Industrial Real Estate – A Complete Guide

IN THIS GUIDE

Industrial real estates are properties that contribute to developing, manufacturing, storing, and moving physical products.

Rather than provide a direct service to clients or tenants, industrial real estate properties support the economy by assisting in the creation of goods and facilitating their transport to consumers.

As a financial investment, industrial property’s high demand and longevity can prevent a worthwhile opportunity for investors. Because there will always be a need to manufacture, store, and distribute physical goods, there will always be a need for some sort of industrial property.

In this article, we’ll look at various types of industrial properties, explain their investment upside, explore different financing options, describe locations of industry, and much more!

Let’s dive in.

Types of Industrial Real Estate

There are four main types of industrial property. Each of them has its role in the production of goods and in transporting those goods to consumers.

  • Warehouse

A “warehouse” is a general term to describe properties involved in the storage and distribution of goods.

Storage and distribution industrial properties are not necessarily “warehouses,” and we’ll discuss the differences later in this article.

Warehouse properties are quite large, usually with high clearing ceilings and sizable square footage to store goods and prep them for shipping.

Most come equipped with multiple loading docks that allow trucks to easily load and unload goods. Depending on the size of the property, many warehouses have multiple loading and unloading docks.

Although some warehouse properties have space dedicated to offices, this isn’t their main focus or value proposition.

After the pandemic decimated many retail storefronts, property investors now look at warehouses as “the next big thing” for property investment.

Notably, e-commerce companies thrive off of warehouse space.

General warehouse property can be seen as a jack of all trades in the industrial property family, serving to both distribute and store goods.

Regardless of whether or not a company has a retail location to sell goods, orders can still be fulfilled online, and warehouses are where goods are kept (at least temporarily), and shipped to distribution centers.

  • Storage

Industrial storage properties are used, as their name implies, for the storage of goods.

Compare that to warehouses. Some warehouses are used to store goods, but this isn’t their primary purpose. Industrial storage properties, on the other hand, are utilized entirety to store and maintain goods. Oftentimes this means storage facilities come with certain characteristics that enable goods to be preserved in a certain state.

For example, in a food production supply chain, while products may be sent to warehouses temporarily, they’re also stored in cold storage buildings. This allows them to maintain their quality for extended periods due to the precise condition controls the property possesses.

Storage properties, just like warehouses, can be a reliable investment for property investors.

They serve a purpose that will never become obsolete. If your property also possesses qualities that certain tenants are looking for (like climate control technology suitable for food storage), you’ll be able to draft profitable lease agreements that reinforce your revenue stream.

  • Manufacturing

Goods and products are created within industrial manufacturing properties.

These properties can vary greatly in their scale. Some manufacturing properties are only a few thousand square feet and don’t require any heavy-duty or intricate machinery.

On the other hand, large-scale, heavy manufacturing properties can be 10-100 thousand square feet, equipped with assembly lines, advanced automated machinery, and a floor plan that allows tenants’ to use the space in ways they see fit.

Manufacturing properties sometimes have their research and development department on site.

Sometimes there’s also space on the property to test new goods.

As an investor, manufacturing properties come with low risks and high potential rewards. Additionally, there’s very little upkeep to be concerned about. Instead, you only need to ensure that the physical property meets proper regulations and safety standards.

Tenants usually sign triple-net leases—long-term leases that delegate maintenance of the property to the tenant.

As an investor, you also don’t need to worry about or provide any of the machinery that the tenant needs to manufacture goods. Tenants are responsible for sourcing and expensing that machinery.

  • Distribution

Distribution industrial properties are the last place products are kept before they get shipped out to customers or sent to retail facilities.

While these properties may have warehouse components, their primary purpose is to distribute goods. This means they’re designed to easily collect necessary logistics data and organize shipping information.

These properties also have more space dedicated to office management than other industrial properties. Typically these offices handle logistics and inventory tracking.

Out of all types of industrial real estate, location matters the most for distribution properties.

Investors should focus on properties located in the center of states (or even the country), as well as properties near airports, major highways, and sometimes even shipping docks.

Why Invest in Industrial Property

Now that we’ve covered the types of industrial properties that exist, we’ll explain some reasons you might consider investing in industrial properties.

  • Security and demand leads to profit

Industrial properties typically represent a secure investment option due to their purpose.

Their value comes from contributing to the production and selling of goods and services. Because of this, they’re often one of the safest property investments you can make!

Since these properties will always be in demand, investors often find that their return on investment for industrial properties is higher than their ROI on commercial or residential properties.

On average, the value of industrial properties increases by 7-10% annually!

  • Favorable lease agreements

Industrial property leases present favorable lease lengths and conditions for investors. Across all industrial properties, leases average around 15-20 years.

Long leases, along with high annual investment returns, almost always lead to quality financial outcomes for property owners.

Many industrial properties are leased under triple net leases. Under these leases, the tenant is responsible for the set operation and maintenance costs, decided by the landlord.

Having your tenants cover the costs of their utilities and property management means that you get to save more money as an investor.

Having fewer operations to manage yourself also means there’s less on your plate to deal with—it’s a win-win!

  • Property classes and opportunities

Industrial properties are classified into 3 classes: Class A, B, and C.

    • Class A

Class A properties are top of the line, new properties located in high-demand locations. They often attract higher-paying tenants. These properties are usually leased out to tenants who are part of well-established, often wealthy, businesses.

Although they’re expensive to purchase, Class A properties also charge tenants the most per square foot. Investing in these properties often provides immense cash flow!

    • Class B

Class B properties are older properties in well-working condition. However, they may not be the first option for a potential tenant. They are great options for tenants with less capital to deploy—tenants who might not be able to afford a Class A property.

As an investor, understand the market of the area you’re interested in. For instance, if you plan to lease out to smaller businesses, Class B properties present a more worthwhile investment, as opposed to Class A properties.

    • Class C

Class C properties are the cheapest properties to purchase. They often aren’t in working condition. Class C properties are often refurbished or improved into Class A or B properties.

Despite not generating income in their purchase state, a little bit of capital can transform a Class C property into an amazing Class A or B property with a great return on investment.

If you’re looking to break into the industrial property game, keep your eyes peeled for cheap Class C properties.

Financing Options for Industrial Commercial Properties

While the barrier to entry for investing in industrial properties can be high due, multiple financing options can help you get started!

Your financing options will vary depending on the type of property you’re purchasing, as well as your financial history.

If you’re considering getting your foot in the door with an industrial property investment, consider these financing options.

  • SBA Loans

The Small Business Administration provides loans for various types of property ventures. Industrial property is no different.

Both SBA 7(a) standard and SBA 504 loans offer up to $5 million in loans to help you purchase industrial property, renovations, and expansion.

These loans have repayment periods of 10-25 years, which gives you plenty of time to accrue revenue to pay back your loan.

  • Business & Industry Loans

Depending on the location of the property and the size of your property portfolio, you might B&I loans as another financing option for industrial property.

These loans are perfect if you have a limited portfolio or limited access to business capital. B&I loans provide an average of $3M paid over a negotiated amortization period ranging from 10-30 years.

While these loans typically max out at $5M, they can go up to $10 million with certain exceptions.

They’re often used to purchase property or expand the existing property.

B&I loans are only available for rural property purchasing, or if you plan to invest in any industrial property in a city or town with less than around 50, 000 occupants.

  • CMBS Loans

Also called conduit loans, these are commercial real estate loans that can be applied to industrial property purchases.

While they begin at around $2 million with amortization periods of around 25-30 years, they do not focus primarily on borrowers’ capital or property portfolio.

Instead, most CMBS lenders inquire about the profitability of your real estate purchase, and if you’ll be able to repay your annual debts and payments.

These qualities make CMBS loans appealing if you don’t have an extensive portfolio or heavy capital.

Where to Buy Industrial Commercial Properties

The significance of location for industrial properties is interesting compared to other types of real estate.

Depending on the type of industrial property you want to invest in, the location may be more of an accessory consideration depending on other factors.

Let’s look at how location affects the demand and purchase rationale for each type of industrial property.

  • Warehouse and Storage

Both warehouse and storage properties are closely tied to other aspects of product creation and consumption.

Look for large properties suitable for storage and short-distance distribution; ideally, they’re near other businesses that might be able to utilize the space.

  • Manufacturing

Manufacturing properties can be utilized in many different locations.

Properties fit for manufacturing are often found in certain districts of busy cities.

Identifying manufacturing hotspots is a great first step when you’re looking for a suitable property to invest in.

  • Distribution

The success of distribution centers depends on their location.

If you plan on investing in these properties, keep a few things in mind.

They should be central to a sphere of business—that can be in the middle of a state (or the middle of the country), or in areas where shipping products is quick and easy. Typically that means distribution properties will be near an airport or cargo bay of some sort.

Look out for businesses expanding their reach—inquire about the distribution centers that help them fulfill their orders. Identifying potential tenants is always a good move before sinking capital into a real estate investment.

FAQs

It’s a combination of available capital, financing options, and location of interest.

All industrial properties tend to be very safe investments, but the barrier to entry for certain properties can be quite high.

If you are someone with surplus capital to invest with, you’ll have the opportunity to purchase very large Class A warehouses or manufacturing properties. You’ll also reap the benefits of high rent.

If you lack the capital or financing options to purchase Class A properties, consider Class C properties or smaller class B warehouses and storage properties!

The biggest risk associated with investing in industrial property is tenants who are unwilling or able to pay their rent.
If your property becomes vacant it’s your responsibility to find the money to cover maintenance costs.

It’s important to become knowledgeable about your potential tenants and their businesses so you can avoid these situations.

Industrial properties propel the economy forward.

Their purposes will almost never be completely obsolete, and old properties usually just need some investment to bring them to modern standards.

Final Thoughts

Purchasing industrial properties is one of the safest, most profitable real investments you can make. If you have access to the necessary, consider investing in industrial properties.

LoanBase can help you get your foot in the proverbial door when it comes to financing industrial properties.

Forget sifting through endless documents or trying to identify the best lenders for your needs. We take care of all that administrative work so you can focus on meeting and closing deals with lenders who can actually help you.

Our online platform optimizes real estate transactions and eliminates friction between borrowers and lenders.

Start your loan application

Lender / Broker? Request a demo