities built to accommodate the storing, break-bulking, and distribution of all manner of commercial and consumer goods.
Tenants with household names like Target, Wal-Mart, FedEx, & Dole are massive industrial tenants. Bulk warehouse facilities can range in size from 50,000-1,000,000 square feet. Industrial spaces are typically much less expensive to build, fit-out, and operate when compared to other type of structures. Many do not even require the entire tenant space to have heating or air-conditioning. Typical industrial buildings are minimalist and boxy, with construction of modular concrete (aka “tilt-up”) and steel. The inherent utilitarian nature of industrial properties is one of the strongest reasons people buy and hold them as investments.
Manufacturing facilities are mostly special use properties. As important as the property’s location is the heavy equipment it takes for the building to work for the tenant’s specific needs. Sometimes, due to the amount of equipment and customizations for a tenant, it can be difficult to find another use for the property without substantial renovations.
Light assembly properties are mix of office, assembly, and warehouse space. In addition to docks for shipping and receiving, these buildings usually have traditional parking spaces for the office staff. If they are easily convertible from industrial to office use and vice versa, these assets typically fall under the “flex” property category.
The main attraction to an owner of office/flex space is the highly “flexible” nature of the unit(s) to be converted by adding a drop ceiling and basic office fit-out if the tenant needs to house more office employees on site. In a multi-tenant flex property, it’s not uncommon to see all varieties of combinations of office-to-warehouse ratios. Some tenants may be nearly all office, while others are an even mix or mostly warehouse users.
Leases vary quite a bit based on the type of property and tenant, with smaller office/flex users seeking short 3-5 year terms and larger, manufacturing and warehouse users seeking long-term 7-10 year leases (some even longer). Most large tenants are set up on triple net leases, whereby the tenant is responsible for paying the real estate taxes, maintenance, and utilities on the property. In addition, tenants often have equipment at the sites that is expensive and troublesome to move. This increases likelihood of lease renewals with industrial tenants in general.
Aesthetically speaking, big box-shaped buildings are not particularly attractive when compared to brand new apartments or a new office high-rise, but they still make money. Industrial assets, especially those with tenants tied to staple items, perform well in any economic climate. From an investor’s viewpoint, the average industrial tenant may pay less rent than an office user, but they rent much more space and tend to sign equally long-term leases.
