Industrial Real Estate Investing 101
The industrial sector is arguably the least glamorous commercial real estate asset class. There are no elaborate architectural design features, resort-like amenities, or high-profile addresses. Instead, industrial real estate provides practical and efficient space and is used for manufacturing, research and development, and the storage and distribution of goods. Industrial is the workhorse of the real estate space and is crucial to supporting the global economy.
The National Association of Industrial & Office Parks (NAIOP) breaks industrial into three categories:
Manufacturing Real Estate Investing
A facility used for the conversion, fabrication, and/or assembly of raw or partly wrought materials into products/goods. This is the classic “production line” used to assemble things like cars, airplanes, or consumer electronics.
Warehouse Real Estate Investing
A facility primarily used for the storage and/or distribution of materials, goods, and merchandise. This category also may include specialty facilities, such as cold or freezer storage for food. This is the building where your online orders are stored, shipped to and from, and picked up by delivery trucks.
Flex / R&D Real Estate Investing
These industrial buildings are designed to give their occupants flexibility in the use of the space. Sometimes referred to as flex/tech space, these buildings are an office-industrial hybrid. Many real estate professionals consider data centers to be in this category.
Investing in Industrial Real Estate
Since most industrial buildings have a huge footprint, finding undeveloped land in/near a key distribution hub, like Indianapolis, that is/can be properly zoned is a tall order for many companies. Rather than building from the ground up (although it can and does happen), it’s often simpler to rent out pre-existing industrial space and modify the building as needed. Leading online real estate investing platform CrowdStreet views such land limitation as a driver for rent growth, low vacancies, and increased tenant renewal rates. Many of their top industrial markets, such as Northern New Jersey, Dallas-Fort Worth, the Inland Empire, and Washington D.C., are close to large populations with excellent access to highways, railways, and seaports.
And while industrial properties aren’t as visually appealing as that brand new hotel in Tampa or state-of-the-art office building in downtown Nashville, they’re vital to the economy. This means tenants usually sign long-term leases (five, ten, or even 20 years) that in turn should lead to stable cash flow for investors. That is one of the many reasons that industrial investment opportunities are often quickly scooped up by institutional investors.
Industrial Real Estate Vacancy Rates
The industrial vacancy rate (meaning unleased space) was only 5.4% in Q1 2021 and since 2019 rents have increased by 4.2%. Leasing activity has jumped 26.9% since 2019, with e-commerce being the primary driver of increased demand. Over the past decade, e-commerce sales, as a percentage of all retail sales, have grown at double-digit rates and the pandemic only accelerated that momentum. This shift to e-commerce is driving up the value of the existing industrial real estate market, as well as those niche industrial properties including data centers, last-mile distribution, and cold storage. The increase in e-commerce sales, which actually requires more square footage than traditional retail to support, has driven the demand for new industrial space–potentially one billion square feet of additional industrial real estate by 2025.
Final Thoughts on Industrial Real Estate Investing
Despite the COVID-19 pandemic and nationwide economic uncertainty, industrial leasing activity in the U.S. set new records in 2020. In order to meet this seemingly endless demand, the industrial sector needs access to land in strategic locations with enough space to accommodate its large footprints. Create a free account with CrowdStreet and get a copy of their 2021 Best Places to Invest in Real Estate report to learn more about their top markets for industrial real estate.