Real estate is booming, and the public is raising many questions about CRE and the industrial sector. It has contributed significantly in the current global economy. It is part of the supply chain evolving around logistics, distribution, warehousing, and manufacturing.
In this guide, we will explore the most frequently asked questions on industrial real estate, breaking down the term, different types and characteristics of industrial properties, and why investors should choose to invest in this sector.
1) What is industrial real estate?
The one million dollar question, what exactly is industrial real estate? Most people relate real estate with homes, retail stores, offices, and restaurants. However, for industrial real estate, what comes to mind are images of assembly plants or tall bricks with smoky chimneys.
While it may seem true, industrial real estate is more than just assembly plants and stacks with smoky chimneys. Almost all items in our offices and homes are made and stored in industrial buildings.
Industrial real estate involves buildings and lands having industrial operations. This includes manufacturing, distribution, production, assembly, storage, and research.
Differentiating Between Commercial and Real Estate
Commercial real estate engages with the general public, while the industrial sector does not. To create the former, modern designs and architecture are the major deal to stand out. Additionally, they should be near occupants, parking spaces, and pedestrian-friendly, with occupancy requirements complying with local legal requirements.
On the other hand, industrial real estate properties work well in rural areas or city outskirts. They are constructed near main roads and train stations to maintain good flow in delivery and transportation. Unlike commercial properties, industry property design focus on functionality and efficiency. Properties like factories are designed to support heavy equipment and machine. However, the permitting requirements must meet local and state agencies’ standards.
2) What are the characteristics of industrial real estate?
Industrial real estate has several key characteristics that distinguish it from other types of commercial real estate, such as:
Industrial real estate is often located near major transportation hubs such as highways, airports, and ports to facilitate the movement of goods. In addition to transportation considerations, location is important for attracting skilled labor and market access. Many industrial properties are located near population centers with a large pool of skilled workers available to meet the needs of industrial tenants.
Industrial properties tend to be larger than other types of commercial real estate. Properties range from small industrial units to large manufacturing plants or distribution centers.
Small industrial units are used for light industrial or storage purposes. They are often leased by small businesses that require affordable and flexible space for their operations.
On the other hand, larger industrial properties require heavy manufacturing, warehousing, or distribution purposes.
These building features are designed to meet industrial tenants’ needs and support the efficient and safe operation of industrial processes. They include:
- Heavy-Duty Flooring: Industrial buildings typically have reinforced flooring that can support heavy equipment and machinery. This is important for protecting the integrity of the building and ensuring that the floor doesn’t crack or become damaged under the weight of heavy machinery.
- High Ceilings: Industrial buildings usually have high ceilings to accommodate large equipment and machinery often used in industrial processes. The high ceilings also allow for vertical storage of goods, making it possible to maximize the use of space within the building.
- Loading Docks: Many industrial buildings have loading docks, which are raised platforms that allow trucks and other vehicles to load and unload goods easily. This is especially important for distribution centers and warehouses, where goods must be efficiently moved in and out of the building.
- Specialized Lighting: Industrial buildings may have specialized lighting systems designed to support the specific needs of the industrial tenant. For example, some types of manufacturing may require bright, even lighting to support quality control inspections.
Minimal tenant improvements
Industrial properties typically have a functional design and layout accommodating various industrial uses. Unlike office or retail properties, industrial properties do not require significant customization or renovation to meet the needs of industrial tenants. This can result in lower leasing costs and reduced vacancy risks for investors, as tenants can move in and use the space more quickly.
Low turnover rate
Industrial tenants have longer lease terms than tenants in other types of commercial real estate. This is because industrial assets require stability and continuity in their operations. They may also have significant investments in specialized equipment or processes that are difficult to move.
As a result, industrial real estate buildings provide investors with more stable and predictable rental income.
3) What are the types of industrial real estate properties?
Industrial real estate properties categorize into:
These are properties that are primarily used for the production of goods through various manufacturing processes. According to NAIOP, these properties have office spaces that take less than 20% and loading docks at least 10 feet.
Large open spaces, high ceilings, and specialized equipment for specific manufacturing processes often characterize manufacturing plants.
The open floor space allows workers to move around easily and efficiently during manufacturing. The high ceilings are designed to accommodate large equipment and to allow for proper ventilation and airflow.
Depending on the type of manufacturing being performed, manufacturing plants may feature specialized equipment such as assembly lines, conveyor belts, robotics, and other machinery designed to streamline the production process.
Warehouses and distribution centers
These properties are used for storing and distributing goods before getting to the final retail destination. The goal is to ship goods to consumers quickly and efficiently, regardless of location. They are mostly one-story and may be more than 50,000 square feet.
Flex space properties are usually characterized by their versatility and ability to adapt to different tenant requirements. They are usually built with open floor space and enclosed offices or conference rooms. The industrial space in flex space properties is designed for manufacturing or storage, while the office space is used for administration and management.
Research and development facilities
Research and development facilities are designed to accommodate scientific research and experimentation, product development, and testing. Companies in the technology, pharmaceutical, and biotech industries, government agencies, and academic institutions often use these facilities.
Data facilities house large computer servers and other data storage, processing, and communication equipment. They are critical to the operation of many businesses, as they provide the infrastructure necessary for cloud computing, e-commerce, and other online services.
Data centers are typically designed with highly specialized infrastructure to ensure the smooth and secure operation of computer servers and other equipment. This includes backup power supplies such as generators and batteries, advanced cooling and ventilation systems, redundant internet connections, and robust security measures to protect against cyber-attacks and physical intrusions.
4) Where is the basic location for most industrial developments?
Industrial locations vary depending on a variety of factors. They include:
- Urban areas: Many industries prefer urban areas because of the availability of a large labor force, access to transportation infrastructure, and proximity to suppliers and customers.
- Coastal regions: These are popular locations for industries like shipping, fishing, and offshore oil drilling because of the access to waterways and ports.
- Areas with abundant natural resources: Industries such as mining and forestry often locate near areas rich in natural resources.
- Areas with low labor costs: Some industries may locate in areas with low labor costs to reduce production costs.
5) Is industrial real estate a good investment?
The potential profitability of industrial real estate as an investment relies on factors such as location, market conditions, demand and supply, and the specific type of industrial property. However, in general, industrial real estate can be a good investment option for these main reasons:
Industrial properties, such as warehouses, factories, and distribution centers, tend to generate steady rental income because they are often leased to long-term tenants who use the property for business operations.
In commercial real estate, properties are only used for their specific purpose. However, industrial real estate assets can fluctuate with the current market demands. An industrial property in an area with low demand for a warehouse but high demand for storage facilities can be advertised for either.
Also, industrial property can be used for multiple purposes and still appeal to the business. For instance, converting a warehouse into an office space.
More rental yields
Traditional office space has a potential of 5% returns on investment and retail about 6% – but industrial properties surpass them. Industrial real estate yields range from 6 to 7.5%, making them every investor’s favorite choice.
6) What is the future of industrial real estate?
The future of industrial real estate looks promising, with increasing demand driven by the growth of e-commerce and demand for efficient supply chain and logistics operations. The trend towards just-in-time delivery and last-mile fulfillment will continue to drive demand for industrial properties in or near urban areas.
The rise of automation and robotics will also impact industrial real estate as companies look for facilities that can accommodate these technologies.
In addition, sustainability and environmental concerns are becoming increasingly important in the industry, focusing on reducing carbon footprints and incorporating green technologies into industrial properties. Overall, industrial real estate is expected to remain a strong and growing sector.
Do you want to find out more about the current industrial real estate market? Here’s a compilation of industrial real estate market news from around the country that we update periodically.