Thoughts on industrial property?

Question

All of the major LA analysts are showing increasing demand, rising rents and vacancy rates at all-time lows for industrial property (among everything else).

I'm interested in learning more about the product type. Does anyone have any experience dealing with industrial? I have a lot of questions.

Steve L. · Answer

I own a handful of industrial properties in the Inland Empire CA. Most of the data is very local.

Industrial is pretty compelling to me. You can get a 5+ year lease with next to no TI and very strong tenants. There are lots of niches and niches within niches. Parking, manufacturing, distribution, heavy power, low power, zoning.

They are doing tons of new construction in my area. Class A, 100,000 SF properties.

Don Konipol · Answer

Small multiple office warehouse space is very "light" industrial; good point of entry for the individusl investor as there is usually strong demand from a variety of tensnts with a variety of uses in metropolitan and suburban areas. Single purpose type and large single user can end up as a costly lesson. This i actually know first hsnd from an expensive eperience.

Ryan Oldenhage · Answer

I agree with all the above responses that it is very specialized. There is and has been strong industrial growth in my market in Eastern PA, but for the most part it is larger companies doing the heavy hitting. I'm not familiar with your market but here there are 100,000+SF buildings going up, some in excess of 2,000,000 SF. These are mostly all build to suit options being done by developers that have a tenant in place where they are either building for the company to purchase or for a long term lease 15-20+ years. Projects like that obviously make sense for the developers, who already own the land and wait until they have a user in place to build. For the smaller individual investor, I think it's a risky investment unless you are already sitting on land, due to the potential long term vacancies. Tenants have specialized needs and as mentioned, older buildings generally aren't up to spec. Lease rates vary by locality as well. Here, they are in the $5-7/SF NNN range whereas one client I worked with was coming from NC where the rates were in some cases under $1/SF.

Smaller industrial spaces typically lease up faster however, in the 5k-10k range. Might be a better option if you can find a distressed building, add immediate value and fix up for a smaller use. There has been an interesting project that was built on spec here where it was almost like industrial units (think strip retail center but for industrial use) in the range of 1k-2k SF each with maybe 200-500 SF of office on the first floor or built into a loft area, higher ceilings with roll up doors. They have been leased up very quickly and take up a relatively low footprint on a parcel of land. Location is very important, as is with pretty much all RE.

Andrew Fielder · Answer

In developed urban centers, light industrial is often the first thing to be rezoned for residential uses. You will see a lot of developers looking to convert industrial into residential during peak housing cycles such as the present one we are in. Most of the buildings tend to be warehouses, which means more empty space, so they're easy to knock down and it doesn't cost much to do that. Most developers will look at the remediation work that is needed, which happens when the soil has been contaminated. Sometimes it can be sealed and capped on site but other times it has to be transported and disposed of off site and that's when it get's expensive. It's important to get an environmental report done during the due diligence phase.

Also yields tend to be higher to reflect the greater risk but varies depending on location, uses and tenants/leases.

Martin Z. · Answer

I believe industrial is much more complex vs retail or office. You need to have super super local knowledge and really understand the potential tenants.

Joel Owens · Answer

I have a friend who oversees a huge industrial fund.

The takeaway from talks is any building older than about 5 years or so tends to be outdated for many of today's business needs.

The older buildings do not have the additional ceiling heights today's tenants want along with other items. If it's an older building you have to make sure there is a demand and what amount retrofits would cost to make it desirable in today's market. Industrial close to shipping ports,railroad lines, and airports is seen as a plus sometimes.

Eric Odum · Answer

Environmental risk is considerably higher too.....failed tenants frequently leave behind nasty messes.

Joshua Leite · Answer

@Joshua McGinnis I sent you a PM.

Don Konipol · Answer

Great point. Much more complex

Don Konipol · Answer

Most industrial property is much harder to appraise than residential, retail, or office. This is because (1) much of it is owner user, (2) much of it is unique and hence lack true comps (3) stays vacant longer as tenants are fewer and (4) needs are more specialized.

Further, many industrial properties are extremely hard to lease if the current tenant leaves. Especially in smaller population areas, where a major business decreases it's footprint.

There is some room for the individual investor, mostly in the more generic type structures in major metropolitan areas, with good access to highways. The rest of the market is better left to the major players with specialized knowledge, trained analysts and enough capital to create a diversified portfolio in this specialty.

IMO the difference in returns between industrial real estate and other commercial real estate is too small to justify the increased risk for anyone but the institutional player.

Thoughts on industrial property?

Thoughts on industrial property?

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