In the world of real estate investment, there is one sector that stands out for its potential, reliability, and stability: Industrial real estate.
Due to being a catalyst for growth and the backbone of economies, an industrial real estate investment offers unique investment advantages. As such, they attract savvy investors wanting long-term returns and consistency.
Whether you’re a seasoned investor or considering developing your portfolio, understanding the compelling reasons to invest in industrial real estate can provide a world of economic potential.
In this article, we’ll detail the key factors behind the appeal of industrial real estate—from growing demand for warehouses and distribution centers—and why you should invest in industrial real estate:
1. High Demand for Industrial Assets
The industrial real estate market is seeing unprecedented growth, making it one of the hottest real estate investments today.
Here are the many reasons for this sharp growth:
The E-Commerce Revolution
The huge growth of E-commerce in the last decade has changed how we shop and paved the way for the industrial real estate boom.
Due to consumers demanding more online purchases, there is a larger need for large-scale fulfillment centers, strategically located warehouses, and last-mile distribution hubs.
E-commerce giants and smaller companies now require these facilities to meet the continuously growing environment. Likewise, they require more efficient deliveries, so companies need more extensive industrial properties with superior logistics.
Growing Technological Advancements
Growing advancements in technology have revolutionized the industrial sector, leading to an increased demand for specialized facilities.
In addition, robotics, automation, and AI have changed the manufacturing process, supply chain management, and logistics operations.
As businesses seek to stay competitive in an increasingly tech-focused industry, they’ll require more industrial real estate assets with cutting-edge features.
Greater Supply-Chain Optimization
Although there have been major supply chain issues since the COVID-19 pandemic, effective supply chain management has never been so important.
Companies across diverse industries are always seeking ways to reduce costs, and industrial assets play a critical role in achieving these objectives.
Investor Demand for Stable Income
Many people in the real estate industry consider industrial real estate to be one of the most stable incomes due to the attractive yields and consistent cash flows.
Due to the long-term lease agreements and reputable corporate tenants, industrial real estate offers a steady income and robust capital appreciation.
2. Industrial Space Has Many Uses
Regardless of the location, people often view industrial real estate as the backbone of economic activity. As a result, it serves as the engine that drives many industries forward.
Here are some of the most common uses for industrial space:
Warehousing and Distribution
The most common way to use industrial space is warehousing. Large warehouses are ideal for businesses that require ample storage for inventory management, enabling efficient distribution and timely order fulfillment.
As the E-commerce industry continues to bloom, the growing requirement for warehouse space has surged, making it a critical component of the modern supply chain and a good industrial property investment.
Production and Manufacturing
Industrial spaces offer the ideal environment for production and manufacturing processes. These facilities, due to their size and logistics, offer the ideal infrastructure for machinery, assembly lines, and specialized equipment.
As a result, industrial spaces accommodate a wide range of industries, including automobile manufacturing and electronics production.
Therefore, industrial areas promote the creation of goods, something the economy always needs.
Research and Development
In recent years, industrial spaces have become hubs of research and development. Companies across various industries, such as technology, pharmaceuticals, and automotive, often use industrial real estate to house their research and development departments.
In turn, these spaces offer the essential infrastructure, laboratories, and collaborative zones required for conducting experiments, prototyping, and fostering innovation.
Creative Studios and Workshops
Industrial studios have become havens for world-class creativity in recent years. They provide excellent spaces for artists, designers, and artisans with unique studio and workshop environments.
Thanks to the spacious layouts, natural lighting, and high ceilings, industrial spaces are ideal for artists looking to work on large-scale projects, furniture makers, sculptors, and other creative professionals requiring ample space for their work.
As the digital age continues to grow, co-working spaces have become far more popular for start-up companies, freelancers, and small companies looking for clean, comfortable, and reliable office spaces.
In addition, start-up companies benefit from networking opportunities, supportive communities, and infrastructure provided by coworking spaces.
And that’s where industrial spaces come in: They provide the perfect place for a coworking space, making them a solid industrial asset investment.
Data Centers and Technology Infrastructure
With the growth of cloud computing and the extensive demand for data storage, industrial spaces now have a new life as data centers. These facilities hold the servers and infrastructure required to manage, store, and process large quantities of data.
There are many unique characteristics within industrial spaces—including robust power supply and adaptable layouts, making them perfectly suited for accommodating technology infrastructure.
Retail and Showroom Spaces
If a company is looking for retail and showroom purposes, industrial spaces have become one of the best options.
The use of industrial spaces to create unique retail spaces has become popular, transforming former factories and warehouses into trendy shopping destinations.
In general, industrial spaces have distinctive architectural features and unrestricted layouts that give retailers the opportunity to create immersive, one-of-a-kind shopping environments.
3. Cash Flow Over Longer Periods of Time
If an investor is seeking quality long-term investment, industrial spaces have become one of the best options.
Here are some of the key reasons why:
Stable Tenant Demand
One of the main advantages of investing in industrial real estate is the stable tenant demand. For example, long-term tenants, including logistics providers, distribution centers, and manufacturing companies, require reliable and dedicated facilities to carry out their operations.
These tenants often sign extensive lease agreements, ensuring a consistent rental income stream that provides a steady investment.
Strong Lease Terms
If you’re looking for longer lease terms compared to other types of commercial properties, industrial real estate is one of the top options.
Tenants are often willing to commit to longer lease periods, offering landlords the security of predictable cash flow over a prolonged duration.
Low Tenant Turnover
One of the biggest upsides of investing in industrial real estate is the lower tenancy turnover rates compared to other sectors, including office spaces and retail spaces.
The stability reduces vacancies and the costs of finding new tenants, ensuring a safer investment.
Low Operating Expenses
Industrial spaces typically have significantly lower operating expenses compared to other types of commercial properties.
For instance, maintenance costs are lower in industrial real estate because they have simple structures with less intricate finishes. As a result, this contributes to a higher net operating income and higher cash flows for landlords.
Resilience to Economic Woes
Industrial properties have always shown strong resilience in the face of economic downturns.
That’s primarily because the demand for logistics and warehousing remains stable because goods always need to be stored, processed, and transported, regardless of the economic conditions.
As such, the stability helps sustain cash flow for industrial property owners even during hard economic times and recessions.
4. Easy to Maintain
Industrial real estate is often considered to be simple to maintain compared to many other types of real estate investments, including residential and commercial properties.
Here are some of the main reasons why:
Industrial buildings are built with stronger materials compared with commercial properties. That’s because the developer creates them to withstand industrial processes and heavy usage.
The most common materials include steel, concrete, and metal cladding; these are all well-known for their resistance to wear and tear and durability.
Minimal Interior Finishes
Another huge advantage of investing in industrial real estate is the minimal interior finishes. That’s because the developer builds them for practicality and functionality, leading to fewer decorative elements or intricate features.
The simplicity reduces the requirements for extensive maintenance of interior finishes, such as wallpaper and carpets.
If you’re looking for robust infrastructure, industrial real estate is one of the best options because it supports heavy machinery, equipment, and industrial processes. The infrastructure includes HVAC, reliable electrical systems, and adequate utility connections.
Therefore, investing in quality infrastructure inside an industrial real estate investment ensures a more resilient property that requires minimal maintenance.
Professional Maintenance Teams
Industrial real estate often involves large-scale properties managed by professional maintenance teams and property management companies. Better still, these teams have expertise in handling industrial real estate and its infrastructure.
In addition, their specialized knowledge and experience contribute to efficient and effective maintenance practices.
5. Industrial Tenants: Rents & Responsibilities
If you become an industrial real estate investor, there are many things you need to consider, including industrial tenant rates and responsibilities. Here are the key aspects of industrial rents and responsibilities:
Choosing Rental Rates
When it comes to setting rental rates, many factors come into play. For instance, location, size, condition, market demand, and presence of specific amenities.
Industrial spaces in prime locations, such as major cities, often command higher rental rates because of their easy access to transportation networks.
Likewise, the unique features and specifications of the property, such as the floor loading capacity, ceiling height, and utility provisions, also impact the rent rates.
The lease agreements in the industrial real estate sector vary considerably, ranging from short-term to long-term lease commitments.
Although some tenants want more flexibility due to the nature of their business, many companies will seek the security of lease agreements.
The lease agreements don’t need to be complicated; they simply outline the terms and conditions, such as rent payment schedules, escalation clauses, maintenance responsibilities, and tenant obligations.
Depending on the terms of the lease agreement, industrial tenants are typically responsible for paying rent according to the agreement terms. You can structure these payments quarterly, monthly, and annually.
In addition, lease agreements may offer an escalation clause that allows for periodic rent increases. However, these clauses are often tied to other factors, such as inflation and market changes.
Downsides of Industrial Real Estate Investment
Although industrial real estate has become one of the best real estate investments in the modern economy, there are also many downsides to these investments.
Here are three of the biggest cons:
Oversupply in the Market
One of the main challenges you’ll face as someone investing in industrial real estate is the potential for oversupply.
As demand and the economy changes, the market may witness periods where the supply of available industrial space exceeds the demand from tenants.
In turn, oversupply can lead to reduced rental rates, increased vacancies, and longer leasing cycles. That puts pressure on real estate owners to adapt their strategies to attract tenants and manage their portfolios.
Another downside of industrial real estate is the challenges in financing the investment. That’s because lenders sometimes perceive industrial properties as riskier investments compared to commercial real estate sectors, including retail and office space.
The unique characteristics of industrial real estate, such as its specialized infrastructure, lead to stricter lending requirements and higher down payments.
If you don’t have a large pool of finances for a downpayment, this can become challenging.
Growing Interest Rates
Interest rates play a major role in all real estate investments, and industrial real estate isn’t any different.
When interest rates rise, which they have in recent years, the cost of borrowing grows. As a result, this affects the financial viability of refinancing industrial assets.
Therefore, industrial property owners must closely monitor interest rate trends and evaluate the potential impact on portfolios for informed decisions on refinancing, acquisition, and financial strategies.
Final Thoughts on Investing in Industrial Real Estate
Industrial real estate investment is one of the best options for investors with property portfolios. There are many advantages over other investments: Stability, low maintenance, and long-term demand.
However, as with any financial investment, you should weigh up the pros and cons and make an informed decision.
If you’re looking for a safe asset with possibly superb long-term returns, invest in industrial real estate.