What Is Industrial Real Estate? ________________
When most people think of real estate, they naturally think about the places where they
spend their time: their homes, their offices, their favorite retail store, or their favorite
restaurant/bar, but when people hear “industrial real estate,” they might picture giant,
brick chimneys pumping out foul-smelling smoke or an assembly line at a GM factory with computer
automated machinery putting cars together. This visual can apply to certain realms of
industrial activity, but as a whole, industrial businesses extend far beyond this picture,
working behind the scenes of all these high-traffic spaces and essentially providing the fuel
for them to operate. Toilet paper, food, clothing, and almost every
item in your home, office, or favorite retail store was either produced or stored in an
industrial building at some point, so it is easy to see the gravity of influence that
industrial businesses have on our everyday lives.
TYPES OF INDUSTRIAL REAL ESTATE ________________
There are many different types of users for industrial properties, and there are different
types of structures associated with them, so it is important to familiarize yourself
with each one to know what kind of tenants occupy each type of property.
Keep in mind that some of these properties can accommodate other industrial uses, so
knowing the basics of each one should help in determining the types of tenant options
you’ll have once you purchase an industrial property.
Industrial Land Industrial land is fairly straight forward
in it’s basic definition whereas it is land that is zoned industrially, but does not have
any permanent structure on its premises. A site like this doesn’t always have to
have a building on its grounds in order for an industrial business to operate. The land
may be used for purposes such as parking equipment, storing gravel or mulch, or any other surface
operation. Investing in industrial land also gives you
the opportunity of building from the ground up. Vacancy rates in the Industrial sector
of commercial real estate have been historically low, so building a structure on your industrial
site carries a much lower risk of having long-term vacancies than that of other commercial real
estate developments. Owning a piece of industrial land also gives
an investor the option of advertising a build to suit type opportunity where the landowner
pays the upfront construction costs of a build that meets the tenant’s specific requirements,
and then leases the space to the tenant upon the project’s completion.
If you own industrial land there are a couple of good routes you can take in order to gain
the most from your development. When developing anything, it is always important to assess
where your market’s local demand lies. Industrial Build-To-Suit
You may have seen a sign on a piece of land before that says “build to suit.” A build
to suit is an advertisement to businesses who may be looking for space for their company.
In a build to suit, a landowner pays for the construction of a structure according to the
tenant’s specifications and then leases that building to the tenant once the building
is delivered. Build to suit options can be great for industrial
land owners because you don’t have to worry about vacancy rates since you already have
a tenant in place. In other words, you are having someone pay you to add value to your
building with less risk than building a speculative building.
Speculative buildings, however, can also a great way to add value to your land. Building
a “spec building” means that you are essentially constructing a building for the purpose of
putting it immediately on the market. For example, if there is a low vacancy rate
for general warehouse space in your area, it may be wise to go ahead and meet the demand
by delivering a brand new warehouse to the market. Spec buildings can be highly risky,
but also highly rewarding if you can fill a need that is lacking in your local market.
Bulk Warehouse Bulk warehouse properties are the largest
industrial product and are typically in the 50,000-1,000,000+ square foot range.These
properties are usually regional distribution for various types of products and require
strong accessibility for trucks entering and exiting the highway systems.
Most bulk warehouses are located outside of metro areas because most of these have incredibly
large footprints, although some larger companies like Amazon are starting to construct multi-story
industrial warehouses in order to use less acreage.
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.
Data Centers Data Centers are very complex properties usually
in centralized locations that are typically equipped with computer systems and networking
equipment that is concentrated for the purpose of storing, processing, distributing, or allowing
access to large amounts of data. Data centers provide important services such
as data storage, backup and recovery, data management and networking. These centers do
things like run Web sites, e-mail, and instant messaging (IM) services, provide cloud storage
and applications, and enable e-commerce transaction among many other things that require computer
processing. In today’s technologically-centered world,
almost every business in operation either needs its own data center or needs access
to someone else’s. Data centers need to be in close proximity
to major communication trunk lines with access to extremely large and redundant power supply
that is capable of powering these servers and telecom equipment.
They also require strong flooring to support the weight of computer and electrical systems,
along with specialized HVAC systems, backup generators, and other specialized equipment.
Because of the large amount of high-tech, specialized equipment that these centers use,
the electric and power systems that run these buildings are extremely complicated and expensive,
which makes new construction of these sites very costly.
If developing one of these facilities, it is always a good idea to work with specialists
who have expertise in this area. Industrial Showroom
Industrial showrooms are a bit of a hybrid between retail and warehousing. This product
allows manufacturers to showcase their goods in a more retail setting while having shipping
and distribution, too. Showrooms are often situated along interstates
where they can achieve high visibility and easy access for consumers. Typically around
50% of a showrooms space is dedicated to sales. These sites are attractive to small business
manufacturers that make custom goods (such as a woodshop) because they are able to showcase
their process to their customers and save on shipping and warehousing costs.
Research And Development Research and Development sites like other
categories of industrial real estate are able to accommodate a large variety of users. These
sites may sometimes fall under the flex space category as they can be any hybrid combination
of office, warehouse, and manufacturing space. Typically users are in fields like electronics,
biotechnology, chemicals, or drug development but can be utilized by anyone who is researching
new products or sciences. Some of these properties are highly specialized
to fit the needs of specific users with custom plumbing, ventilation, and electrical layouts.
Oftentimes these types of buildings are located in industrial parks or on campuses that contain
other similar operations.