The past year’s pandemic accelerated the widespread adoption of e-commerce, with experts postulating that the shift moved the digital transformation of shopping ahead by at least five years.
In tandem with more people shopping online, industrial real estate also saw tremendous growth and continues to be one of the best-performing investment markets. How are the two connected?
While retail brick-and-mortar locations have seen reduced foot traffic, sellers have successfully shifted resources online, where they can provide a wider range of competitive options with fast turnarounds and lower overhead. But online sales do require much more industrial real estate space (think warehouses and fulfillment centers) to meet customer demands—at whiplash delivery speeds.
Is industrial real estate a good option for investors to include in their portfolios? We’ve put together an overview of industrial real estate investing and why it might be a fit for your portfolio.
Industrial real estate property can be versatile.
A well-located industrial real estate site provides more opportunities for value creation because the facilities have the potential to be used by multiple tenants. And, just as with multifamily apartments, sharing a real estate site with multiple tenants and multiple business types can decrease lease risk.
I managed a historic industrial manufacturing facility a few years back. I did not fully realize the potential of the property, both in terms of current use and future value. The space now plays host to a business incubator and office space as well as storage.
Industrial property use can also change along with shifts in the market. Properties located in high-demand areas can also increase in value over time, creating an additional opportunity to increase revenue through high exit price valuations.
Versatility expands opportunities
Many industrial properties can be repurposed throughout their lifetimes as demands in the market and among tenants change. An industrial space is often a blank canvas that can be reconfigured to support:
- Office space
- Warehouse and distribution centers
- Cold storage buildings
- Data centers
- Research and development centers
- Event space
In the event of a downturn in one industry, spaces can be repurposed to fit the needs of another, reducing the potential for the property to remain untenanted for long. This flexibility makes industrial real estate particularly attractive for investment groups as it reduces risk, increases the number of potential clients interested in a particular space, and reduces the likelihood that a space will sit empty for a long period of time.
For example, while the need for office space has decreased during the pandemic, e-commerce and the need for fulfillment centers grew. One caveat to keep in mind is that highly customized spaces, such as cold storage facilities, may be expensive or time-consuming to repurpose when clients turn over.
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Low vacancy rates signal ongoing growth opportunity.
The industrial real estate market is steadily growing and benefiting from increasing demand. Vacancy rates in industrial real estate have dropped by half, from around 10 percent a decade ago to lower than 5 percent today. More than 400 million additional square feet of industrial real estate space is currently under construction.
Companies will continue to require space in large metropolitan areas in order to handle last-mile logistics for e-commerce purchasing. Even mid-size metros are seeing record-low vacancies and previously unthinkable rates per square foot, as recently reported in upstate New York and Louisville, Kentucky.
Low variable costs equal stronger NOI.
Investors in industrial real estate typically rent their properties out to tenants and turn the variable costs/expenses over to them. Tenants are generally expected to pay their own maintenance, property taxes, and other operating costs, keeping management overhead low and net operating income (NOI) high. In addition, longer leases (typically in the 3- to 10-year range) tend to mean less turnover of the space and less investment required upon re-tenanting.
According to the US Census Bureau, about 13 percent of retail purchases (or $222.5 billion) were made online in Q2 of 2021. Just ten years ago, that number was around 5 percent. As the digital shift continues, the opportunity to invest in high-demand industrial properties will continue to look appealing to both individual and syndicate investors.
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