Hi i'm chad i'm doing a series of videos about investing in industrial real estate. I gave an
overview of the industry in the first video which I'll link to up top. I'd recommend checking out
that video first if you haven't already. As a summary of that video a critical process of
industrial real estate involves things coming in and going out so it's imperative that you identify
the overhead doors, the loading area and access to any industrial property you're considering.
Over the next couple of videos i'm going to break industrial real estate into the two main
categories: warehousing and manufacturing so that I can identify some of the key characteristics for
each of them. While they're both industrial properties in the broader sense there are
actually some major differences between them. So let's jump into warehouses! Since we already
discussed the importance of getting vehicles to and from the property, the next logical step is
to discuss what happens inside the building itself. At the most basic level a warehouse is designed to
store product. Intuitively it makes sense that raw and semi-raw materials need someplace to be stored
until they're needed for production or manufacturing. And along those lines
all the finished products also need to be stored until they're purchased or used.
In addition to product being stored in a warehouse it's also common for warehouse
tenants to unpackage sort and repackage product as it comes to and leaves the property. Some companies
called break bulk operators do this exclusively. A simple example is a truckload of a single product
coming into the warehouse which is then sorted and sent out as smaller sizes to numerous customers.
There's an entire field of study about inventory management. I'll leave a link in the description to
a book that goes into detail on the topic but for the purposes of this video i'm going to focus on
the physical attributes that are most commonly required by warehouse tenants. Let's start with
the most important aspect: ceiling heights. We're all familiar with square footage but a number
that has become increasingly more popular is cubic footage, which is length times width times height.
Companies are putting more emphasis on cubic footage because it sets the literal parameters
for how much racking they can get into the building. A key number you want to pay attention
to is the clear ceiling height, which is the height underneath any trusses beams or sprinkler heads.
It wasn't long ago that 20 foot clear ceiling heights was acceptable but many logistics and
distribution companies are now requesting 34 to 36 foot clear ceiling heights and in some cases even
higher. Again not every tenant is going to require higher ceilings but just be aware that lower
ceiling heights can be physical limitations. This leads to a term called functional obsolescence.
If an older property has ceiling heights which are lower than modern buildings
then that building will be less useful by comparison at some point older properties
will not be compatible for some tenants and subsequently need to be retrofitted
for other uses or have a discounted lease rate. To account for it next i'd examine the type of
construction you'll typically see concrete or steel and occasionally you might even see wood
construction. Concrete will be more durable and last longer whereas steel is easier to modify.
For example if you want to add an extra overhead door it should be a lot less expensive to do it
in a steel building. From my experience tenants themselves do not necessarily put a whole lot of
value on the type of construction but it does play a big role in the life expectancy of the building.
How the building is constructed itself will lead to something called column spacing which
is a very important consideration for tenants as it determines how functional the space will be.
More specifically, the distance between the columns, which is often called the column grid, will dictate
how much racking can go in the space and how much room is available for forklift and pallet access.
It's common to see columns spaced 40 to 50 feet apart, which is a result of architects
and engineers designing the building for both cost efficiency and optimization. Those two features are
often in conflict with one another. For example, a property can theoretically have a larger area
between columns, which is often referred to as the clear span, but it comes with a trade-off of higher
construction costs. There are consultants dedicated exclusively towards warehouse design and there's
an art and science into optimizing a warehouse specific to each individual company's requirements.
I'll leave warehouse design to the professionals, but just be aware of the building aspects they'll
require in order to plan it out in the first place. Equally important be aware of any limitations
the property might have. Similar to the functional obsolescence an older industrial building with low
ceilings will have, a property with narrow column spacing might not be suitable for some tenants.
On that topic, as part of your due diligence a thorough assessment into the roof, the structure,
foundation, and any asphalt or concrete on the site will also be important. This starts getting into
the individual components of the building, which presumably you'll be addressing when you conduct
a building condition assessment anyways, but sophisticated tenants will push for replacement
of these components to be a capital cost, meaning you might not be able to amortize the expense into
the operating costs. Naturally your lawyer will be instrumental in drafting your lease agreement and
your accountant will help you plan for and account for these costs, but it's imperative that you're
prepared for them in the first place. Furthermore, most tenants will be quite conscious about the
amount of maintenance required. All things being equal, the less maintenance required the better.
Moving on let's talk about sprinkler systems. Many modern buildings are sprinklered but it's
not a guarantee, and older buildings are hit and miss when it comes to being sprinklered.
Not every tenant will require the building to be sprinklered, but if they require it or even if their
insurance company or municipality requires them to have it, the cost of having a system installed
can be substantial. There are a few different variations available but the most common ones I've
come across are either ESFR or in-rack systems. ESFR stands for early suppression fast response,
and as the name suggests the system is designed to respond quickly if a fire is detected. In rack
systems, on the other hand, are designed to surround the racking in the warehouse and contain any fire
to that area. I'd recommend getting an opinion from a contractor or company that specializes
in sprinkler systems to ensure it's working properly and compliant with any zoning regulations.
Along the lines of some tenants requiring sprinkler systems while others do not, the same can be said
about make up air systems. The different levels of make up air can vary greatly but the principle is
that make up air units turn over the inside air with 100% outside air. I've heard of more and more
municipalities requiring makeup air for certain tenants. It's not a necessity for all tenants,
but you should be aware of it because the cost of having one installed can be quite expensive.
Logistics companies will likely have less of a need for make up air systems than say a heavy
manufacturer, but even something as simple as a propane forklift might prompt your municipality
to make a make up air system a condition of getting a business license. Another feature
that's becoming increasingly more important is having a super flat floor. While it seems obvious
that a floor would be flat, a super flat floor has a much tighter tolerance for how much variance can
be in the floor. This might not be practical in some buildings but the trend of incorporating
finely tuned material handling equipment and advanced robotics is probably a trend that will
only increase in popularity. For those not overly familiar with warehouses you might envision a
poorly lit building eerily reminiscent of a set from a horror movie and when you contrast
bad lighting to modern lighting it becomes quite evident how much of a difference good lighting
can make. The last point i want to address is the office build out this is usually one of the last
considerations a warehouse tenant will take into account but it's still a relevant consideration
and one can can still have a major impact on the overall cost or leasability of the space.
Most warehouse tenants I've worked with required between five to twenty percent of the total space
to be allocated as dedicated office space. There will be outliers on either side, but be prepared
that having too little or too much office space comparative to similar properties in your market
could mean that either more office might need to be developed or perhaps even demolished.
While that covers the major considerations also be cognizant that some companies might
have specialized requirements beyond these key factors. As an example, a granite wholesaler might
require cranes in the warehouse or perhaps even reinforced floors to handle the extra weight.
I put a link in the description to the Logistics Bureau which prepared a list of rules of thumb
for warehouse design. So let's summarize the important factors to take into account for
warehouse properties and I'm probably sounding quite repetitive at this point:
Things come in those things are either sorted repackaged or stored then those things go out.
Pay close attention to how these tasks are handled with any building you're considering.
In the next video i'm going to talk about the essential components when it comes to
industrial properties intended for manufacturing. There's some overlap with warehouses but there
are also some key considerations which are quite different. So if you want to be alerted when I post
the next video, subscribe to my channel and hit that notification bell. I hope these videos are
helping you learn more about the industry and I truly thank you for watching. Have a great day!