How to Start Investing in Industrial Real Estate

If you went to a coffee shop or restaurant and asked the patrons what they think is the best way to invest in real estate, most of them would probably say flipping homes or renting apartments. That makes sense because everyone needs a place to live. 

But most of them would overlook commercial and industrial real estate opportunities like warehouses and office complexes that are great real estate investments, too.

You can work with a real estate agent who will help you find real property, but what type of income-producing real estate do you want? If you're ready to jump into the potentially lucrative world of industrial real estate, it's best to go in prepared and educated. That's why Benzinga has compiled a complete guide to investing in industrial real estate to get you started.

What Is Industrial Real Estate Investing?

Industrial real estate investing is an often under-appreciated but significant driver of real estate markets. The industrial real estate sector covers a diverse range of buildings for various purposes, including:

• Warehouses
• Storage
• Light industrial such as dry cleaners or garment manufacturers
• Heavy industries such as steel mills, lumber yards and factories
• Flex space
• Distribution centers

These types of industrial properties have different subgroups within them. Take a storage facility for example. Large operations, such as cold-storage facilities, are designed to serve major shippers of perishable goods. Companies like Walmart Inc. (NYSE: WMT) and Amazon.com Inc. (NASDAQ: AMZN) need local distribution hubs, which makes industrial real estate very important to their operations. Likewise, there can be private individual storage or smaller company warehouses or drop-shipping centers. 

Industrial properties can also be single-tenant or multitenant. You could have a 20,000-square-foot warehouse and rent it to one company that uses it as a logistics hub. Or you could subdivide the inside and lease the space to multiple tenants. 

That's one major advantage of industrial real estate over residential spaces. You can change spaces on the inside and lease the structure so that your tenant is responsible for some of the tenant improvements or repurposing of your space. By contrast, you can’t start knocking out walls in your apartment building to suit a tenant who needs three bedrooms instead of two bedrooms. 

Acquiring industrial real estate is similar to other properties but requires unique market research regarding rental potential, location and target tenants. You should consider financing, cash flow, specs and whether you plan to buy an existing property or construct a new building.

Once you own the property, a management and exit strategy is essential. You'll want to look at the total tenant pool for the area and emerging opportunities in e-commerce, tech startups and international trade. 

Types of Industrial Real Estate

You can invest in various types of industrial real estate, from warehouses to flex spaces. Industrial real estate is different from other types of commercial real estate. Commercial real estate encompasses buildings that most people know and use daily, such as offices and retail spaces. In contrast, industrial real estate involves properties for industrial applications, such as facilities where goods are made, stored or shipped.

Warehouses

Warehouses store products or goods. Different types of warehouses include bulk warehouses and multistory warehouses. The size, location and purpose of the warehouse affect costs and return on investment (ROI). Speak with a broker specializing in industrial real estate to compare specs on warehouses and understand price per square foot, typical rental prices and any necessary improvements to make the space usable. 

Manufacturing

Manufacturing facilities are the second type of industrial real estate for specialized production applications. As manufacturing facilities are costly and highly specialized, they are typically owned by larger national companies or local owner-users. Manufacturing facilities range from food production to products ranging from toys to computers and are typically rented for long-term use.  

Tenants for manufacturing facilities include:

• Large national or international companies
• Smaller companies with partial tenant rights
• Local owner-users
• Any other company with one-time or short-term manufacturing needs

The key features and characteristics of heavy manufacturing industrial properties include:

• Heavy-duty equipment
• Three-phase electricity
• Ample loading dock space
• Possible storage or warehouse space included

Flex Space

Flex space is a hybrid between warehouse and office space or subdivided between warehouse and office space. Flex space is typically in suburban locations with ample parking so it can accommodate a variety of tenants and operating activities. 

Flex spaces were originally designed for manufacturers who needed to combine warehouse space with offices but it now attracts tech startups as well. The possibility for functional buildouts makes flex space uses even more diverse and one of the best options for industrial real estate investors. 

Things to Consider Before Investing in Industrial Real Estate

Before investing in industrial real estate, consider longer lease terms and incentive programs. Here is what else you think about before investing in industrial real estate.

Longer Lease Terms

Real estate investments depend on rental income, which makes the longer lease terms of industrial real estate an attractive option. The longer lease terms give industrial real estate investors greater rental revenue stability. Longer lease terms also provide predictable income and fewer landlord responsibilities.

Quick Construction

One major advantage of building industrial real estate is the comparatively quick construction time. Quick construction in speculative development, including shorter completion timelines for industrial buildings compared to other property types, can be an attractive solution for investors.  

The strong underlying fundamentals of industrial real estate, such as long-term leases and high occupancy, are attractive, but quick delivery times add to this. Depending on certain variables, industrial buildings can have completion timelines as fast as eight to 12 months, making them attractive to both investors and lenders. 

A shorter development time frame than with other real estate property types can be affected by:

• Local supply and delays in the construction materials supply chain
• The nature of the site and the need for additional site prep
• Delays related to financing or investor funding

Incentive Programs

Fortunately for industrial investors, federal and state legislatures often use incentive programs to attract industrial tenants and developers. In addition, many local governing bodies have additional business-friendly incentives, such as expedited permitting, tax abatements, tax credits or other stimulus programs to attract companies and reduce the cost of industrial development. 

For example, the Foreign Trade Zone (FTZ) program, administered by the Customs Border Protection (CBP), allows businesses located in an FTZ to store commercial products without paying customs duties. This can help reduce the administrative burden of customs entry procedures. If you maintain a warehouse in an FTZ, your tenants (or company) can potentially benefit from duty-deferral or exemption if you store international trade merchandise. FTZ-located properties may also be eligible for reductions in property taxes.

How to Invest in Industrial Real Estate

Strategies to effectively invest in industrial real estate include the basics of any other type of real estate investment, including:

• Research: Carefully research target markets, look at comparable properties (comps) and understand the demand of a particular location. 
• Get support: From networking with other real estate investors to enlisting the support of a reliable real estate broker, building a network of professionals who can advise you about the markets, pricing, construction costs and more can increase success.
• Get financing:  Whether you choose private equity investment or a mortgage, consider your financing options and have reliable financing in place before searching for properties. 
• Have an exit strategy: As with any investment, having an exit strategy and knowing when to implement it is essential. Plan based on your financial goals and property projects. 

Pros and Cons of Investing in Industrial Real Estate

Investing in industrial real estate can help you diversify your investments, create a relationship with a real estate brokerage firm and get ahead of real estate wholesalers. You should be aware of the advantages and a few disadvantages of investing in industrial real estate Here is an overview. 

Pros

Advantages of investing in industrial real estate include:

• Long-term leases for consistent returns
• Passive income 
• Capital appreciation on the industrial properties
• Option to leverage equity in the property to build or purchase new industrial properties
• High costs on rental prices because of large space and/or specialized equipment (in the case of manufacturing)

Cons

While there are many advantages to investing in industrial real estate, it's not without a few major disadvantages. The cons of investing in industrial real estate include:

• High cost of entry or needed for purchasing a property
• Market fluctuations
• Potential drop in property value
• Risks of long-term vacancies
• Need for effective property management can lead to losses without a skilled team

Should You Invest In Industrial Real Estate?

Industrial real estate investments offer the possibility for high, stable returns. They also require higher capital investment and a long-term commitment with strong management and an exit strategy. Compared to other commercial real estate investments, it offers the possibility for higher returns. You can also consider industrial real estate investment trusts (REITs) or learn more about the best commercial real estate investments or how to make money in commercial real estate. 

Frequently Asked Questions