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An Insider's Guide to Industrial Real Estate - Unveiling the Secrets

CEO Khai Intela
What Exactly is Industrial Real Estate? Industrial real estate is not just about massive buildings with high ceilings. There's a whole world waiting to be explored within this niche market. Picture open boxes, generous ceiling...

What Exactly is Industrial Real Estate?

Industrial real estate is not just about massive buildings with high ceilings. There's a whole world waiting to be explored within this niche market. Picture open boxes, generous ceiling heights, and loading docks that facilitate the movement of goods in and out of these buildings. These features make industrial real estate the perfect choice for manufacturing companies and businesses that require ample storage space.

Let's dive deeper into the key components that make industrial real estate tick.

Industrial Real Estate Image Source: Saigon Intela

The Class System of Industrial Real Estate

Not all industrial real estate is created equal. There are three distinct classes: A, B, and C.

Class A Industrial Real Estate

The epitome of quality, Class A industrial properties boast multiple loading docks, prime locations near highways, and generous ceiling heights ranging from 32' to 40'. These buildings are relatively new and feature modern design and amenities such as sophisticated sprinkler systems. Class A industrial real estate is typically favored by major corporations like Amazon and Target.

Class B Industrial Real Estate

Class B industrial properties, though slightly older, still hold their own. They may have lower ceilings and fewer loading docks, but they offer great value for smaller, locally-based tenants. These buildings might have brick exteriors and older windows, but they continue to meet the needs of diverse businesses.

Class C Industrial Real Estate

Class C industrial buildings, often over 20 years old, require some renovation. Located in less desirable areas with limited parking, these properties have lower ceiling heights and are mostly suited for light manufacturing rather than distribution. While they may not be a top choice for many investors, Class C buildings can still be lucrative depending on your investment strategy.

Class A, B, and C Image Source: Saigon Intela

The Importance of Parking in Industrial Real Estate

Parking is often overlooked when it comes to industrial real estate, but it plays a crucial role. As companies grow, they require more parking spaces to accommodate their expanding workforce. Insufficient parking can lead to businesses relocating. Moreover, on-street parking is rarely an option, and municipalities can ban it at any time. Ample parking spaces make an industrial building more attractive to potential users.

The Impact of Building Design on Industrial Decision-Making

Gone are the days when industrial building design merely served a functional purpose. Nowadays, aesthetics play a significant role. In the quest to attract and retain talent, companies are turning to attractive buildings. When workers feel good about the physical environment, they are more likely to choose a company that operates from a visually appealing industrial building. Tenants also prefer well-designed buildings, as they generally have more options when choosing their workspace. Additionally, owning an aesthetically pleasing industrial building can increase resale value.

The Significance of Thick and Smooth Floor Slabs

Within industrial buildings, forklifts and heavy machinery are common sights. To ensure safe operations and stacked goods that remain stable, a smooth floor is paramount. Uneven floors can lead to accidents and damage to goods. However, there are exceptions. Industrial buildings designed for food and chemical manufacturers may have sloped floors to direct spills towards drains. These specialized facilities are unique and cater to specific industries.

Floor Slabs Image Source: Saigon Intela

The Hidden Locations of Industrial Real Estate

Industrial real estate often remains hidden from the public eye, tucked away behind shopping centers or residential areas. You'll find concentrations of industrial properties on streets with names like "Industrial Way" or "Commerce Drive." Major highways often feature clusters of industrial complexes, as former farms have made way for industrial developers over time.

Exploring the Different Types of Industrial Real Estate

Industrial real estate goes beyond manufacturing and warehousing. Understanding the various types is crucial when evaluating investment opportunities.

Manufacturing

There are two main types of manufacturing properties: heavy manufacturing and light industrial. Heavy manufacturing involves refining raw materials like steel and requires large, purpose-built facilities. Light manufacturing, on the other hand, focuses on part and goods creation and assembly. Light manufacturing facilities generally have lower ceilings than warehouses, as they don't require the same amount of clearance.

Warehouse/Distribution

Warehouses and distribution centers are essential in the supply chain. These facilities serve as storage spaces for goods produced in manufacturing facilities before being shipped to end users. They are typically large, square or rectangular buildings with loading docks.

Cold Storage

Cold storage facilities cater to specific industries, such as food manufacturing and pharmaceuticals. These specialized buildings maintain extremely low temperatures for the storage of perishable goods. Cold storage has gained popularity with the rise of online grocery shopping and digital expansion by grocery chains.

Data Centers

Data centers are unique industrial properties that require specific power and telecom infrastructure. These facilities house servers and computer systems and are critical for the storage and processing of large volumes of digital data.

Flex Space/R&D

Flex space or research and development (R&D) facilities combine warehouse and office/retail space. These versatile buildings often cater to high-tech machinery manufacturers and house showrooms at the front, with offices or service centers located behind.

Types of Industrial Real Estate Image Source: Saigon Intela

What Drives Demand for Industrial Real Estate?

Industrial real estate has witnessed a surge in popularity, especially in recent times. As more people turn to online shopping, retailers are battling it out for customers with rapid delivery services. This requires a widespread network of distribution centers in major metro areas.

At a local level, businesses that are in the midst of organic growth or acquisitions often find themselves in need of more space. Whether it's consolidation or expansion, these companies drive the demand for larger industrial buildings in their existing areas. With vacancy rates currently around 6%, industrial real estate has proven to be a resilient market.

The Benefits of Investing in Industrial Real Estate

Investing in industrial real estate offers simplicity and stability. Unlike multifamily properties with numerous tenants and annual lease renewals, industrial properties usually have one or just a few tenants. This makes rent collection and re-leasing hassle-free. The majority of industrial tenants sign multi-year leases, ensuring a relatively hands-off investment experience with built-in rent escalations.

Furthermore, industrial real estate requires minimal interior build-out, and when tenants move out, others can often move in without extensive modifications. The ease of management and the potential for tenants becoming future buyers make industrial real estate an attractive investment option.

The Risks of Investing in Industrial Real Estate

Vacancy poses the biggest risk for industrial real estate investors. Single-tenant buildings can experience lengthy periods of vacancy when a tenant moves out. During this time, owners must bear the burden of carrying costs such as mortgage payments, taxes, insurance, and utilities. Staying informed about the local market can help investors mitigate this risk.

Passive Investment Opportunities in Industrial Real Estate

Interested in investing passively in industrial real estate? There are several avenues to explore:

  • Real Estate Investment Trusts (REITs): By investing in REITs, you become a shareholder in a company that owns and operates industrial properties. REIT shares tend to move along with the general stock market.
  • Joint Ventures: Partnering with someone else, such as a developer, allows you to own industrial real estate in tandem. This arrangement often involves hiring a property manager while you take a more passive role in the investment process.
  • Syndications: Although less common nowadays, investing through syndications enables individuals to invest smaller amounts directly into industrial properties or portfolios. Syndications offer an alternative for those seeking smaller-scale passive investments.

Industrial real estate presents lucrative opportunities for investors. Understanding the market, assessing risks, and exploring different investment options are keys to success in this dynamic sector. Whether you choose Class A, B, or C properties, or dive into manufacturing, warehouses, or other industrial types, the possibilities are vast.

So, are you ready to embark on an industrial real estate adventure?

Disclaimer: The information provided in this article does not constitute financial or investment advice. Always do thorough research and consult with professionals before making any investment decisions.

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