Evaluating Industrial Real Estate for Investment

Looking for an interesting type of real estate to invest in to diversify your portfolio? Consider industrial real estate. It offers the possibility of strong profits, especially if you buy in a burgeoning market.

What Is Industrial Real Estate?

There are four classes of commercial real estate: retail, multifamily, office, and industrial. Industrial real estate is what it sounds like: buildings and properties used for manufacturing, storage, and research and development. Think of factories, facilities that process food items, or even storage buildings.

Industry predictions say that leases for industrial spaces will reach pre-pandemic levels this year, thanks, in part, to a movement toward reshoring manufacturing in America. That means that now is a great time to invest in industrial real estate so you can lease it out as demand increases.

Benefits of Investing in Industrial Real Estate

When it comes to real estate investing, there are many benefits to choosing industrial property. 

As I mentioned, experts expect the industry to rise this year and in the future. The rise of e-commerce and global trade has increased demand for warehouses, distribution centers, and manufacturing facilities, which means that not only will you be able to find tenants easily, but you can also command top rent rates.

With longer leases (up to around 15 years), you can find stable tenants and see steady income without having to constantly search for new renters every few years.

Compared to other real estate sectors, industrial properties tend to offer higher capitalization rates and better return on investment (ROI). Also, industrial real estate provides diversification in an investment portfolio, reducing overall risk.

Tips for Choosing the Right Industrial Property

If you’re new to evaluating industrial property, here are some tips to help.

1. Consider Your Options

Industrial real estate has a variety of classes within the category. There are buildings for heavy manufacturing, which may be hundreds of thousands of square feet, and there are buildings for light assembly, which are smaller and possibly more affordable. 

Then, there are properties for storage and distribution. This can include commercial storage and distribution, as well as consumer storage buildings.

The third class may offer facilities that can be used for a variety of purposes, including research and development, data centers, and showrooms.

If you have an interest in a particular class of property, start there. If you have a budget, see what fits it.

2. Get Smart About Industrial Leases

If you have experience with other types of commercial real estate, you may think you understand industrial leases, but there are a few differences in the industrial world. The first is that these leases may be longer, ranging from three to 15 years. Rent increases annually.

There are a few types of industrial leases. The first is a net lease. With this, the tenant may be responsible for paying not only the rent but also the taxes for the property, as well as other expenses like insurance and operating expenses.

Within the net lease category are single, double, and triple net leases. With each, the number of expenses the tenant shoulders increases.

There are also gross leases, where you, as the landlord, pay all the fees other than rent, though these leases are less common. There’s also a modified gross lease (or modified net lease) where the landlord and tenant come to an agreement about who covers which expenses.

3. Check Out Incentives

Like the idea of saving money with your investment? There may be federal, state, or local incentives that can provide tax savings if you invest in certain areas or make environmentally friendly changes to the property you’re buying.

At the federal level, you can defer or eliminate capital gains taxes if you invest in Qualified Opportunity Zones, which are designated to promote economic growth in distressed areas. There are also tax credits to investors who fund industrial projects in low-income communities with the New Markets Tax Credit (NMTC).

At the state and local level, you may qualify for Tax Increment Financing (TIF), which is provided by local governments. This can offset the upfront cost you need to provide and can give you the financing you need to make the purchase. There may also be tax breaks and sales tax exemptions if you invest in designated Enterprise Zones.

4. Know the Risks

Just like any investment, industrial real estate doesn’t provide a guaranteed return on investment over a given period. Know the risks you’re taking before you invest.

Industrial real estate is closely tied to the economy. A recession or downturn can lead to reduced demand for warehouse, manufacturing, and distribution spaces, which may make it difficult to rent. Economic shifts, such as changes in trade policies or supply chain disruptions, can impact your ability to rent at top dollar, if at all.

Even with a long lease, there is always the risk that a tenant might be unable to pay rent or may evacuate the premises early. You may then be forced to take legal action to get the financial commitment agreed to in the lease, and in the meantime, it may be difficult to rent out the property to someone else.

Large industrial buildings may require significant investment in maintenance and repair, especially for older buildings. This can eat into your profit.

Industrial properties are often used for practices that use hazardous materials like chemicals that can seep into the soil. You may need to invest money to remain compliant with local, state, and federal environmental laws.

5. Do Your Due Diligence

Before you buy, do your homework. First, find out what the zoning regulations are for the property, as this may limit the types of tenants you can attract.

Inspect all HVAC systems as well as the structure itself. Buying an older property at a discount only to find out the entire plumbing system has to be reconfigured (on your dime) will result in a headache and an expense that keeps you from profitability.

Hire professionals to do environmental inspections like soil contamination. This can ensure the property you buy doesn’t come with environmental risks that end up costing you down the line.

Also, review legal documents, title history, and potential liabilities so you have a firm understanding of what you’re investing in.

6. Have a Long-Term Plan

It’s smart to see the end at the beginning. Before investing in industrial real estate, decide what your exit strategy will be. 

How many years do you want to rent out the property before selling it? Consider an exit plan that includes resale, redevelopment, or leasing to higher-value tenants.

Final Thought

Investing in industrial real estate is a great way to diversify your portfolio and introduce you to other types of real estate. It can provide steady returns, but do your homework before investing.