What Is Industrial Real Estate and Why You Should Care

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

If you’re looking to expand your investment portfolio, you might be wondering what is industrial real estate and whether is it a lucrative investment. I remember when I first started looking into real estate investing, I had no idea what industrial property was or how it could be used to generate income. But after doing some research, I realized that industrial real estate can actually be a great way to make money. Here’s everything you need to know about what is industrial real estate.

Industrial properties are usually defined as buildings or complexes that are used for manufacturing, assembly, storage, or distribution of goods. They can also include office space for workers involved in these activities. Industrial properties are typically located in areas with good transportation access so that products can easily be shipped out.

Investing in an industrial property can offer many potential benefits. For one thing, they tend to appreciate at a higher rate than other types of commercial real estate investments like office buildings or retail stores. Additionally, the demand for warehouses and other types of industrial space has been on the rise due to the growth of e-commerce. This means that there is currently high demand and low supply for this type of real estate which presents a great opportunity for investors like you.

What is Industrial Real Estate?

Buildings and land used primarily for industrial production, manufacturing, and storage are known as industrial properties.

The industrial revolution brought about a huge change in the way goods were produced and transported. This led to a need for more industrial property, which is now a vital part of the real estate industry.

Industrial property plays an important role in our society, providing space for production, manufacturing, warehousing, distribution, research, assembly, storage, and data centers.

Types of Industrial Real Estate

Industrial properties come in many forms, including manufacturing and warehouses. But there are other types that you should be aware of when analyzing a property.

There are two main types of manufacturing facilities: light and heavy.

Light facilities include things like printing, packaging, and assembly. On the other hand, the heavy category includes refining materials like steel and chemicals.

Heavy manufacturing facilities are purpose-built to accommodate the large-scale production of goods. These factories often have specific energy requirements that must be met in order to maintain production levels.

Light manufacturing, on the other hand, is used for the creation and assembly of smaller parts and goods. This type of manufacturing is more common and easier to repurpose than heavy manufacturing.

Manufacturing facilities tend to have a lower ceiling than warehouse spaces. This is because manufacturers don’t require the same clearances as warehousing companies, and the extra headroom is often viewed as a waste of valuable real estate.

A warehouse or distribution center is essentially a large, box-shaped building with loading bays. Some may have a small office area, but the majority of the space is used for storage.

Warehouses play an important role in the distribution of goods produced in manufacturing facilities. By storing these products before they are shipped to end users, distribution companies can ensure that the products are delivered in a timely and efficient manner.

Industrial cold storage is a very specific type of commercial real estate. It’s primarily used by companies that need to maintain specific temperatures for their products, such as food and pharmaceutical manufacturers.

More grocery store chains are expanding their online presence, leading to a higher demand for cold storage.

Specialized industrial facilities like cold storage warehouses and data centers can have high utility demands, making them costly to own and operate. Leasing to a top-tier tenant can help offset these costs.

Another type of commercial real estate is data centers. These buildings have very specific needs for power, cooling, and telecommunications. They are often designed without windows and with thick, reinforced concrete exteriors.

Flex space/R&D is a type of industrial real estate that includes a combination of warehouse and office/retail space. This type of property is versatile and can be used for a variety of purposes.

Flex space/R&D is the perfect type of industrial real estate for high-tech machinery manufacturers. Their showroom can be located at the front of the building, with the offices or service center located behind. This allows them to have a central location for their customers to come and see their products, while still having a place to conduct business or provide services.

Flex space/R&D space is ideal for biopharma, brewers, artists, cabinet makers, and other specialized manufacturers.

How Building Design Influences Industrial Property

The aesthetics of an industrial building used to not be as important. However, today, it is as important as ever.

One of the most important things to consider when designing an industrial building is how it will impact the company’s ability to attract and retain a talented workforce. An attractive building can make a big difference when trying to recruit workers.

What an industrial company wants is for potential employees to have a great feeling about the physical environment of the building. They want them to feel like it would be a comfortable place to work. If all other factors are equal, workers will choose to work for a company in a nicely designed building.

Tenants, given the choice between three similar-looking properties, will pick the one they think looks the best.

Tenants who occupy industrial buildings often care more about the appearance of their space because it affects their property value. They’ll get more interest, and a better price, if their property looks better than the rest.

Why Parking Is Essential For Industrial Real Estate

An often-overlooked component of industrial real estate is parking. Parking is essential for industrial users of all kinds.

As companies began to grow in the 1970s, it became apparent that the standard of one parking space for every 1,000 square feet of industrial space was no longer sufficient. Tenants realized they would need more parking to accommodate additional workers or risk having to move elsewhere.

Today, 1.5 parking spaces per 1,000 is more standard to account for this growth.

Trailer parking is also important to today’s industrial base. Tractor-trailer parking is especially important for large distributors, as even trucks that only need to stay overnight need a place to rest.

Parking is an important issue because many cities don’t allow on-street parking and if they do, there is no guarantee that it will always be allowed.

With no warning, municipalities can suddenly post signs that prohibit on-street parking, forcing drivers to park elsewhere.

An office building with ample parking is very attractive to many tenants.

Benefits of Investing in Industrial Real Estate

The simplicity of owning industrial real estate is one of its appeals.

For example, an industrial property will usually have only one or a small handful of tenants, as opposed to a multifamily property with dozens or even hundreds of individual tenants.

This makes it easier to collect and release rental payments.

Another key benefit is that most industrial tenants have multi-year leases, which can provide a more stable income stream than other types of investments.

The lease for an industrial property often has built-in increases, so after an initial period of low expenses, the owner typically has a relatively low-maintenance investment property. This can be a good way for a real estate investor to earn passive rental income.

One benefit of buying industrial real estate is that buildings typically don’t require as much interior work as other properties. This can save you a lot of money on construction and renovation costs.

Industrial properties can be easy to rent because tenants often don’t change them much. When a tenant moves out, another one often can move in without altering the interior at all.

Many investors are attracted to industrial real estate due to the potential that the tenant will opt to buy the property at some point.

If the business is thriving, they plan on staying put for a long time.

These are called “sticky” tenants who stick around as natural buyers.

Risks of Investing in Industrial Real Estate

One of the biggest risks with owning an industrial property is having the property sit vacant when the tenant leaves.

The building may sit vacant for months before another tenant is found. Meanwhile, you continue paying taxes, utilities, insurance, and mortgage payments with no income from your building.

The best way for owners to mitigate risk is for them to have a deep understanding of their local market.

Someone who has extensive contacts in the industrial real estate industry will almost always know of companies who are looking for new office space. This gives them a leg up on finding tenants for vacant spaces.

How Passive Investors Can Profit from Industrial Real Estate

The most common ways to invest in industrial real estate are through REITs, joint ventures, or syndicated deals.

When you invest in REITs, you are purchasing shares of companies that own and manage real estate. The performance of your REIT investment will fluctuate with the overall stock market.

If the stock market has a downturn, then the values of those stocks that are affected will go down.

You could also consider investing in a joint venture, where you partner with another business to own the piece of property.

The other party in this scenario would be a developer, who would be responsible for hiring a property manager to take care of day-to-day activities. You, on the other hand, would play a more passive role in this venture. 

These investments are often brokered by brokers.

Few firms adopt this strategy, because once an industrial investment company achieves enough growth, they typically partner with a larger institutional firm and no longer require funding from small-time, individual investors.

The syndication of real estate is one of the only ways you can still invest in industrial properties or portfolios with a smaller amount of money.

Is Commercial Real Estate The Same as Industrial Real Estate?

No, commercial real estate is not the same as industrial real estate. Commercial properties refer to buildings or land that are used for business purposes, while industrial real estate generally refers to buildings or land that are used for the manufacturing, storage, or distribution of goods.

Industrial property is often located in industrial parks or zones, which are designated areas that are zoned for industrial use.

Conclusion

Now that you know what is industrial real estate, it’s something definitely worth considering if you’re thinking about investing in real estate. It can offer many potential benefits, including appreciation at a higher rate than other types of commercial real estate and high demand due to the growth of e-commerce businesses.

Justin McGill