If you are a commercial real estate investor, you might want to consider investing in industrial real estate to expand your portfolio in 2022.
Why?
Because the US Industrial real estate market is undergoing a fantastic revolution this year. The continued growth of e-commerce and supply chain disruptions are driving the demand for industrial real estate investments.
The National Association of Real Estate Investment Trusts (Nareit) reports that Industrial Real Estate Investment Trusts (REITs) are providing an average return of more than 20% to their investors.
Moreover, Industrial and Logistics was the second-highest yielding REIT subsector behind self-storage in 2021.
Therefore, it is safe to assume that Industrial real estate will continue to dominate the market in 2022.
Hence, if you are keen to add industrial real estate to your portfolio, read this blog to know more about how you can get started with the investments in 2022.
What is Industrial Real Estate?
When talking about industrial real estate the first thing that pops into your mind is probably big factories with large smoke-pumping chimneys or large manufacturing plants.
However, that’s not the entire picture.
Investing in industrial real estate means dealing with properties that are involved in industrial activities like production, manufacturing, warehousing, storage, distribution, and others.
Any building that can facilitate these activities is termed an industrial real estate property.
When compared with other commercial real estate properties, industrial properties are less expensive and also provide a stable cash flow for the long term.
Based on the nature of the operation, industrial properties can be classified into the following types.
1. Manufacturing buildings
- Heavy manufacturing building
- Light manufacturing building
2. Storage and distributions
- Distribution warehouse
- General-purpose warehouse
3. Flex spaces
- Data Center
- Research Labs
This diversified range of properties and the above-mentioned factors make industrial real estate investments appealing to investors.
To learn more about the types of industrial real estate check out Lilypads’ types of industrial properties blog.
See why Industrial REITs are reporting high returns this year
The present and future of industrial real estate look promising. The rise of e-commerce platforms has increased the demand for warehouse spaces. Thereby, leading to the growth of the distribution and logistics hubs as well. Due to this demand, the investors are repurposing themselves to become industrial.
A report by JLL states that in 2021 the average industrial vacancy rate fell below 4% for the first time. According to CBRE the vacancy rate for the fourth quarter of 2021 stood at 3.2%.
Graph depicting Vacancy Rates of Industrial Properties over time
Source: CBRE Q4 2021 U.S. INDUSTRIAL AND LOGISTICS FIGURES
Apart from the rapid growth of eCommerce sites, another reason for the low vacancy rates is the low supply of industrial warehouse spaces compared to the overwhelming demand. According to Q4 2021 data, 89.7 million square feet of new industrial construction was completed, while 141.8 million square feet were absorbed. In 2020, retailers occupied the most industrial space, while logistics and warehouse operators took the lead in 2021.
Graph depicting net absorption of industrial space compared to completions
Source: CBRE Q4 2021 U.S. INDUSTRIAL AND LOGISTICS FIGURES
The limited supply of industrial space has also resulted in the industrial rents soaring high. Industrial properties saw a 25% hike in rents during renewals of leases and this trend is supposed to stay that way for most of 2022.
Graph depicting the increase in industrial rent over time
Source: CBRE Q4 2021 U.S. INDUSTRIAL AND LOGISTICS FIGURES
With such strong market reports and numbers, the future of industrial real estate looks quite promising enough for beginner investors.
How to get started with investing in Industrial Real Estate?
As a beginner, you shouldn’t think that investing in industrial real estate simply means buying a property and leasing it to tenants. The secret to a profitable industrial real estate investment is lots of research and identifying the right investment property. Apart from that, there are various ways of investing in industrial real estate.
Here at Lilypads, we believe that investors must take the following nine factors into consideration before investing in Industrial Real Estate.
1. Market Dynamics
Higher vacancy rates are always a threat to the real estate market. Therefore, it’s important to look for market areas with low vacancy rates and high demands for industrial property.
It is always a good idea to own industrial buildings in a place with a limited inventory but a higher demand. And always consult with expertise before investing in such industrial buildings to ensure maximum possible returns.
2. Selecting Tenants
Industrial properties are asset classes that are generally owned by single tenants. On top of that, these properties are leased for long terms generally between 5 to 10 years. As a result, you do not have to worry about finding tenants so often as compared to other commercial properties.
However, you still need to conduct detailed research about the tenant to make sure that he is capable of sticking around for the long term without any problems. Make sure to review their previous records and financial history to help you make a better decision.
You should also keep an emergency fund ready to mitigate any damage brought to the property by the tenants.
3. Know The Types of Leases
As we’ve already discovered that industrial properties are leased for the long term. Therefore, with such a long time period you must know your lease terms accurately.
In the case of a full-term lease, the tenants are supposed to pay rent including the maintenance and property taxes.
Whereas, in a net lease the tenants give only the rents along with a portion of money including the property expenses. Here, the property expenses vary from one property to another depending on their size. The portion of the expense paid by the tenants is negotiable.
Another category of the lease is a triple-net lease that is quite similar to the net lease. Here the tenants pay the expenses depending on the space they have rented along with the rent.
Longer lease terms provide more security. And the rental rates in a full-term lease are more than the net lease and triple-net lease.
We have a detailed blog on the various types of commercial real estate leases. Read it here.
4. Property Management
Before purchasing an industrial property you must be aware of the condition of your investment property. Make sure to check if any renovations are required to attract appropriate tenants. Although industrial properties require little to no maintenance, make sure to keep additional capital set aside for accidents causing damage to the structure of the property during the investment tenure.
5. Location Matters
The ideal location for industrial real estate properties is near the transport hubs. It’s beneficial to look for locations near the residential areas. As the demand increases due to the short delivery period and also the supply chain enhances. Thus, having the right location is very much crucial for the proper functioning of industrial buildings.
6. Infrastructure Design
Industrial properties that offer an optimal office to warehouse space ratio and can be easily configured by splitting the floor space of the property according to one’s requirement can cater to a wider range of tenants. Providing tenants with this flexible option ensure that your investment property doesn’t stay vacant for a long time.
7. Risk Management
Apart from various benefits industrial real estate has its fair share of disadvantages too. As you know investing in industrial properties deals with single tenants for a longer lease. If that tenant exits suddenly then you are left with a vacant spot. Moreover, it is not easy finding tenants for industrial properties, thus leaving you to face the financial risks of paying the expenses by yourself. With proper research and due diligence and a good lease agreement, you can mitigate such risks.
8. Redevelopment Possibilities
A complete study on zoning restrictions is mandatory before investing in industrial real estate. If the coverage ratio of the property is less then it allows you to expand it further. Therefore, the rate of passive income generated also increases in the future. So, please be sure enough about the redevelopment possibilities and the potential restrictions.
9. Industrial REITs
Purchasing and managing a property is one way of investing in industrial real estate. But there are other ways of investing in industrial real estate. With Real estate investment trusts (REITs), you can invest passively. Also, you can opt for REIT funds and stocks.
Industrial REITs are the most flexible form of investment. Through this, you can purchase one share with minimal cost. And you can sell that share whenever you want. Thus, industrial REITs allow you to have a wide-ranging investment portfolio.
Pros and Cons of Industrial Real Estate
Like any other investment, industrial real estate also comes with both pros and cons. As a beginner investor, you need to understand both the qualities of industrial real estate investments to make a good uniform decision.
Pros
- Generally, in industrial properties, the lease terms are of 3 – 10 years. Sometimes it can be for 20 years. Thus, a longer lease term provides more security.
- Industrial properties ensure more passive income. Since the rate per square foot is more than residential real estate.
- While availing of net leases or triple-net leases the property taxes and the maintenance costs are borne by the tenants.
- Industrial properties are flexible. You can easily reconvert the space as per the requirements.
Cons
- The longer lease term may result in longer vacancies sometimes.
- Industrial properties can have more regulations and zoning restrictions due to their characteristics.
- It’s hard to purchase industrial real estate since it has higher monthly payments and also the interest rate is high.
Should you invest in Industrial Real Estate?
The Lilypads Bottomline
Before purchasing industrial real estate, perform proper due diligence and be fully aware of the risks. Though it has several advantages, still it can be a financial burden to you if proper analysis is not done. This criterion makes it different from other commercial real estate.
Besides following these strategies join Lilypads network and consult with experts to know all the nooks and corners of your industrial space and make the most of your investment.