Currently, retail giant Amazon operates 110 fulfillment centers in the U.S., with more than 180 globally. And Amazon continues to expand, increasing the square footage of its fulfillment and logistics network by 50% in 2020. With its network of fulfillment and distribution centers spread across the United States, Amazon’s investment in industrial real estate has ensured that the average American is no more than a couple of days away from any of its commercial warehouse facilities. The industrial warehouse market remains as strong an asset class as we have ever seen.
Now, Amazon is buying up out-of-business shopping malls and anchor stores to use as distribution centers as they expand operations. Indeed, this e-commerce model is one of the main drivers behind the current commercial industrial warehouse market boom.
Will the industrial warehouse market continue to outperform expectations? Should commercial real estate investors add industrial assets to their portfolios?
What is Commercial Industrial Space?
Generally speaking, there are three main types of commercial real estate: retail, office, and industrial properties. Within the industrial market, there are several types of industrial properties. In this article, we focus on industrial warehouses: the pros and cons of owning a warehouse, logistics to consider, and current warehouse trends.
Tenants of warehouse properties vary but can be either logistics or distribution companies. Furthermore, commercial industrial warehouses come in all shapes and sizes, from small spaces to massive fulfillment centers. Some of the nations’ largest industrial warehouses are:
- The Boeing Everett Factory in Washington State, which also ranks as the biggest warehouse in the world as of 2020 end of year reports. The warehouse measures 4.3M SF, with plenty of space to manufacture some of the world’s largest airliners.
- John Deere’s 2.6M SF Milan, Illinois factory and North American distribution center; the world’s largest factory parts warehouse.
- Target’s 2M SF Import Warehouse in Lacey, Washington, which serves as a distribution hub for the company.
- Tesla’s 500,000 SF warehouse facility in Fremont, California.
Commercial Warehouse Trends
The industrial warehouse market continues to be a strong CRE investment. As e-commerce continues to boom, more and more companies are searching for smaller warehouse spaces out of which to base their operations. From 2014-2019, rents for warehouse spaces rose more than 33% nationwide.
Early 2021 saw those trends continue. However, no one was prepared for the COVID-19 pandemic and its effects on the commercial real estate landscape.
More than a year into the crisis, the Coronavirus pandemic continues to drive unexpected changes in the industrial warehouse market.
In a December 2020 report, CRE news leader NREI Online confirmed that industrial real estate continues to outpace other asset classes. This growth is based on several factors:
- Changing supply chains mean more businesses now need additional storage and manufacturing space.
- The rise in e-commerce sales is driving the need for warehouses.
- Vaccine distribution requires cold storage facilities, leading to an increase in leasing for such storage sites across the nation.
- A wide range of investors continue to purchase industrial properties, from REITs to high-net-worth investors and foreign investment firms. It seems everyone agrees that the industrial market is a good investment.
- The industrial industry will likely prove more resilient than other commercial real estate properties as the world starts to recover from the pandemic.
The U.S. industrial market is so hot that it’s drawing attention from foreign investors. Buyers from around the world are scooping up warehouses as the e-commerce boom continues.
Many investors see industrial properties as one of the few safe property types amid a sluggish global economy. While some asset classes have floundered over the past year, the industrial market remains strong.
Things to Consider When Investing in Industrial Real Estate
For investors, warehouses, storage facilities, and even data centers may prove to be stable investments in the coming years, particularly as companies adjust to business in a pandemic.
Many investors are moving away from office space and retail investments amid slipping returns. Instead, logistics, manufacturing, and storage show the most promise in the year ahead, according to reports.
If you are considering industrial warehouse investments, there are many factors to consider. For instance, you must consider the square footage needed for companies in your area. You will also have to be familiar with real estate trends in your local area.
Below are three key factors to look at when considering a warehouse property investment:
- Ease of Access and Loading – These days, consumers are accustomed to next-day shipping. As a result, distribution facilities and fulfillment centers need operations to be as streamlined as possible. Trucks should be able to access the facility quickly and easily. Loading and unloading should be as simple and seamless as possible to maximize results. An industrial property needs full-height loading docks to facilitate the loading and unloading process.
- Location – In the logistics and distribution businesses, location is everything. Overall, facilities that are near major transportation arteries (expressways, railways, shipping ports) are more desirable than those further away. The further away the property is from these arteries, the more time and fuel the company will spend transporting these goods. Therefore, consider the property’s proximity to major transportation thoroughfares when making an investment.
- Height – A property’s square footage only denotes its floor space. However, you must also consider the facility’s vertical capacity (the available height inside the property). Also referred to as ‘clear height,’ this is the measurement of the space under the property’s roof. Clear height refers to unobstructed space within the building. This measurement represents the stacking potential of warehoused contents like crates and boxes.
Pros and Cons of Investing in Industrial Real Estate
Investing in commercial warehouse properties has both advantages and disadvantages. Yet as is the case with any investment, knowing both the upside and potential downside can help you make informed decisions.
To assist you in making the best investment choice, below are some pros and cons of investing in industrial real estate.
Advantages
- Compared to the other types of commercial real estate (office and retail), industrial warehouses often offer and higher ROI (return on investment). This is particularly true in the current pandemic-driven e-commerce market.
- Warehouse tenants tend to sign longer leases. Moving a logistical operation from one location to the next is complicated, expensive, and time-consuming. Therefore, many warehouse renters prefer to stay in one location long-term. This is great news for property owners.
- Industrial warehouse spaces are lower maintenance properties. Due to this, owners tend to incur fewer maintenance costs. Industrial properties tend to be a fairly hands-off investment, which appeals to many CRE investors.
Disadvantages
- Compared to other commercial properties, warehouse properties tend to cost more upfront. In addition, banks may ask for larger down payments.
- When an industrial tenant vacates, finding new warehouse tenants often takes longer than finding new retail or office tenants.
- Technology changes quickly. Therefore, outdated buildings that cannot meet these changing demands may become obsolete.
Let Lumicre Guide You
Commercial real estate can be a lucrative investment. However, it’s crucial you know your options before taking the leap. While warehouse investing may be a good fit for your portfolio, there are many factors to consider when making this decision.
Investing in the industrial warehouse market continues to be a safe bet for commercial real estate investors. Whether you’re looking to invest in your first commercial warehouse or expand your commercial industrial space portfolio, we can help. At Lumicre, we know the industrial markets and can identify warehouse properties to fit your needs.
Alternatively, if you’re searching for industrial real estate to meet your company’s growing needs, we can also help you find suitable space. No matter what you need, our team can assist you. Contact Lumicre’s team of commercial real estate professionals today for more information.